In this case, the Collateral Warranty which had been executed some 4 years after practical completion and 8 months after the remediation works had been completed was determined to have retrospective effect by the Court of Appeal.
This article reviews the key aspects of the Court of Appeal’s judgment and its implications for parties agreeing the terms of Collateral Warranties and ancillary contracts for construction operations.
The Court of Appeal’s judgment determined three key issues as elaborated below:
Issue 1: Can a Collateral Warranty ever be a construction contract under the Construction Act?
In principle the Court of Appeal said: Yes. But this will always depend on the wording of the Collateral Warranty in question in their proper context.
In reaching its conclusion the Court of Appeal referred to the specific wording in the Collateral Warranty in question that provided that the contractor was carrying out and would continue to carry out construction operations (to a specified standard) as the crucial wording which enabled the majority in the Court of Appeal to consider that the Collateral Warranty may well be “a contract for the carrying out of construction operations” in accordance the Construction Act. That is because, unlike a product guarantee, it is a promise which regulates (at least in part) the ongoing carrying out of construction operations. However, it was also emphasised that if a Collateral Warranty is just a guarantee in relation to a past state of affairs then this is unlikely to be a construction contract.
In reaching this conclusion the Court of Appeal also reinforced the view that a construction contract should not be construed too narrowly, as the drafters of the Construction Act intended a wide definition.
Issue 2: If the answer to Issue 1 was Yes, did the terms of the Collateral Warranty make it a construction contract for the purposes of the Construction Act?
Applying the analysis above the majority in the Court of Appealed determined that the terms of the Collateral Warranty brough it within the ambit of the Construction Act. In particular, the wording that warranted that the contractor “has performed and will continue to perform diligently its obligations under the contract” had a significant bearing on the reaching this conclusion.
Issue 3: Did the date on which the Collateral Warranty was executed make any difference?
The majority in the Court of Appeal considered that the fact that the Collateral Warranty was executed at a time when the works were complete was of little relevance to its categorisation as a construction contract. This was on the basis that the Collateral Warranty, its wording, and the surrounding evidence pointed to the conclusion that the agreement for the carrying out of the construction operations had retrospective effect.
Therefore because the Collateral Warranty contained future-facing obligations and was retrospective in effect, the date of execution was ultimately irrelevant, even in circumstances where the date of execution post-dated the completion of the works.
Comments:
- Close legal scrutiny of the wording of the Collateral Warranties is recommended to ensure they fall within the scope of the Construction Act, as this decision confirms that in determining whether a Collateral Warranty is a construction contract the focus will not be on when it was entered into but what the Contractors/Consultant is actually warranting and what the terms of the Collateral Warranty actually provide.
- For the beneficiaries of the Collateral Warranties, (that is landlords, tenants, developers, funders), this decision reinforces the right to recourse to adjudication for Collateral Warranties within the ambit of the Construction Act.
- This is particularly relevant in the current climate concerning fire safety related defects where the quality of past work could be secured against a Collateral Warranty.
- This decision raises the possibility of ancillary contracts being deemed “construction contracts” and thus attracting the right to adjudication. This could include funding agreements, third-party rights schedules, parent company guarantees guaranteeing the performance by the contractor of its obligations under a building contract, or even joint venture agreements where the parties agree with one another properly to perform their obligation under a construction contracts.
- Parties entering into other ancillary agreements should therefore consider whether the express language of any such contracts establish primary obligations in relation to past, future, or ongoing performance of construction operations, as this may enable recourse to adjudication under the Construction Act in respect of these agreements.
