Collateral Warranties and the Irish Construction Contracts Act, 2013

The Irish Construction Contracts Act, 2013 (‘the Act’), will apply to all construction contracts entered into after the 25th July, 2016. The Act allows a party to a construction contract to refer a payment dispute to adjudication for resolution. In order to avail of this right the contract in question must be a ‘construction contract.’ Such a contract is defined in the Act as including ‘carrying out construction operations.’ In turn ‘construction operations’ is defined, and it includes items that one would normally associate with building works such as construction, alteration, repair, maintenance and so on. Almost identical provisions are contained in UK legislation.

An interesting issue arises regarding whether and in what circumstances collateral warranties can amount to construction contracts. Consequently, if it is considered a construction contract, a payment dispute arising thereunder could be referred to the new adjudication procedure. Guidance on this point can be drawn from the UK case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC).

In Parkwood a landlord entered into a construction contract with the contractor (Laing). The contractor also entered into a collateral warranty agreement with the tenant (Parkwood, the beneficiary under the warranty) towards the end of the construction period. Defects in the works arose which were not remedied by the contractor. Parkwood sought to enforce its legal rights under the warranty and sought a declaration that the collateral warranty was a construction contract. There was no authority on that point prior to this case.

Akenhead J in analysing the wording of the collateral warranty concluded that it was a construction contract for the carrying out of construction operations. Emphasis was placed on a number of points including:

• The Recital and a clause of the collateral warranty set out that the underlying construction contract was ‘for the design, carrying out and completion of a … development;’
• A clause in the warranty contained the express wording that the contractor ‘warrants, acknowledges and undertakes.’ The undertaking involved doing something which, in this case meant, designing, carrying out and completing the remaining works in accordance with the contract. Thus, the contractor undertook to comply with the contract;
• A clause in the warranty set out the remedies to be provided to Parkwood (the beneficiary) by the contractor including the reasonable cost of repair, renewal and/or reinstatement. It also provided that, in the event of the contractor’s breach, the contractor was liable for further damage or losses incurred by the beneficiary up to a certain limit; and
• Although the warranty was agreed towards the end of the construction period, it was not merely guaranteeing a past state of affairs. It provided that the contractor would actually carry out and complete the works to a standard called for by the contract.

As the Irish and UK legislation is identical on relevant issues which arose in Parkwood, the above suggests that if this issue occurred in Ireland, a similar outcome is probable. However, it does not mean that all collateral warranties may be within the scope of the Act. It will depend on the wording of the warranty in question. Import considerations are whether the contractor gives an undertaking to the beneficiary to carry out operations, or merely, warrants a past state of affairs regarding quality. Mindful of this, Akenhead J pointed out that:

‘It does not follow from the above that all collateral warranties given in connection with all construction developments will be construction contracts under the [UK] Act. One needs primarily to determine in the light of the wording and of the relevant factual background each such warranty to see whether, properly construed, it is such a construction contract for the carrying out of construction operations. A very strong pointer to that end will be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed and that the Contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard.’

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