Abbey Healthcare further confirmed that the test for whether a collateral warranty will be a construction contract is as follows:
- A collateral warranty will be an agreement “for … the carrying out of construction operations” if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor’s obligation to do so under the building contract.
- A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement “for” the carrying out of construction operations.”
Therefore, if the test in (1) above is not satisfied and the parties wish to refer disputes to adjudication, then the parties will need to include a contractual adjudication clause in the collateral warranty.
It is unclear at the moment how the market will approach the inclusion of a contractual adjudication clause in a collateral warranty. There are arguments for and against doing so.
On the plus side:
- Adjudication, by comparison to lengthier alternative dispute resolution (ADR) processes (such as arbitration) or court litigation, offers parties a swift, cost-effective form of dispute resolution.
- Contractual adjudication offers the parties the flexibility to determine the powers of the adjudicator, procedure, timetable and the effect of the decision (for example, whether it is temporarily or finally binding).
- Parties are free to choose the arbitrator with specific qualifications and professional backgrounds appropriate to the nature of the dispute.
- The process is likely to remain private (subject to any confidentiality provisions in the collateral warranty). If the adjudication process needs to be adapted
On the negative side:
- The parties are free to agree whether the adjudication decision is to be temporary or binding. As claims under a collateral warranty are most likely to arise at the end of the project, and not related to cash flow, a non-binding decision will be of little benefit.
- Matters are unlikely to be considered in detail, making adjudication inappropriate for complex defects claims more appropriately addressed in proceedings in the courts or arbitration. If adjudication processes need to be adapted to deal with complex matters, there may not be any significant cost savings particularly where inspections, testing, expert meetings, and the like are required.
- Adjudication limits the ability to join other parties to the dispute. This can be provided for in the drafting, but will become complex where related contracts do not contain a similar mechanism. It is unlikely in most circumstances that multi-party adjudications will result in significant cost savings.
- Unless specifically provided for, the parties will not be able to recover legal costs.
In conclusion, prior to the decision in Abbey Healthcare there appeared to be little appetite to include a contractual adjudication clause in collateral warranties. However, that is not to say that it may not be appropriate to do so in certain circumstances. Should you wish to discuss this further, or need advice about a dispute relating to collateral warranties, please contact construction and engineering solicitor Kerry Beattie.
