Collateral warranties - can you adjudicate?

Collateral warranties are often provided in the construction industry. They give a party a contractual right where none would otherwise exist. So for instance, warranties can be given by contractors to funders and tenants, or by a sub-contractor to an employer. 

One of the reasons a warranty is chosen, rather relying on the Contracts (Rights of Third Parties) Act, is that it can be treated as a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act which means that the parties to a warranty can resolve disputes by adjudication.

In 2013 the courts cast doubt on whether all collateral warranties provided in relation to building contracts were construction contracts and therefore whether they all automatically provided for adjudication. Click here for Alexandra Pike's blog at the time.  

It has taken rather longer than expected, but we now have a case which has sought to clarify the position (Toppan v Simply). 

Broadly, if the works are not complete when the warranty is executed, there is a much stronger argument that there is a statutory right to adjudicate under the warranty.  The chances of there being a right to adjudicate under the warranty diminish when the warranty is entered into after completion, and the longer after completion the more likelihood there is that there is no right to adjudicate.

Although not determinative it is worth noting that the judge also made the point that the warranty in question  did not include the words ‘acknowledges’ or ‘undertakes’.

So, if parties want to provide for adjudication, make sure the warranty is entered into before completion of the works, and  if in any doubt, include a specific adjudication clause in the warranty itself.

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