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A slip-up by the pool? Collateral warranties held to fall within the Construction Act for the first time

13 December 2013
Have you noticed how often swimming pools feature in important cases? Consider, for example, the 2012 case of Walter Lilly & Co Ltd v Mackay which clarified several issues commonly encountered in construction disputes and involved a luxury home with a basement pool. The recent High Court decision in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] is likely to join this (water) canon.

The case concerned a swimming pool and leisure facility on a site owned by Cardiff City Council. The Council let the site to a property developer who engaged Laing O'Rourke Wales and West Ltd to construct the facility. Practical completion was achieved in 2008. In December 2007, before completing the works, LOR provided a collateral warranty in respect of the works to the facility operator, Parkwood Leisure Ltd, a subsidiary of the developer.

In 2011, a dispute between Parkwood and LOR arose over defective work. The parties settled and LOR agreed to carry out further works as part of the settlement. Parkwood found further defects and, relying on the warranty, initiated proceedings.  LOR denied there was a dispute. Parkwood sought a declaration that the warranty was effectively a "construction contract" pursuant to the Housing Grants, Construction and Regeneration Act 1996 (commonly referred to  as the Construction Act) and that its claim could therefore be adjudicated. Mr Justice Akenhead granted the declaration.

Many industry players have criticised the decision, arguing that collateral warranties are not the types of contract the Act was introduced to cover, because, for example, they do not include direct payment obligations for having carried out work or rights to deduct liquidated damages for late or defective performance. However, the decision still stands.

Perhaps an unexpected outcome will be increased support for third party rights in place of warranties. While the matter has not been the subject of a reported decision, it is generally accepted that third party rights do not of themselves create a contract. As such there is less chance of statutory adjudication rights being invoked for their enforcement.

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