This blog will consider whether a collateral warranty can be considered a construction contract under the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act 1996”). This was the very question asked in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP. In that case, the court confirmed that a collateral warranty could be a construction contract for the purposes of the Construction Act, but it set out that the timing of the collateral warranty was key in this determination. However, only a few months later, the Court of Appeal has confirmed that it intends to review this first instance decision as a matter of public importance.
Briefly, under a collateral warranty a party involved in construction works typically warrants to a third-party beneficiary that it has fulfilled its obligations under its underlying building contract, subcontract or design appointment.
A question which then arises is whether a collateral warranty can constitute a "construction contract" under Section 104(1) of the Construction Act 1996 to allow a beneficiary to exercise the right to refer a dispute arising under the collateral warranty to adjudication. The key question for us, then, is what factors are relevant in determining whether a collateral warranty is a "construction contract"?
This was the issue before the Technology and Construction Court in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP:
Certain construction defects were discovered in a care home after practical completion. The contractor who built this care home, Simply, was asked to rectify these defects but failed to do so. Toppan, the freeholder, and Abbey, the tenant, employed another contractor to remedy these defects.
In October 2020, four years after practical completion, a collateral warranty was executed between Simply, Toppan and Abbey. Toppan and Abbey both brought adjudication proceedings against Simply to recover losses sustained remedying the above defects, both of which were decided in Toppan and Abbey's favour. However, Simply resisted enforcement of this decision on the grounds that the adjudicator lacked jurisdiction, arguing the collateral warranty was not a construction contract. Toppan and Abbey subsequently sought to enforce the adjudicator's decisions in this action.
The question of whether the collateral warranty could fall within the definition of a "construction contract" had previously been considered in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Limited  EWHC 2665 (TCC).
In Parkwood, it was concluded that the collateral warranty in that case was a construction contract, but it was stressed that not all collateral warranties would necessarily be construction contracts. Indeed, this question had to be considered in light of the wording and the relevant factual background of the collateral warranty. Akenhead J considered specifically the wording "warrants, acknowledges and undertakes" in the warranty, finding that the use of these three verbs meant the collateral warranty was for work both in the past and in the future. Indeed, looking at the factual background of the collateral warranty, Akenhead J stated that "a pointer against [a collateral warranty being a construction contract] may be that all the works were completed and that the contractor is simply warrantying a past state of affairs as reaching a certain level, quality or standard."
Consequently, in Toppan, the collateral warranty was considered in light of its factual background and wording, as per Parkwood. While Simply had warranted that it "has performed and will continue to perform diligently its obligations under the Contract" and the judge did consider this referred to both the past and future, the judge ultimately placed more weight on the factual background of the collateral warranty.
The judge noted this factual background was that the collateral warranty was being executed four years after practical completion of the works, and eight months after the remedial works had been carried out by another contractor. The judge ultimately considered that, in these circumstances, the collateral warranty could not be construed as a "construction contract" for the purposes of the Construction Act 1996.
Permission to Appeal
But, the Court of Appeal has recently granted permission to appeal this decision given the wider public importance for the sector in obtaining certainty as to whether collateral warranties are to be treated as construction contracts or not.
While the first instance judgment in Toppan did confirm that a collateral warranty could be a construction contract for the purposes of the Construction Act 1996, it did so by creating a two tier system. It effectively suggested the separation of those collateral warranties executed before completion of the project, which would be deemed "construction contracts" and could proceed to adjudication, from those collateral warranties executed after practical completion, which would not be "construction contracts" and could not be the subject of adjudication. This has created what might be thought to be an unsatisfactory position where collateral warranties in very similar terms might be construed differently on account only of their timing.
It will be interesting to see how the case is dealt with on appeal. We will remain alert to the developments in this case and will post an update in due course.