Collateral warranties are unlikely to be construction contracts

The Supreme Court have allowed the appeal in Abbey Healthcare (Mill Hill) Limited ("Abbey") v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) ("Simply") [2024] UKSC 23.

The Court held that for a collateral warranty to be a construction contract in accordance with section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 ("the Act") then there must be a separate or distinct obligation to carry out construction operations for the beneficiary of that collateral warranty. This means that s108 of the Act, which provides for a mandatory right to adjudication, will not be applicable to that majority of collateral warranties which, absent such an obligation, do not qualify as construction contracts.

Contractual Background

Simply entered into a JCT Design and Build Contract 2011 (the "Building Contract") with Sapphire Building Servies Limited ("Sapphire") to design and build the Aarandale Manor care home ("the Property"). The Building Contract was novated from Sapphire to the owner of the property, Toppan Holdings Limited ("Toppan") who subsequently granted a 21-year lease of the property to Abbey as the operator of the care home business.

In August 2018, alleged fire safety defects were discovered at the Property. Simply was notified of these defects and requested to rectify them. They failed to do so, and a third party contractor was engaged to carry out the remedial works. After some legal wrangling, Simply entered into a collateral warranty in favour of Abbey (the "Abbey Collateral Warranty"), under which it confirmed, amongst other things, that it had diligently performed its works under the Building Contract.

Procedural History

In December 2020, Toppan and Abbey each brought adjudication claims against Simply regarding the alleged fire safety defects and the cost of remedial works. Simply challenged the jurisdiction of the adjudicator in the Abbey adjudication on the grounds that the Abbey Collateral Warranty was not a construction contract within the meaning of s104(1) of the Act. The adjudicator rejected this challenge and awarded damages to Abbey. Simply did not pay the award, and the matter then proceeded to the Technology and Construction Court for enforcement (which we have commented on further here), and from there to the Court of Appeal (commented on here). The Court of Appeal held that the Abbey Collateral Warranty was a construction contract, meaning Abbey were entitled to adjudicate and that the Adjudicator's award should stand.

Supreme Court Decision

Simply appealed the decision to the Supreme Court, arguing that the finding that the Abbey Collateral Warranty was a construction contract was wrong and that the dissenting judgment of Stuart-Smith LJ in the Court of Appeal was correct. The Court agreed and held that for an agreement to fall within the definition of a construction contract then it must give rise to separateobligations for the carrying out of construction work, distinct from those undertaken under the related building contract.

Applying this approach to the Abbey Collateral Warranty, the Court found that the promise provided by Simply that it "has performed and will continue to perform" its obligations under the main building contract, was solely a derivative obligation that did not give rise to separate or distinct obligations to Abbey for the carrying out of construction operations. Therefore, the Abbey Collateral Warranty was not a construction contract and the adjudicator lacked jurisdiction to make his award.

Practical Implications

This decision brings to a close more than a decade of debate on this issue (starting with the case of Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC)). The Supreme Court have given clear and unambiguous guidance that unless a document itself provides for the carrying out of construction operations, then it will not be a construction contract.

What this means in practice is that most collateral warranties will not be considered as construction contracts and, as a result, parties to a warranty will no longer have a right to adjudicate unless they expressly provide for such a right in the warranty itself. We expect to see negotiations on this issue increase as parties are likely to disagree on whether an express right to adjudicate is beneficial.