Collateral warranties – now "construction contracts"?

In Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] EWCA Civ 823 the Court of Appeal restored clarity in this area of law, holding by a majority decision that collateral warranties can be classified as "construction contracts" in terms of section 104(1) of the Housing Grants Construction and Regeneration Act 1996 (the "Act") and that accordingly there was a right to adjudicate under these forms of agreement.

Background

On 29 June 2015 Sapphire Building Services Limited ("Sapphire") entered into an amended JCT Design and Build 2011 Edition contract with Simply Construct (UK) LLP ("Simply") for the design and construction of the Aarandale Manor care home. Practical Completion was achieved on 29 October 2015.

Sapphire novated the building contract to Toppan Holdings Limited ("Toppan") on 14 June 2017 who then granted a long lease in favour of Abbey Healthcare (Mill Hill) Limited ("Abbey") on 12 August 2017.

Around a year later, Toppan discovered defects in the care home. Simply had not granted a collateral warranty in favour of Abbey as was required by the building contract, and shortly after the defects were discovered Toppan issued proceedings for specific performance for the collateral warranty to be executed. On 23 September 2020 Simply executed and delivered the collateral warranty to Abbey (the "Abbey Collateral Warranty"). The Abbey Collateral Warranty warranted that Simply "has performed and will continue to perform" its obligations under the building contract.

Adjudications and TCC Decision

Toppan and Abbey both raised adjudication proceedings against Simply in respect of the defects and the cost of the necessary remedial work. In the Abbey adjudication, Simply took a jurisdictional objection that the Abbey Collateral Warranty was not a construction contract in terms of s104 of the Act.

That point was heard before the TCC in summary judgement proceedings raised by Abbey. The TCC relied upon Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC) and held that the Abbey Collateral Warranty was not a construction contract as it was not an agreement for "the carrying out of construction operations".

Key points

Abbey appealed that decision to the Court of Appeal who were asked to consider whether a collateral warranty could be a construction contract as defined by s104 of the Act.

The Court of Appeal found that the Abbey Collateral Warranty was a construction contract.

The court looked at the statutory definition of a "construction contract". As defined in the Act, a construction contract is "an agreement…for the carrying out of…construction operations". The court decided this should be given a wide interpretation and said that it was not to be confined to either a traditional building contract or the primary building contract, where more than one construction contract exists.

The court then looked at whether or not a collateral warranty could be a construction contract and said this would depend on the express words and substantive rights construed within their proper context. For example, a warranty which provided a fixed promise or guarantee in respect of a past state of affairs may not be a construction contract, but a warranty that a contractor was carrying out and would continue to carry out construction operations to a specified standard, could be.

Lord Justice Coulson went on to discuss the need for a construction contract to contain detailed payment provisions in terms of s109 of the Act and said that if a collateral warranty contained an agreement to pay a single amount (often a nominal sum), it could be a construction contract in terms of the Act.

On the basis that the Abbey Collateral Warranty did not fall outside of the broad interpretation of s104(1) and was not materially different to the collateral warranty in the Parkwood case, it was held to be a construction contract.

The court also considered whether the date of execution of the Abbey Collateral Warranty made any difference – here the warranty was executed after the contract works were completed. The court found that because the warranty was retrospective in nature – and made a promise as to the standard of past work as well as to the future carrying out of work – the timing of the execution of the warranty was of little relevance to its categorisation under s104(1).

Implications of the decision?

The decision clarifies that collateral warranties can be construction contracts in terms of the Act. This means that should a dispute arise under or in terms of a collateral warranty then depending on its particular terms parties could have a statutory right to adjudicate under it. If the Act applies it cannot then be contracted out of. This is particularly important as claims under collateral warranties could then be subject to a fast track adjudication process, as opposed to lengthy (and likely more expensive) litigation proceedings.

Parties entering into collateral warranties should therefore carefully review the particular terms of the warranty as depending on its terms they could be exposed to claims under the warranty being heard in adjudication proceedings.