Summary
Supreme Court decides that most collateral warranties will not be ‘construction contracts’ for the purposes of the Construction Act.
Introduction
Last year, we closely followed the Court of Appeal decision on collateral warranties in Abbey Healthcare (Mill Hill) Ltd (Abbey) -v- Simply Construct (UK) LLP (Simply) [2022] EWCA Civ 823. You can find our update here.
This case marks a significant development in UK construction law, particularly concerning the interpretation of and applicability of statutory adjudication provisions to, collateral warranties.
A collateral warranty is a promise by the contractor or a professional consultant (the warrantor) to carry out its obligations under a building contract or professional appointment for the benefit of a third party who has an interest in the construction project such as a purchaser, funder or tenant.
On 9 July 2024, the Supreme Court’s released its landmark ruling which will have implications for the wider construction industry.
Background
Abbey was the ultimate tenant and operated a care home designed and built by Simply in 2015. Practical completion of the works was achieved in 2016.
In 2018, a dispute arose in relation to certain cladding and fire safety defects discovered at the property. Remedial works were carried out and were practically complete by 2020.
In late 2020, Abbey and Simply entered into a collateral warranty concerning the works.
Amongst other things, Simply warranted to Abbey that it, “has performed and will continue to perform” its obligations under the building contract.
Both Abbey and the ultimate owner commenced separate adjudication proceedings against Simply seeking damages in respect of the cost of the remedial works. Each were awarded in the region of £1m.
The case has been in the hands of three courts culminating in the Judgment of the Supreme Court.
Technology and Construction Court (TCC)
The central issue in this case was whether the collateral warranty constituted a “construction contract” under the Housing Grants, Construction and Regeneration Act 1996 (the Act). Specifically, was the collateral warranty an, “agreement for the carrying out of construction operations” within the meaning of s.104 of the Act.
If it was a construction contract, then the statutory adjudication provisions of the Act would apply, and the adjudicator’s award would likely be enforced against Simply. If the collateral warranty was not a construction contract (as Simply contended during the adjudication), then the statutory adjudication provisions of the Act would not be implied into the collateral warranty; the Adjudicator would be deemed to have no jurisdiction and his award against Simply would not be enforced.
The TCC ruled that the collateral warranty was not a construction contract within the meaning of the Act.
This decision was primarily based on the interpretation of the terms and the timing of the warranty. The Court’s key points were threefold:
- The nature of the obligation was retrospective and only warranted the work already completed rather than any future work;
- The collateral warranty was issued after practical completion of the works and thereby indicated it was not a contract to perform construction work; and
- The Court deemed the purpose of the collateral warranty was to provide assurance about the works already completed, rather than to govern the performance of ongoing or future construction operations.
Court of Appeal Decision
The decision of the TCC judge was appealed and the Court of Appeal took a different view. The majority decided that the collateral warranty was a construction contract, and that the wider question as to whether a collateral warranty was a construction contract depended on what was actually warranted.
This judgment followed the judgment in Parkwood Leisure Ltd -v- Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (Parkwood).
Parkwood made clear that not every collateral warranty would be a construction contract as it depended on the precise wording used; if a contractor warranted to positively carry out the construction operations, the collateral warranty would likely be a construction contract but if they only warranted to a previous state of affairs then it pointed towards the collateral warranty not being a construction contract.
Coulson LJ noted that whilst the collateral warranty warranted past performance of Simply’s construction operations, the use of the words, “will continue to perform” created an ongoing promise as to future performance.
The Court of Appeal also confirmed that the date of execution of the collateral warranty (some years after practical completion of the works) was not relevant, as the collateral warranty warranted both past and future obligations and was therefore retrospective in nature.
In December 2022, Simply was granted permission to appeal to the Supreme Court.
Supreme Court Decision
The Supreme Court overturned the decision of the Court of Appeal and concluded that the collateral warranty was not a construction contract.
Lord Hamblem agreed with the Court of Appeal’s judgment to the extent that the warranty was potentially a warranty as to future performance and that it was a promise to carry out the works.
The crucial distinction however was that the promise under the warranty was a ‘derivative promise’ – i.e. Simply was only promising to Abbey that which it had already promised to the employer under the building contract – the promise to Abbey gave rise to no separate construction operation.
Lord Hamblen agreed with Simply in that a workable approach to the question of whether a collateral warranty is a construction contract, is whether the collateral warranty merely replicates undertakings given in the building contract, or whether it gives rise to separate and distinct undertakings for the carrying out of construction operations. A collateral warranty where the contractor merely warranted performance of its obligations under the building contract will not be a construction contract.
Accordingly, adopting such an approach, the Supreme Court’s view was that most collateral warranties will not be construction contracts.
Key takeaways
The decision of the Supreme Court is important. It draws a clear dividing line between the status of collateral warranties which either replicate existing obligations of a contractor under a building contract, or those which include separate and distinct obligations owed to the beneficiary under the warranty.
Accordingly, most collateral warranties will not be considered construction contracts. The position is likely to be the same with respect to other ancillary documents such as parent company guarantees.
Those drafting collateral warranties should ensure that the obligations owed by a contractor under a collateral warranty go no further in scope than those provided under any building contract, if they want to avoid the implication of the statutory right to adjudicate.
Should a beneficiary under a collateral warranty wish to benefit from the statutory adjudication provisions of the Act, it should now consider including an express contractual right to refer a dispute under the warranty to adjudication.
For further information, please contact:
Tricia Morrison, Hill Dickinson
tricia.morrison@hilldickinson.com
