Collateral Warranties in Construction Contracts
The Supreme Court has recently clarified the law around collateral warranties and whether they are ‘construction contracts’ for the purposes of the Housing, Grants, Construction & Regeneration Act 1996, when it handed down judgment in the case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23.
B P Collins’ construction dispute resolution team explores why the case has significant implications with regard to whether the statutory right to adjudication will be available to parties to a collateral warranty.
Construction Contracts and Collateral Warranties
A construction contract is widely defined by section 104 of the Act as an agreement with a person for any of the following:
(a) the carrying out of construction operations;
(b) arranging for the carrying out of construction operations by others, whether under a sub-contract or otherwise;
(c) providing their own labour, or the labour of others, for the carrying out of construction operations.
Take a construction contract between contractor and employer: a third-party purchaser buying the land and building(s) will want assurances that the works undertaken by the contractor are defect-free and if they are not, they are able to bring a claim against the contractor (with whom they do not have a contractual relationship).
This issue is often dealt with by way of the employer inviting the contractor to “warrant” to the purchaser that they are carrying / have carried out the works properly, or in a certain way or to a certain standard and, in this way, a collateral warranty arises.
Prior to the Abbey Healthcare case, in Parkwood v Laing [2013] the courts had considered that a collateral warranty could be a construction contract in certain circumstances.
Background to the Abbey Healthcare case
The case concerned various fire safety defects which were discovered at a care home operated by Abbey Healthcare. The care home was designed and built by Simply Construct.
Simply was engaged by Sapphire Building Services to build the care home in 2015. The build contract contained a clause which required Simply to execute a collateral warranty for the benefit of a tenant: Abbey Healthcare.
Practical completion was achieved in 2016. The alleged fire safety defects were discovered in 2018.
In December 2020, Abbey referred the dispute to adjudication. Simply challenged (unsuccessfully) the jurisdiction of the adjudicator on the grounds that the collateral warranty was not a construction contract. Subsequently, the adjudicator found in favour of Abbey and awarded damages of £869,500 plus interest.
Simply did not pay the sums due under the adjudication and in May 2021, Abbey issued enforcement proceedings to enforce the adjudicator’s decision. The Judge at first instance found that the contract was not a construction contract. That judgment was overturned by the Court of Appeal, which in turn was appealed to the Supreme Court.
The Supreme Court’s Decision
The Court of Appeal had relied on the decision in Parkwood, which had placed importance on whether or not the collateral warranty made promises with regard to future performance (in which case it would be a construction contract) or was purely a promise in respect of previously carried out works (which would not be a construction contract.)
The wording of the collateral warranty in Abbey referred to Simply continuing to perform its obligations under the build contact and continuing to exercise all reasonable care and skill in carrying out the design and build works, notwithstanding that those works were substantially complete prior to the execution of the collateral warranty. On that basis, the Court of Appeal concluded that the collateral warranty was a construction contract.
The Supreme Court, however, took issue with this approach. In the Supreme Court’s view, the plain wording of section 104 of the Construction Act was instructive. A construction contract meant an “agreement with a person for […] the carrying out of construction operations”.
The use of the word “for” meant that for a collateral warranty to be a construction contract it would need to go further than simply promising to perform obligations owed to someone else under the build contract, as the majority of collateral warranties do. There would need to be a distinct obligation to carry out construction operations for the beneficiary of the warranty, “not one which is merely derivative and reflective” of existing obligations under the build contract.
Since the majority of collateral warranties do merely promise to perform the obligations owed to someone else (i.e. the employer) under a build contract, the impact of this decision is that, generally speaking, collateral warranties will not be considered construction contracts and the statutory right to adjudicate will not apply. The Supreme Court’s decision has re-established the orthodox pre-Parkwood position.
The certainty provided by this decision is to be welcomed. For those parties who want there to be a right of adjudication under a collateral warranty, this can still be achieved – whether by ensuring that the collateral warranty contains an express contractual right to adjudicate, or by executing a collateral warranty that does in fact create a separate and distinct obligation for the carrying out of construction operations for the beneficiary of the warranty.
One question the decision raises is what the position will be going forward in respect of existing disputes where collateral warranties are at issue? It would appear that parties who might have been anticipating adjudication proceedings, or are even partway through an adjudication, will now find themselves having to resort instead to traditional litigation.
For further details on our construction law services, please contact us at enquiries@bpcollins.co.uk or call 01753 889995.
