Choose your words carefully: is a collateral warranty a construction contract?
In the recent case of Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP, the Supreme Court held that a collateral warranty is not a construction contract.
Ross Galbraith, partner, and Ellen Williamson, solicitor apprentice, both in our construction team, summarise the case and reflect on practical implications.
What are the facts?
Simply Construct (UK) LLP (“Simply”) was a contractor appointed by Sapphire Building Services under a JCT Design and Build Contract 2011 to build a 65-bedroom care home.
In June 2017, the building contract was novated to Toppan Holdings Ltd (“Toppan”) and, in August 2017, Toppan granted a 21-year lease to Abbey Healthcare (Mill Hill) Ltd (“Abbey”). Practical completion occurred in 2018.
Following practical completion, Toppan discovered fire safety defects and engaged a third party to carry out remedial works, which were completed in February 2020.
In June 2020, Toppan requested that Simply provided a collateral warranty in favour of Abbey. This was completed in October 2020.
Toppan and Abbey both issued claims, pursuant to the building contract and collateral warranty respectively, in relation to fire safety defects and the costs of remedial works.
Toppan and Abbey referred the separate claims against Simply to the same adjudicator, who awarded sums in favour of both Toppan and Abbey.
Simply subsequently argued that a collateral warranty is not a “construction contract” pursuant to section 104(1) of the Construction Act and, as such, Abbey did not have a statutory right to refer the claim to adjudication.
Proceedings
The initial judgment found that the collateral warranty in these circumstances was not a construction contract.
The reason was that the collateral warranty could not be interpreted as an agreement for the carrying out of “construction operations” pursuant to section 104(1)(a) of the Construction Act.
The Court of Appeal then reversed the initial judgment and found that a collateral warranty could be considered a construction contract pursuant to the Construction Act.
The Court of Appeal followed the judgment in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd (“Parkwood”). Parkwood clarified that not every collateral warranty could be considered 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.
However, if the operations only warranted a previous state of affairs, then it pointed towards the collateral warranty not being a construction contract.
The Court of Appeal noted that, whilst the collateral warranty justified the 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 retrospective in nature.
In its latest decision, the Supreme Court has overturned the Court of Appeal’s decision and has found in favour of the initial judgment (that a collateral warranty is generally not a construction contract).
In its judgment, the Supreme Court said that for a collateral warranty to be construed as a construction contract:
“There needs to be a separate or distinct obligation to carry out construction operations; not one which is merely derivative and reflective of obligations owed under the building contract”.
The collateral warranty in this case was not considered a construction contract as it did not promise anything that was not otherwise promised to the employer under the building contract.
The decision in Parkwood, which was the initial judgment stating that a collateral warranty could be a construction contract, has been overturned.
Practical implications
Although it’s still possible for a collateral warranty to be construed as a construction contract (if it contains separate/distinct obligations to undertake works), generally a collateral warranty won’t be considered a construction contract.
As such, either party will not have a statutory right to refer any dispute that arises pursuant to the collateral warranty to adjudication.
If the parties pursuant to a collateral warranty want to benefit from the statutory adjudication process, then express wording should be included to that effect in the collateral warranty.
For more information on the above changes, or if you have any questions on construction law in general, please contact Ross Galbraith using [email protected].