The Supreme Court has unanimously ruled that a collateral warranty is not a “construction contract” for the purposes of the section 104(1) of Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996). This means parties do not have any statutory right at any time to adjudicate any dispute under it.
The Supreme Court in Abbey Healthcare (Mill Hill) Ltd v Simply Construction (UK) LLP has clarified the position with regards to collateral warranties as construction contracts- and unanimously overturned the previous Court of Appeal judgment and the previous ruling in a different case, Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013]. The ruling means that a beneficiary of a collateral warranty does not have a statutory right to refer a dispute to adjudication unless it has other separate and distinct rights, or the warranty contains express provisions allowing for adjudication.
Background
The Abbey v Simply case concerned the construction of a London based 65 bedroom care home called Avondale Manor. Simply was engaged to construct the care home under a JCT design and build contract. In September 2016 Abbey was granted a lease of the care home and practical completion was achieved the following month.
The freeholder of the care home requested that Simply execute a collateral warranty in favour of Abbey, under which Simply warranted that it “has performed and will continue to perform diligently its obligations under the contract”.
In 2018, alleged fire safety defects were discovered at the care home. Simply was informed of the defects but did not go on to correct them and another contractor was engaged to rectify the defects.
The freeholder and Abbey consequently referred a dispute to adjudication and both were awarded sums against Simply by the adjudicator and applied to the Court for summary judgment to enforce the adjudicator’s awards. Simply objected to Abbey’s application, claiming that the collateral warranty was not a “construction contract” under s104(1) of the Act and consequently could not be referred to adjudication.
Ruling
The issue was whether the collateral warranty granted to Abbey was a construction contract within the meaning of the Act. At first instance, the Court held that it was not and the Court of Appeal, by a majority, found that it was. Simply then appealed to the Supreme Court.
The Supreme Court ruled that this collateral warranty was not a “construction contract” as the contractor is merely warranting to the beneficiary that it will perform the obligations it owes to the employer under the building contract.
If, by contrast, it was the case the contractor had given a collateral warranty undertaking a contractual obligation to a beneficiary to carry out specific construction obligations (separate from those under the building contract to which the warranty relates) the position could be different.
In practice, most collateral warranties will therefore not be considered construction contracts, as they do not give separate and distinct obligations to carry out construction operations. In order for adjudication to be available as a method of dispute resolution, provisions will need to be specifically drafted into the collateral warranty.
Further, Lord Hamblen made a few other helpful observations:
- Collateral warranties were never intended to fall within the scope of the Act. This was evidenced by the fact that the payment provisions contained within the Act are not applicable to warranties – one of the main purposes of the Act is to improve of cash flow, and adjudication is designed to assist with this.
- If the parties wish to have a right to adjudication, that can always be provided for. However, adjudication on collateral warranties will be voluntary rather than mandatory.
Impact
This judgment offers welcome clarification as to whether collateral warranties are construction contracts and may impact their use in the construction industry. There is now a clear dividing line between collateral warranties which merely replicate undertakings in the building contract and those which give rise to separate and distinct undertakings for the carrying out of construction operations.
The majority of typical collateral warranties used in the construction industry will be the former and therefore beneficiaries of collateral warranties must now pursue any disputes through litigation. Those advising on construction contracts may therefore wish to consider including express contractual rights in their warranties to refer disputes to adjudication, and the inclusion of such clauses may become a common feature in future negotiations.
If you need any help with negotiating or drafting collateral warranties please contact Charlotte Burroughs at [email protected]
