Collateral Warranties: Are They Simply Construction Contracts?
Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP
This Court of Appeal case considers the meaning of a “construction contract” under the Housing Grants, Construction and Regeneration Act 1996 (the “Act”) and provides some clarity in respect of whether collateral warranties are to be treated as construction contracts and caught by the Act’s adjudication provisions.
By a contract dated 29 June 2015, Sapphire Building Services Limited (“Sapphire”) engaged Simply Construct (UK) LLP (“Simply Construct”) to construct a care home (“the Contract”). The Contract contained Purchaser and Tenant rights in the form of a collateral warranty. Toppan Holdings Limited (“Toppan”), the freeholder, became the Purchaser, and Abbey Healthcare (Mill Hill) Limited (“Abbey”) became the Tenant.
On 13 June 2017, Sapphire and Simply Construct entered into a settlement agreement which required a deed of novation, by which Sapphire transferred its rights and obligations under the Contract to Toppan. On 12 August 2017, Toppan granted a long lease holding of the care home to Abbey.
The following year, Toppan discovered fire-safety defects in the care home. Toppan notified Simply Construct of these and requested them to rectify them, which they did not do, leading Toppan to engage a third party to carry out remedial works. Following requests by Toppan and the issuing of proceedings for specific performance, Simply Construct executed and delivered a collateral warranty to Abbey (“the Abbey Collateral Warranty”) on 23 September 2020 as required by the Contract.
Toppan and Abbey brought claims against Simply Construct arising out of the cost of the remedial works. They served separate adjudication notices on 11 December 2020 and the same adjudicator was appointed in respect of both disputes.
In the Abbey adjudication, the adjudicator awarded Abbey c.£900k. Simply Construct resisted and argued that the Abbey Collateral Warranty was not a construction contract as defined by s.104 of the Act and, therefore, the adjudication machinery was not implied into it, meaning the adjudicator lacked jurisdiction.
The TCC judge, at first instance, found that the Abbey Collateral Warranty could not be construed as a “construction contract” under s.104 of the Act. The judge referred to Akenhead J’s judgment in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd which stated that “A pointer against [a collateral warranty being construed as a construction contract] may be that all the works were completed and that the contractor is simply warranting a past state of affairs ...”
The Abbey Collateral Warranty was executed 4 years after practical completion and 8 months after the remedial works had been completed. There was also no evidence that further construction operations were being contemplated. The only latent defects discovered after the date of the Settlement Agreement had been remedied before the Abbey Collateral Warranty had been executed. The judge considered that, where the works had already been completed, and in this case, even the latent defects remedied, a construction contract was unlikely to arise and there was no right to adjudicate.
" When deciding whether a collateral warranty falls within the s.104 definition of construction contracts, the courts will be looking closely at the wording of the warranty itself and all the relevant factual background."
Abbey appealed this decision. There were three issues on the appeal; 1: can a collateral warranty ever be a construction contract as defined by s.104(1)? 2: if the answer to Issue 1 was ‘yes’, did the terms of the Abbey Collateral Warranty make it a construction contract as defined by s.104(1)? 3: if the answer to Issue 2 is ‘yes’, did the date on which the Abbey Collateral Warranty was executed make any difference?
In respect of Issue 1, the Court of Appeal found that a collateral warranty is capable of being construed as a construction contract under s.104(1). It will depend on the wording; a warranty which provides a fixed promise or guarantee in respect of a past state of affairs may not be a contract for the carrying out of construction operations. Conversely, a warranty that the contractor was carrying out, and would continue to carry out, construction operations may well be a contract for the carrying out of construction operations. Coulson LJ ascribed a broad interpretation to s.104(1), stating that it is not to be confined to a traditional building contract. Coulson LJ also looked at the intention of the 1996 Act, and that one of its purposes was to improve the dispute resolution process. It, therefore, follows that the idea that a dispute between a contractor and an employer arising out of allegedly defective work is heard by an adjudicator, whilst the same dispute between the employer and warrantor must be litigated, may be viewed as contrary to the purpose of the Act.
In response to an argument from the Respondent that a s.104 construction contract is usually required to contain detailed payment provisions, Coulson LJ stated that there was nothing in s.104(1) that suggested a construction contract must contain detailed remuneration obligations. Provided the collateral warranty complies with s.109, the absence of detailed payment provisions does not prevent it from being a construction contract.
The second issue was whether the terms of the Abbey Collateral Warranty made it a construction contract as defined by s.104(1). Under clause 4.1(a), Simply Construct warranted that it “has performed and will continue to perform diligently its obligations under the contract.” In Coulson LJ’s view, that warranty covered two things: (i) it set out the standard to which the construction operations would be carried out; and (ii) it is a warranty of past and future performance of the construction operations. It was not limited to the standard to be achieved nor a past situation. The warranty does not include the verbs “acknowledges” or “undertakes” which were present in Parkwood. Akenhead J in Parkwood said an undertaking often involves an obligation “to do something”. In Coulson LJ’s view, the obligation here whereby Simply Construct warranted that it “will continue to perform diligently its obligations under the contract” was also a promise and obligation to do something. Coulson LJ concluded, by the same process Akenhead J adopted in Parkwood, that the terms of the Abbey Collateral Warranty made it a construction contract as defined in s.104(1).
The third issue was whether the date on which the Abbey Collateral Warranty was executed made any difference. The judge had decided against Abbey on this, finding that, because there were no future works to be carried out at the time the Abbey Collateral Warranty was signed, this was a warranty of a state of affairs akin to a manufacturer’s product warranty and was not a construction contract. Coulson LJ disagreed and found that, because the Abbey Collateral Warranty contained future-facing obligations and was retrospective in effect, the date of execution was ultimately irrelevant. Further, it would be counter intuitive and cause uncertainty in situations where a warranty may not be a construction contract in respect of construction operation X because that was completed on 1 January, but it may be a construction contract for the purposes of construction operation Y because that was completed a month later, by which time the warranty had been signed. This is unsatisfactory and would encourage contractors not to sign collateral warranties until after they had finished as many of the construction operation as they could to avoid the implication of the Scheme.
The appeal was, therefore, allowed on the basis that the judge was wrong to find that the timing of the execution of the Abbey Collateral Warranty was the determinative factor.
This decision provides some certainty in respect of the interpretation of collateral warranties and their place in s.104 of the Act and, in doing so, endorses the Akenhead J’s decision in Parkwood. When deciding whether a collateral warranty falls within the s.104 definition of construction contracts, the courts will be looking closely at the wording of the warranty itself and all the relevant factual background. The decision also continues the Court’s policy of endorsing adjudication and making it as widely available as possible within the drafting of the Act.
The story might not be over. Leave to appeal to the Supreme Court was granted in December 2022, so watch this space!