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Posted July 10, 2024 | Published in Dispute resolution

UK Supreme Court finds that collateral warranties are not a construction contract

Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2024] UKSC 23

The Supreme Court has provided welcome guidance on whether a collateral warranty is a “construction contract” as defined by the Housing Grants Construction and Regeneration Act 19961 (the “Construction Act”) by determining that, in most, cases they are not. 

This is important, as a defining feature of the Construction Act is that it confers a statutory right on parties to a “construction contract” to refer disputes arising under that contract to adjudication at any time.  As explained below, while the Supreme Court’s decision severely limits any such statutory right in respect of collateral warranties, it provides much needed clarity for the industry.  

In Abbey the dispute concerned a care home constructed by Simply in North London, alleged fire safety defects and a collateral warranty that Simply had provided to Abbey (the tenant and operator of the care home), which warranted, amongst other things, that Simply: “has performed and will continue to perform diligently its obligations under the building Contract.”

In December 2020, Abbey commenced an adjudication against Simply to recover costs arising from the alleged fire safety defects and associated remedial works. In response, Simply argued the Adjudicator did not have the necessary jurisdiction to determine the dispute as the collateral warranty was not a construction contract within the definition in the Construction Act.  

The Adjudicator decided that he did have jurisdiction, because the collateral warranty was a construction contract, and ultimately the dispute in Abbey’s favour. However Simply refused to pay the sums awarded, forcing Abbey to enforce the Adjudicator’s decision in the Technology and Construction Court.

The TCC found that the collateral warranty given by Simply was not a construction contract within the meaning of the Construction Act, meaning the Adjudicator had no jurisdiction to determine the dispute. Abbey appealed to the Court of Appeal. 

In 2022 the Court of Appeal reversed the decision, finding that the collateral warranty was a construction contract for the purpose of the Construction Act.  It is worth noting at this point, that the Court of Appeal’s decision created a bit of a headache for the industry as the question of whether a collateral warranty was indeed a construction contract was dependent solely on its wording.  There was also a concern that the Court of Appeal’s judgment would mean ancillary contracts, such as parent company guarantees or funding agreements, could also be deemed construction contracts. 

Thankfully, Simply sought and was awarded permission to appeal to the Supreme Court, which leads us here…

A collateral warranty is not a construction contract

The Supreme Court unanimously found that the Simply collateral warranty was not a construction contract and that, more widely, most collateral warranties would not be considered a construction contract capable of conferring the right to adjudicate under the Construction Act. The reasons for this important decision were that:

  • A construction contract under the Construction Act is defined as an agreement “for…the carrying out of construction operations”. 
  • In determining whether a construction contract exists, a tribunal will have to assess “whether the object or purpose of the agreement is the carrying out of construction operations”. On this point, the Supreme Court added it was “difficult to see” how most collateral warranties could be assessed in that way. 
  • Collateral warranties were never intended to be caught by the scope of the Construction Act as the Act’s provisions regarding payment and cash flow (i.e., those provisions which are the cornerstone of the Act) are not applicable to collateral warranties. 
  • A collateral warranty (such as Simply’s) where the contractor merely promises to the beneficiary that the construction operations undertaken under a building contract have been and will be performed, is not an agreement “for” the carrying out of construction obligations.  In such circumstances, it is the building contract which gives rise to the carrying out of the construction operations, not the collateral warranty. 

Lord Hamblen in his leading judgment did note, however, the possibility for a collateral warranty to constitute a construction contract for the purpose of the Construction Act if it were to contain a separate or distinct obligation to carry out construction operations for the beneficiary; not an obligation which is merely reflects the obligations owed under the building contract.  The Supreme Court was also clear that parties were free to draft their collateral warranties so as to include a right to adjudicate. 

Ultimately, in handing down its judgment, the Supreme Court has introduced a clear dividing line between construction contracts that govern primary relationships between employers and contractors and documents such as collateral warranties that provide secondary obligations, which will be of great assistance to the industry. As Lord Hamblen neatly put it, the Supreme Court’s judgment creates certainty and: “will assist those in the construction industry, and those advising them, to know where they stand.”   

  • 1. Section 104(1)(a)

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