The final verdict: Is a collateral warranty a construction contract?
As many were commencing their summer vacations, a longstanding and groundbreaking decision emerged from the Supreme Court. The issue to be decided has been the subject of commentary and discussion amongst construction professionals for several years relating to the case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP).
Last year, those within the industry waited in anticipation for the Court of Appeal’s decision which provided determination as to whether a collateral warranty could be construed as being a construction contract. At the time it was formally held to be the case, as decided by the Court of Appeal, that a collateral warranty was indeed a construction contract
In July 2024, the Supreme Court overturned the Court of Appeal’s decision and reached a significant conclusion that the majority of collateral warranties cannot be construction contracts bringing the long-lasting debate to fruition. This will no doubt have consequences throughout the construction industry. For instance, the decision will impact on the statutory adjudication provisions and the applicability of them going forwards.
Case background
In 2015 Abbey Healthcare (‘‘Abbey’’), as an ultimate tenant, engaged Simply Construct to build a care home. Practical completion was achieved in 2016, but fire safety defects were discovered, and remedial works were carried out and completed by 2020. Abbey and Simply Construct then entered a collateral warranty relating to the remedial works.
Abbey sought to rely on the collateral warranty issued by Simply Construct to recoup their c.£1mil loss arising from having to carry out the remedial works.
The warranty stated that Simply Construct “has performed and will continue to perform diligently its obligations under the contract”.
Abbey referred the dispute to adjudication and were awarded sums against Simply Construct. Simply Construct contested the jurisdiction of the adjudicator, arguing that the collateral warranty was not a construction contract and resisted paying the sums awarded.
The decision to do so set the scene for a long-lasting dispute which culminated in the recent Supreme Court decision.
The Technology and Construction Court (TCC), as part of enforcement proceedings, was left to consider whether the collateral warranty was a construction contract pursuant to the Housing Grants, Construction and Regeneration Act 1996 (‘‘the Act’’) and specifically whether a collateral warranty gave rise to an agreement for the carrying out of construction operations under the Act (s.104). If the Act were to apply, it would mean that adjudication was the correct forum for the dispute and that the adjudicator’s decision would be enforceable against Simply Construct. Conversely, if the Act was not applicable and a collateral warranty was deemed not to be a construction contract it would deem the adjudicator to lack jurisdiction and the award would not be enforceable against Simply Construct.
The TCC determined that the collateral warranty was not a construction contract.
The Court considered the following in reaching the decision:
- The obligation in the collateral warranty was retrospective which only warranted the work already completed as opposed to any future work.
- Unusually, the collateral warranty was only issued after practical completion had been achieved which suggested it was not a contract to perform construction work; and
- The TCC’s view was that the intention of the collateral warranty was to provide assurances as for the works completed as opposed to guarantee future performance of construction.
Abbey took the decision to the Court of Appeal which adopted a different stance to the TCC determining that the collateral warranty was a construction contract under the Act relying on the judgment of Parkwood Leisure Ltd v Laing O’Rouke Wales and West Ltd [2013].
The decision in Parkwood set out that not every collateral warranty can be considered a construction contract, and it was dependant on the nature of the wording used. If the collateral warranty set out construction operations, then it could be construed as being a construction contract, but if it only warranted previous works then it was indicative of a collateral warranty not being a construction contract.
In reaching a decision Coulson LJ placed emphasis on the use of words within the collateral warranty such as ‘‘will continue to perform’’ creating an obligation for Simply Construct to warrant future performance. Simply Construct were granted permission to appeal to the Supreme Court. The Supreme Court concluded that the collateral warranty was not a construction contract and therefore the adjudicator did not have jurisdiction and Abbey were unable to enforce the adjudicator’s decision.
The decision is pivotal in several respects and provides an insight into the treatment of collateral warranties going forwards. The key takeaways are outlined below;
1. Broad Interpretation of a “Construction Contract”: The Court of Appeal and the Supreme Court interpreted Section 104(1) broadly, affirming that collateral warranties can sometimes qualify as construction contracts.
- Future Obligations: The timing of the execution of the warranty was deemed not to be a determinative factor in this instance, but the Supreme Court closely scrutinised the nature of the obligations. The court considered a warranty as to future performance and a promise to carry out works to be a collateral warranty that could be viewed as a construction contract.
- Derivative Promise: The key distinction was that the promise under the warranty was a ‘derivative promise’ – i.e. Simply Construct was only promising to Abbey what it had already promised to the employer under the building contract – the promise to Abbey gave rise to no separate construction operation.
In reaching the decision Lord Hamblen determined that the bone of contention was whether the collateral warranty merely replicates undertakings given in the building contract, or whether it gives rise to separate and distinct undertakings for the carrying out of construction operations. It was held that where in a collateral warranty a contractor merely warranted performance of its obligations under the building contract this will not be a construction contract.
The Supreme Court’s stance was that the majority of collateral warranties cannot be considered to be construction contracts.
Implications
This ruling clarifies that not all collateral warranties will automatically be considered construction contracts, but many could be depending on their terms and the nature of the obligations. This logic could also be applied to ancillary documents such as parent company guarantees, and we could see further satellite litigation going forwards.
The Supreme Court’s decision in Abbey Healthcare v Simply Construct marks a significant development in construction law, providing clarity on the status of collateral warranties and supporting the broader interpretation to facilitate efficient dispute resolution. This judgment will likely influence how construction contracts and collateral warranties are drafted and enforced in future cases.
Those drafting collateral warranties should try to ensure that obligations owed under a collateral warranty extend no further than those already provided under a respective building contract if they wish to avoid disputes being referred to adjudication.
Should a party wish to benefit from the right to refer a dispute to adjudication, an express contractual right to do so should be included when collateral warranties are being drafted.
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