The Supreme Court has determined that a collateral warranty is not a construction contract and therefore cannot be subject to adjudication
The case, Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct UK LLP), concerned whether the collateral warranty given by Simply Construct to Abbey Healthcare is a ‘construction contract’ within the meaning of section 104(1)(a) of the Housing Grants (Construction & Regeneration) Act 1996 so as to give rise to a right to statutory adjudication.
Simply Construct built a care home in 2015 in north London for Sapphire Building Services Ltd. In 2017, the building contract was novated from Sapphire to Toppan Holdings, which granted a 21 year lease of the property to Abbey Healthcare.
In 2018, Toppan discovered alleged fire safety defects at the property. Simply was asked to rectify them but it didn’t. Toppan subsequently engaged a third party contractor to conduct remedial works, paid for by Abbey.
In 2020 Toppan Simply provided a collateral warranty to Abbey and Toppan.
Toppan and Abbey made claims against Simply arising out of the fire safety defects and costs of remedial works. Toppan and Abbey each referred to adjudication a dispute regarding the alleged defects, seeking sums in excess of £8.8m and £5.5m respectively.
The adjudicator, Peter Vinden, issued his decisions in April 2021 finding for Toppan and Abbey on liability. Simply did not pay the sums due. The following month Toppan and Abbey issued proceedings in the Technology & Construction Court to enforce the decisions by way of summary judgment.
The initial judge ruled that the warranty given to Abbey was not a construction contract within the meaning of 1996 Act and therefore the adjudicator lacked jurisdiction.
Abbey appealed to the Court of Appeal, successfully. The appeal court judges agreed that a collateral warranty could be a construction contract and a majority held that the Abbey collateral warranty was such a contract.
In December 2022 Simply got permission to appeal to the Supreme Court. The Supreme Court unanimously came down on Simply’s side.
This conclusion means that the decision of Akenhead J in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC) was wrongly decided and must be overruled, the Supreme Court said.
Commenting on the judgment, Gordon Chan, a solicitor in the construction & engineering team at Irwin Mitchell, said: "This judgment has substantial implications for the construction industry as it provides clarity on the limits of statutory adjudication rights under the Construction Act, and distinction between primary contractual obligations and warranties of performance."
Tim Seal, head of construction at law firm Ridgemont, elaborated: “In today’s judgment, the Supreme Court has unanimously decided that the Court of Appeal was wrong to hold in 2022, that the collateral warranty in favour of Abbey Healthcare was a construction contract under S.104(1) Housing Grants, Construction and Regeneration Act 1996 and hence it carried the right to adjudicate. In doing so the court decided that the case of Parkwood on which the Court of Appeal relied, had also been wrongly decided.
"The Supreme Court concluded – in paragraph 84 of the judgment – that: 'A collateral warranty will be an agreement 'for … the carrying out of construction operations' if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor’s obligation to do so under the building contract'. And that, 'A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement 'for' the carrying out of construction operations.'
"It follows from this that 'most collateral warranties will not be construction contracts' and hence will be without the right to adjudicate. However, an express right to adjudicate can always be included in the warranty if required.
"This decision is a significant reversal of the law as it has been since Parkwood.”
The full judgment can be found at www.supremecourt.uk/cases/docs/uksc-2022-0124-judgment.pdf
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