Collateral warranties and the right to adjudicate

This article was authored by Tegan Johnson, Solicitor Apprentice, Sheffield.

Is a collateral warranty to a construction contract also classed as a construction contract?

The answer had been taken for granted until a decision arose which found a particular collateral warranty was actually not a construction contract for the purposes of the Housing Grants (Construction & Regeneration) Act 1996 (the Construction Act). As a result, it did not include the statutory right to adjudicate, and an adjudication brought in relation to it was invalid for lack of jurisdiction.

Background

Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP was first considered in 2021, but has now been successfully appealed.

Simply Construct (UK) LLP (Simply) was the contractor on the project. Abbey Healthcare (Mill Hill) Limited (Abbey) had the benefit of a long-term lease and a collateral warranty executed in their favour (albeit one which was executed well before any works carried out).

Abbey relied on the warranty and brought an adjudication against Simply for losses incurred. The first instance decision granted some £900,000 to Abbey but the sum went unpaid and enforcement proceedings were brought.

In the first instance, the court refused to enforce the decision on the basis that the adjudicator did not have jurisdiction to hear the claim as the collateral warranty was not a construction contract for the purposes of the Construction Act. Stating that the timing and wording of the warranty was such that it could not be considered an agreement for the carrying out of construction works, the court deemed the warranty was instead “a state of affairs past or future akin to a manufacturer’s product warranty”.

Appeal

A split decision of the Court of Appeal has now granted Abbey’s appeal against that decision. In deciding the appeal, the court considered three questions:

1. Can a collateral warranty ever be a construction contract?
2. If yes, do the terms of the Abbey collateral warranty allow it to be considered a construction contract?
3. If yes to both of the above, did the date of execution of the Abbey collateral warranty make a difference to its status?

As the Construction Act defines a construction contract widely (per the very broad section 104 defining one as “an agreement … for … the carrying out of construction operations” and other supporting sections), a collateral warranty was deemed able to fall within that. However, it would very much depend on the warranty at hand; whether it was purely a reflection of the past or if it relates to ongoing operations.

The collateral warranty in question certainly did fall within the definition of construction contract. It was not “akin to a product warranty” per the first instance judgment, but future facing, warranting both past and future operations – “not a warranty limited to the standard to be achieved [or] limited to a past or fixed situation”. It was a separately actionable agreement to the building contract with separately actionable obligations.

Finally, the date of execution was deemed irrelevant because it was retrospective in effect, so any delay between actions undertaken and the execution were of no real importance. It also contained future-facing obligations, which was another point in its favour. In any event, timing is only one factor and is not determinative.

It was also noted that any other decision on this question of timing would create real uncertainty in practice. If a line was drawn here distinguishing this as an unacceptable delay, a multitude of questions would arise in relation to where the line would be between acceptable and unacceptable delays (as well as practical questions about both past and future warranties and other contractual documents to be executed). It could also mean two identical warranties entered on different dates could have differing validity.

Comment

Permission was not granted for Simply to appeal the decision to the Supreme Court, so this will be the final bite of the cherry – and the confirmed position going forwards.

While the first instance decision caused some mild panic and quick redrafting of collateral warranty templates, this judgment restores certainty. This may mean that beneficiaries such as purchasers, tenants and funders are now more likely to favour collateral warranties over what was previously an increasing trend for third party rights.

The case acts as a reminder to always bear in mind the law (both the letter and spirit of) and to ensure contractual documents are considered and carefully drafted - inserting an express clause in respect of adjudication rights into template collateral warranties is likely to still be a smart move!

Related item: Construction Brief: latest decisions October 2021

Readother items in Construction Brief – July 2022