Wed 22 Jun 2022

Collateral Warranties: Construction Contracts in Their Own Right?

In a hotly anticipated decision, the England and Wales Court of Appeal has this week overturned the TCC decision in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP. In doing so they have laid to rest the decades-long debate of whether a collateral warranty is considered a construction contract under the terms of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”).

By way of a quick recap, Abbey Healthcare (“Abbey”) and Simply Construct (“Simply”) found themselves before the TCC in an adjudication enforcement action. This was a result of a jurisdictional challenge by Simply during the course of adjudication proceedings between the two as a result of various fire-safety defects and associated necessary remedial works in relation to the construction of Aarandale Manor care home. Parallel adjudication proceedings took place between Simply and the substitute employer, Toppan Holdings Ltd.

Simply were the main contractor in the project, Abbey were the tenants. As such, their contractual relationship was governed by means of a collateral warranty. Simply’s position during the adjudication was that the collateral warranty was not a construction contract as defined under the Act, and that accordingly Abbey had no implied right to adjudication against Simply under the warranty.

The TCC judge found in favour of Simply’s argument. In so doing, he applied the exception to the interpretation stated in the 2013 TCC judgment of Parkwood Leisure Ltd v Laing O’Rourke: a warranty may simply be that “a past state of affairs (has reached) a certain level, quality or standard….” rather than an agreement for “the carrying out of construction operations” which is required by the Act. In the case of the Aarandale Manor project, the warranty was executed and delivered 7 months after practical completion. The TCC considered that retrospective collateral warranties were unlikely to ever constitute a construction contract.

On appeal, the EWCA considered firstly the theoretical issue of i) whether a collateral warranty can ever be a construction contract under the Act; ii) if it could, whether the particular warranty in between Abbey and Simply fulfilled this function; and iii) if so, did the date of execution make any difference.

In coming to their decision, the court considered the statutory intention behind the Act and determined that Parliament had intended that the definition of a construction contract be construed widely. Moreover, the Act aimed to improve the payment regime and dispute resolution mechanisms. In the case of Simply and Abbey, it was therefore appropriate that as the underlying dispute and defective work was the same as between Toppan and Simply, to argue that only one of these could be resolved by adjudication was counterintuitive to the aim of the Act. The court concluded that a collateral warranty can be a construction contract, but that the factual background to the warranty must be taken into account.

In respect of the second issue, the court analysed the wording of the warranty between Abbey and Simply and determined that the warranty was for both past and future construction operations. It was not limited to the standard to be achieved, nor a past or fixed situation. It went further than merely recognising the existence of Simply’s obligations to Toppan under the building contract and placed separately actionable obligations on to Simply. Lastly, the court stated that as the collateral warranty contained future-facing obligations and was retrospective in effect, the date of execution was irrelevant.

This decision will have wide reaching effects in the construction industry, not least with respect to insurance. If you are concerned about the implications of collateral warranties under your building contracts, please contact us to discuss.

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