Adjudication is an alternative method of resolving disputes where an adjudicator, usually an expert, is appointed to decide a dispute using specialist expertise. In the UK, parties to a construction contract may include express provision in the contract requiring the parties to refer a dispute to adjudication. However, even where there is no express provision under a construction contract to refer a dispute to adjudication, the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) implies a statutory right to refer to adjudication any disputes which arise under a “construction contract”. A construction contract is defined under the Construction Act.
The question of whether Collateral warranties are construction contracts within the meaning of the Construction Act and therefore give beneficiaries the statutory right to refer a dispute adjudication was at the centre of the dispute in the recent Supreme Court decision in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23.
A Developer/Employer will enter into contracts with the professional team of designers and a building contract with the contractor. However third parties such as Tenants, Purchasers, or Funders who may be impacted should any of the professional team and/or contractor fail to comply with their contractual obligations do not have any right contractual or otherwise to pursue an action against any of these parties should they suffer any losses
Collateral warranties as we know create that contractual link in the absence of one and give the third-party beneficiary, a right to bring a contractual claim against the party performing the obligation if it fails to fulfil its obligations under the underlying building contract, subcontract, or professional appointment.
In the construction industry, collateral warranties are usually provided by contractors, subcontractors, and professional consultants who have a design liability to third parties, such as funders, purchasers, and prospective tenants.
Background
The Appellant in this matter, Simply is the contractor under a JCT Design and Build Contract 2011 with bespoke amendments dated 29 June 2015 (the "Building Contract") with Sapphire Building Servies Limited ("Sapphire") to design and build a 65 bedroom care home at Holders Hill Road, Mill Hill, London ("the Property"). The building works were completed in October 2016.
In June 2017, the Building Contract was novated from Sapphire to Toppan Holdings Limited ("Toppan"), the owner of the Property, who subsequently granted a 21-year lease of the Property to Abbey as the tenant for the operation of its care home business.
In August 2018, Toppan discovered alleged fire safety defects at the Property. Simply was notified of these defects and requested to rectify them. Simply failed to do so, and a third-party contractor was engaged to carry out the remedial works which were completed in February 2020 and paid for by Abbey.
In September 2020, Simply provided a collateral warranty to Abbey (“Abbey Collateral Warranty”) following proceedings issued by Toppan to enforce a term of the Building Contract requiring Simply to provide such a warranty to the tenant upon request.
In December 2020, Toppan and Abbey each commenced adjudication proceedings against Simply regarding the alleged fire safety defects and the cost of remedial works. In the Abbey’s adjudication, Simply challenged the adjudicator’s jurisdiction on the basis the Abbey Collateral Warranty was not a “construction contract” within the meaning of section 104(1) of the Construction Act. The adjudicator rejected this challenge and awarded damages to Abbey.
Simply did not pay the sums awarded by the adjudicator and this led to Abbey and Toppan seeking summary judgment in the High Court to enforce the adjudication awards. The High Court declined to enforce the Abbey award on the grounds of jurisdiction, finding that the Abbey Collateral Warranty was not a construction contract for the purposes of the Construction Act.
Abbey successfully appealed to the Court of Appeal, which held by majority decision that the Abbey Collateral Warranty was a construction contract.
Simply appealed to the Supreme Court.
The Decision
Simply argued its appeal to the Supreme Court that the finding that the Abbey Collateral Warranty was a construction contract was wrong and that the dissenting judgment of Stuart-Smith LJ in the Court of Appeal was correct. The Supreme Court agreed and held that for a collateral warranty to fall within the definition of a construction contract as defined under the Construction Act, it must give rise to separate obligations for the carrying out of construction work, distinct from those undertaken under the related building contract.
The Court found that under the Abbey Collateral Warranty the promise provided by Simply that it "has performed and will continue to perform" its obligations under the main building contract, was solely a derivative obligation that did not give rise to separate or distinct obligations to Abbey for the carrying out of construction operations. Therefore, the Abbey Collateral Warranty was not a construction contract and the adjudicator lacked jurisdiction to make his award.
The Court held at paragraphs 65 and 70 as follows:
65. As a generality, it is difficult to see how the object or purpose of a collateral warranty is the carrying out of construction operations. The main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work.
70 “……….., I consider that a collateral warranty will not be an agreement “for” the carrying out of construction operations for the purposes of section 104(1) if it merely promises to perform obligations owed to someone else under the building contract. There needs to be a separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract. This is what I understand Stuart-Smith LJ to mean when he speaks throughout his judgment of the need for a “direct” contractual obligation. This does not prevent the collateral warranty overcoming the difficulty arising from Murphy v Brentwood District Council referred to earlier.”
The Court also made it clear that parties can make provision for the right to adjudicate if they so wish:
78 “…………. Moreover, if it is wished to have a right to adjudication that can always be provided for. Adjudication will, however, be voluntary rather than mandatory.”
The Supreme Court in allowing the appeal against the majority ruling of the Court of Appeal also overturned the earlier decision in Parkwood v Laing O'Rourke [2013] EWHC 2665 (TCC), which was the first court judgment stating that a collateral warranty could constitute a "construction contract".
What does it mean in practice?
The Supreme Court has now given clear and unambiguous guidance that unless there is a separate or distinct obligation to carry out construction operations for the beneficiary, then a collateral warranty will not be a construction contract.
As expressly stated in the judgment, this decision will help practitioners to properly advise their clients with some degree of certainty as it reverses the position on this issue to pre Parkwood.
This decision also means that some collateral warranties may still be considered a construction contract within the meaning of the Construction Act albeit that it will be very rare in practice.
Further, if parties to a collateral warranty wish to avail themselves of the right to adjudicate, they should expressly provide for such a right in the warranty itself.