The Supreme Court has unanimously decided that a collateral warranty is not a construction contract, in a verdict believed to have far-reaching impact across the industry.
The judgment relates to the 2022 case Abbey Healthcare v Simply Construction, where the Court of Appeal held that the collateral warranty in favour of Abbey Healthcare was a construction contract under S.104(1) of the Housing Grants, Construction and Regeneration Act 1996, and therefore carried the right to adjudication.
Collateral warranties give third parties contractual rights against contractors should defects arise regarding the works carried out by them. It is common practice in the construction industry for collateral warranties to be provided to third parties.
However, in the judgment handed down this week, the Supreme Court ruled the Court of Appeal was wrong because a collateral warranty is not a construction contract and therefore cannot be subject to adjudication.
In doing so, the Supreme Court determined as well that the decision of Akenhead J in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), the majority of which the Court of Appeal placed considerable reliance on and held to be indistinguishable from Abbey v Simply, was also wrongly decided and must be overruled.
Case background
Simply Construction was engaged by its employer Sapphire Building Services Ltd to design and build a 65-bedroom care home in Mill Hill, north London, which it completed in October 2016.
In 2017, the building contract was replaced from Sapphire to Toppan Holdings Ltd, and Toppan granted a 21-year lease of the property to Abbey.
The following year, Toppan discovered alleged fire safety defects at the building. Simply was notified of the defects and requested to rectify them, which Simply did not do. Toppan subsequently engaged a third-party contractor to conduct remedial works, paid for by Abbey.
In September 2020, Simply provided a collateral warranty to Abbey and Toppan. Both companies made claims against Simply arising out of the fire safety defects and costs of remedial works. On 11 December, Toppan and Abbey each referred to adjudication a dispute regarding the alleged defects, seeking sums over £8.8m and £5.5m, respectively.
The adjudicator issued his decisions on April 2021 finding for Toppan and Abbey on liability. Simply did not pay the sums due, and in May 2021, Toppan and Abbey issued proceedings to enforce the decisions by way of summary judgment.
The judge granted summary judgment in respect of Toppan and dismissed the summary judgment application on the grounds that the warranty given to Abbey was not a construction contract within the meaning of section 104(1) of the 1996 Act and therefore the adjudicator lacked jurisdiction.
Abbey went to the Court of Appeal. All members agreed that a collateral warranty could be a construction contract and a majority held that the Abbey collateral warranty was such a contract.
On 21 December 2022, the Supreme Court granted Simply permission to appeal on the question of whether or not the Abbey collateral warranty was a construction contract within the meaning of the 1996 Act.
‘A significant reversal of the law’
Commenting on the judgment, head of construction at law firm Ridgemont, Tim Seal, said: “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 […]. 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.’
Seal added: “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.”
