When can you adjudicate a dispute under a collateral warranty? (the 2nd sequel)

The Court of Appeal judgment has now been handed down in Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] – it relates to a collateral warranty and whether or not it constitutes a “construction contract” falling within the ambit of the Housing Grants, Construction and Regeneration Act 1996, as amended (the Construction Act).  In a majority decision of the Court of Appeal, the first instance decision was overturned, finding that the warranty was a construction contract.

We review the key parts of the judgment and its implications going forward for parties agreeing the terms of collateral warranties, concentrating here on the collateral warranty between Abbey and Simply and whether it falls within the Construction Act.

Background

• Simply was appointed to design and construct a care home in Mill Hill under an amended form of JCT Design and Build Contract 2011 with June 2015 updates (the Building Contract).  After completion, the care home was occupied and operated by Abbey, the leaseholder.
• In 2017, the original employer novated its rights and obligations under the Building Contract to Toppan, the owner of the care home.
• Fire safety defects were discovered in the building in mid-2018 and notified to Simply in January 2019.  Remediation works were carried out by a different contractor.
• A collateral warranty was executed in 2020 in which Simply warranted to Abbey that it had performed and would continue to perform its obligations under the Building Contract (the Abbey Collateral Warranty).
• Various adjudications followed, both under the Building Contract between Toppan and Simply and under the Abbey Collateral Warranty, between Abbey and Simply.  Toppan and Abbey succeeded in the adjudications, in which the same adjudicator awarded amounts of (approximately) £908,000 to Toppan and £1 million to Abbey. Simply did not comply with either award.

The TCC proceedings were commenced in order to enforce the two adjudication decisions against Simply.

The first instance TCC decision

In the August 2021 TCC decision in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2021] (the 1st sequel), Martin Bowdery QC sitting as a Deputy Judge of the High Court gave detailed consideration to the first and only other judgment on this issue (the original feature) - Parkwood Leisure Limited v Laing O'Rourke Wales and West Limited [2013

In Parkwood, the collateral warranty was held to be a “construction contract” for the purposes of the Construction Act, turning on the wording of that particular warranty.  Mr Justice Akenhead however was careful to state in his judgment that this did not mean that all collateral warranties on construction projects will be "construction contracts" - each warranty must be construed on its wording and factual background.

The Abbey Collateral Warranty

The operative terms of the Abbey Collateral Warranty provide (in summary) warranties from Simply to Abbey that:

1. Simply has performed and will continue to perform diligently its obligations under the Building Contract; and
2. in carrying out and completing the works and design, it has exercised and will continue to exercise all reasonable skill care and diligence.

It was noted that, unlike the collateral warranty in Parkwood, the Abbey Collateral Warranty gave a warranty but did not refer to any "acknowledgment" or "undertaking" in favour of the beneficiary.

Martin Bowdery QC sitting as a Deputy Judge of the High Court stated "[o]n the facts of this case I cannot see how applying commercial common sense a collateral warranty executed four years after practical completion and months after the disputed remedial works had been remedied by another contractor can be construed as an agreement for carrying out of construction operations".

The TCC held that the Abbey Collateral Warranty was not a construction contract under the Construction Act and as a result, there was no contractual right to adjudicate - the adjudicator's decisions could not be enforced. In the Deputy Judge’s view, the Abbey Collateral Warranty was "akin to a manufacturer's product warranty". 

The Court of Appeal decision

The Court of Appeal, by a majority decision (Lord Justice Stuart Smith dissenting), overturned the TCC judgment, holding that the Abbey Collateral Warranty is a “construction contract” under the Construction Act.  The key issues considered by the Court of Appeal were:

1. can a collateral warranty ever be a construction contract as defined by s.104(1)?
2. if the answer to Issue 1 was yes, did the terms of the Abbey Collateral Warranty make it a construction contract as defined by s.104(1)?
3. if the answer to Issue 2 was yes, did the date on which the Abbey Collateral Warranty was executed make any difference?

Lord Justice Coulson gave the leading judgment of the Court of Appeal and he noted that it was an integral part of Simply’s case that the decision in Parkwood was wrong.

Firstly, the definition of “construction contract” in the Construction Act.

The Construction Act

Section 104(1) of the Construction Act provides:

"In this Part a "construction contract" means an agreement with a person for any of the following;

1. the carrying out of construction operations;
2. arranging for the carrying out of construction operations by others, whether under sub contract to him or otherwise;
3. providing his own labour, or the labour of others, for the carrying out of construction operations

(2) References in this Part to a construction contract include an agreement;

1. to do architectural, design, or surveying work; or
2. provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape,
   
   in relation to construction operations..."

Issue 1: Can a collateral warranty ever be a construction contract as defined by s.104(1)?

The Court of Appeal held the answer to Issue 1 is yes: “What may be critical is whether the warranty is in respect of the ongoing carrying out of construction operations, on the one hand, or is in respect of a past and static state of affairs, on the other”.

The key points on this issue are set out below.

• It will always depend on the wording of the particular warranty.
• S.104 was intended to “cast the net of the [Construction] Act as widely as possible”.
• Mr Justice Akenhead in Parkwood found that the warranty in that case would give rise to ordinary contractual remedies, including, in principle, specific performance or injunctive relief.  The Court of Appeal stated that if the beneficiary of such a warranty might be able to require performance of the construction operations, that would be “a strong indicator that the warranty was a construction contract for the purposes of s.104(1)”.
• The fact that a warranty did not contain detailed payment obligations was not determinative.
• The decision in Parkwood was and remains good law.

One of Simply’s contentions was that building contracts and collateral warranties are mutually exclusive and that only the former fall within the definition of “construction contract”. This argument was rejected by the Court of Appeal.

Another argument was that in respect of one set of construction operations, there could only be one construction contract (or possibly two, the main contract and the sub-contract).  Again, this was rejected by the Court of Appeal.

Lord Justice Coulson stated that the conclusion on Issue 1 meant the following: “unless the wording of the Abbey Collateral Warranty is outside the broad interpretation of s.104(1), and/or is materially different to the collateral warranty in Parkwood, the Abbey Collateral Warranty will be a construction contract in accordance with s.104(1)”.

Issue 2: Did the terms of the Abbey Collateral Warranty make it a construction contract as defined by s104(1)?

Using the same reasoning as Mr Justice Akenhead in Parkwood, the Court of Appeal held that the answer to Issue 2 is yes.

The fact that the Abbey Collateral Warranty (as well as setting out the standards to which works would be carried out) warrants both past and future construction operations differentiates it from a product guarantee.

Lord Justice Coulson stated that the absence of the verbs “acknowledges” and “undertakes” in the Abbey Collateral Warranty made no material difference to this consideration.  This is notable as these verbs were present in the Parkwood warranty – this difference in wording was noted by the Deputy Judge at first instance but in Lord Justice Coulson’s view: ”…[he] did not decide that those differences were relevant to the issue”. 

Issue 3: Did the date on which the Abbey Collateral Warranty was executed make any difference?

The Court of Appeal held that the timing of execution of a collateral warranty can never be determinative and that the Deputy Judge at first instance was wrong on this point.

Lord Justice Coulson stated as follows: “[the Abbey Collateral Warranty] was...an agreement for the carrying out of construction operations which had retrospective effect. Once that is accepted, the delay between the completion of the works and the execution of the warranty does not matter...As the Abbey Collateral Warranty contained future-facing obligations and was retrospective in effect, the date of execution was ultimately irrelevant”.

Another reason why the date of execution should not matter was that a different result would be “counter-intuitive as a matter of statutory construction”; it would encourage contractors to delay signing warranties until after works were finished so they could avoid the warranty falling within the Construction Act (and so avoid adjudication).

Commentary

The Court of Appeal’s decision in Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] is not new law but it is of real significance to contractors and professionals that provide collateral warranties, and to their professional indemnity insurers.

A broad interpretation of the meaning of “construction contracts” in the Construction Act is likely to result in more adjudication referrals under collateral warranties, at least in the short term. Going forward, the parties to collateral warranties will need to consider carefully whether or not they wish the warranty to be caught by the Construction Act, and the precise terms to be used to achieve that end. However, given the expansive approach taken by the Court of Appeal to the Construction Act, it may be challenging to agree a form of wording that falls outside the scope of the Act.