Adjudication in the UK and New South Wales: A UK Supreme Court decision highlights a key difference

In July 2024, the Supreme Court, the highest court in England and Wales, had to determine whether a dispute under a collateral warranty (commonly known as a warranty deed in Australia) could be referred to adjudication in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23.

Although warranty deeds are used in the same manner (i.e. to provide third parties with contractual rights against contractors should defects arise in respect of the works) and are in a similar form in the UK and Australia, this case highlights a key difference between the security of payment legislation in England and Wales, namely the Housing Grants (Construction & Regeneration) Act 1996 (the E&W Construction Act), and its equivalent  in New South Wales, the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOPA). In New South Wales, it is unlikely a case of this nature would have even reached the courts given the scope of adjudication in NSW compared to the UK.

Background

Sapphire Building Services Ltd, as the employer (commonly known as the principal in Australia), engaged Augusta 2008 LLP (Formerly Simply Construct (UK) LLP) (Simply) as the contractor, under a building contract dated 29 June 2015 to design and construct a 65 bedroom aged care home (the Property).

After practical completion, alleged fire safety defects were discovered. Abbey Healthcare (Mill Hill) Ltd (Abbey), the tenant of the Property since 2017, paid a third party contractor to rectify these defects and in June 2020, received a collateral warranty from Simply.

As is common in the industry, the collateral warranty stated “The Contractor warrants that… the Contractor has performed and will continue to perform diligently its obligations under the Contract [i.e. the head contract]”.

Abbey sought to recover the remediation costs from Simply under the collateral warranty and referred the dispute to adjudication. Abbey was awarded a substantial sum at the adjudication. However, Abbey could not enforce that decision because the High Court, the court of first instance in England and Wales, did not consider the collateral warranty was a “construction contract” for the purpose of s104(1)(a) of the Housing Grants (Construction & Regeneration) Act 1996 (the E&W Construction Act). This was overturned by the Court of Appeal before the case appeared before the Supreme Court.

Supreme Court’s judgment

The Supreme Court agreed with the High Court and determined that the collateral warranty was not a construction contract for the purposes of the E&W Construction Act and therefore could not be referred to adjudication.

Importantly, 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.

If the warranty contains a contractual obligation to the beneficiary to carry out construction operations which are separate and distinct from those under the building contract, then it would be a construction contract.

Position in New South Wales

A comparison between relevant terms of the E&W Construction Act and the NSW SOPA is set out below:

One difference is the definition of “construction contract”. In England and Wales, the Supreme Court was asked to determine the meaning of “for… the carrying out of construction operations”. In an earlier decision, Coulson LJ in the Court of Appeal interpreted this broadly so that a construction contract is any such contract which “relates to” the carrying out of construction operations. This interpretation was subsequently overturned by the Supreme Court with the term given its natural meaning.

There would have been no such debate on this interpretation in New South Wales. It is clear from the NSW SOPA that a construction contract is where “one party undertakes to carry out construction work”. Although it is arguable that a warranty deed is a contractual promise from the contractor to the beneficiary to undertake to carry out construction work (namely, rectification works where it has failed to comply with the underlying building contract), we would expect a court to follow the England and Wales Supreme Court finding that a warranty deed would not be a construction contract. It would be highly unusual for a warranty deed to contain a separate and distinct obligation from those under the building contract. Further, the NSW SOPA does not apply, and therefore adjudication is not available, to a construction contract to the extent it contains provisions under which a party undertakes to provide an indemnity in respect of construction work. Such clauses are common in warranty deeds, but are often resisted by contractors. 

In any event, in New South Wales, the beneficiary’s argument above would be academic. A party’s ability to refer matters to adjudication is much more limited than in England and Wales, where an adjudicator may determine disputes relating to defects, delay and damages. Under the NSW SOPA, only a person entitled to a progress claim can bring an adjudication and a case with similar facts to Abbey v Simply, with a beneficiary seeking to recover rectification costs through adjudication, is unlikely to reach the courts here.