The Supreme Court handed down judgment in the case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 on 9 July 2024, providing much needed clarity on whether collateral warranties can be considered construction contracts for the purposes of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996).

Collateral warranties are used on construction projects to create contractual relationships between those responsible for designing, constructing or managing works and third parties such as funders, purchasers and prospective tenants, awarding third party rights against the contract should defects arise.

The Supreme Court found, unanimously, that the collateral warranty in dispute was not a construction contract, and that on a proper construction the majority of collateral warranties were not construction contracts.

The finding is significant as parties to a collateral warranty will not have a statutory right to adjudicate any dispute under that collateral warranty “at any time”, a right granted to parties under a construction contract by virtue of section 108 Construction Act 1996.

Facts

Simply Construction (UK) LLP (now Augusta 2008 LLP) was engaged under a building contract dated 29 June 2015 to carry out the construction of a care home of which Abbey Healthcare (Mill Hill) Ltd were subsequently granted a long lease. Fire-safety defects were discovered in 2018 and rectified by another party. Simply executed a collateral warranty in favour of Abbey on the freeholder’s request.

Abbey brought adjudication proceedings against Simply and subsequently sought summary judgment to enforce the award of £908,495.98 inclusive of VAT made in its favour. The application was at first refused on the basis that the collateral warranty had been executed years after the construction operations had been completed and was therefore not a construction contract.

The Court of Appeal accepted that if the collateral warranty was a construction contract then its timing could not be determinative and looked to Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), [2013] BLR 589, in which the collateral warranty was a construction contract.

Issues

Simply sought to advance new submissions to the effect that the collateral warranty was not capable  of  being  a construction  contract under the Construction Act 1996, raising two questions:

1. Can a collateral warranty ever be a construction contract?
2. If it can, did the terms of this particular warranty (regardless of timing) make it a construction contract?

A construction contract means an agreement with a person for —

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

Lord Briggs, Lord Hamblen, Lord Richards, Lady Rose and Lady Simler considered the meaning of an agreement “for… the carrying out of construction operations” and found –

• 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.
• 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.

Looking ahead

The Supreme Court recognised that such an approach is likely to mean that most collateral warranties will not be construction contracts but considered that in general, it was not the intention of the Construction Act 1996 to include such warranties.

In addition, a dividing line meaning collateral warranties are generally outside the Housing Grants Construction and Regeneration Act 1996 (as amended), rather than everything being dependent on the wording of the collateral warranty in issue, will assist those in the construction industry.

Adjudication can be voluntary. If it is wished to have a right to adjudication, that can always be provided for by means of contractual rather than statutory adjudication. Adjudication provisions can mirror the terms of the primary contract and parties can consider providing clarity by the following – naming an adjudicator, identifying an adjudicator nominating body, allowing the adjudicator to adjudicate on more than one dispute under the same contract at the same time and requiring the adjudicator to give reasons for the decision and to declare any conflict of interest.

If you want your collateral warranty to be subject to adjudication then you must draft it into the warranty to be sure.

Key takeaway: A collateral warranty is unlikely to be a construction contract.

Case:  Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK)LLP) [2024] UKSC 23 (9 July 2024)

For more information please contact Zoë Deckker.