The Supreme Court has decided that most collateral warranties will not be construction contracts for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).
The decision in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) means that, in most cases, the parties to a collateral warranty will not have a statutory right to refer disputes to adjudication. Instead, those relying on warranties will usually have to bring claims through the courts or arbitration, which may be more time-consuming and costly.
It is now clear that it is not the language of the warranty that determines its status, but rather what is promised and whether that promise is "separate and distinct" to promises under the building contract.
Therefore, in most instances, if parties to a collateral warranty want the ability to adjudicate disputes, they will need to expressly include such provisions.
Status of Warranties
Collateral warranties are commonly used on construction projects to give third parties (such as tenants, funders, and subsequent purchasers) direct rights against the original construction team if defects arise. Warranties provide a solution to the difficulties in English law of relying on tortious negligence claims for pure economic loss.
The question of whether a warranty is a 'construction contract' has troubled construction lawyers since at least the 2013 decision of Parkwood. In that case, the court decided that a collateral warranty may be a construction contract for the purposes of the Construction Act, with the consequent right to refer a dispute under the warranty to adjudication. On the Parkwood reasoning, the distinction between a construction contract or not came down to the use of particular words in the warranty. The decision came as a surprise but the industry took note and, where it was desirous to avoid the adjudication regime, amended warranties to stop using these words.
This remained the position until the Abbey Healthcare dispute.
Background Facts
The case relates to a care home with alleged fire safety defects.
Sapphire (the employer) engaged Simply (the contractor) under an amended JCT DB, 2011 Contract. This required warranties to be given to Toppan (the purchaser) and Abbey (the tenant and operator of the care home) (the Abbey Warranty).
Simply provided a warranty to Toppan before practical completion in October 2015 and to Abbey (following negotiations) after practical completion in October 2020. Under the warranties, Simply warranted it had "performed and will continue to perform diligently its obligations under the [Building] Contract".
Abbey and Toppan started adjudication claims against Simply seeking the costs of remediating certain fire safety defects. The adjudicator upheld these claims but Simply did not pay the sums due, so Toppan and Abbey commenced enforcement proceedings.
In respect of the Toppan adjudication, the court ordered Simply to pay the adjudication sum.
On the Abbey adjudication, Simply argued that the Abbey Warranty was not a construction contract under the Construction Act, so the adjudicator had no jurisdiction (and so Simply had no liability to pay the sum awarded). The lower courts reached conflicting decisions on this point.
The Supreme Court Decision
In a unanimous decision, the Supreme Court ruled that the Abbey Warranty was not a construction contract.
The Supreme Court said the key is whether or not the contractor assumed a "separate or distinct obligation to carry out construction operations for the beneficiary". If separate obligations are assumed, then the warranty will be a construction contract under the Construction Act. If not, the warranty is merely warranting the performance of obligations owed to the employer (i.e. it is truly collateral), and it will not be a construction contract. Here, the Abbey Warranty simply repeated the obligations owed under the building contract and so it was not a construction contract.
The decision also expressly overruled Parkwood, doing away with detailed enquiries into the wording of the specific document.
The Court acknowledged the effect of its test would be that most collateral warranties would not be construction contracts but considered there are good reasons for concluding that warranties were not intended to be caught by the Construction Act. For example, one of the main purposes of the Act is improvement of cashflow, which is not furthered by its application to warranties unless step-in rights are exercised.
The decision brings collateral warranties in line with Third Party Rights, which are also widely used in the industry and are not considered to be construction contracts.
Key Take Away
As a result of the Supreme Court decision, most collateral warranties will not be construction contracts under the Construction Act and therefore the parties will not have a statutory right to adjudicate. However, it remains open to parties to contract into the adjudication regime by adding express wording to the warranty.
The decision will be welcomed by contractors, subcontractors and consultants who regularly provide warranties. The decision will be of concern for occupiers and owners relying on warranties in relation to defects, because it removes a quick and efficient route to recovery. Instead, those relying on warranties will in most cases have to bring their claims through the courts.