Collateral warranties are not construction contracts: the Supreme Court’s decision in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP

Summary

In its judgment in Abbey Healthcare (Mill Hill) Ltd (Respondent) v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (Appellant) [2024] UKSC 23, the Supreme Court has decided that collateral warranties are not construction contracts for the purposes of section 104 (1) of the Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”). 

This decision has overruled the Technology and Construction Court’s decision in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), which first decided that a collateral warranty could be a construction contract under the 1996 Act. 

The implication of this decision is that parties to a collateral warranty are unable to use adjudication as a form of resolving any disputes arising in respect of it. 

Statutory framework

The 1996 Act provides that “a party to a construction contract has the right to refer a dispute arising under the contract for adjudication”.

Section 104 (1) of the 1996 Act defines a “construction contract” as one for: 

“(a) the carrying out of construction operations;

(b) arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise;

(c) providing his own labour, or the labour of others, for the carrying out of construction operations.”

Background

Pursuant to an amended JCT Design and Build Contract dated 29 June 2015, Simply Construct (UK) LLP (“Simply”) was engaged as contractor, by Sapphire Building Services Limited, to design and build a 65-bedroom care home in Mill Hill, London (the “Property”). Abbey Healthcare (Mill Hill) Ltd (“Abbey”) was the tenant and operator of the care home.  

Practical completion of the works was certified on or around 10 October 2016. 

Some time after practical completion, Simply issued a collateral warranty in favour of Abbey on or around 23 September 2020.

In August 2018 fire safety defects were discovered at the Property and upon Simply refusing to carry out the required remedial works, the owner of the Property, Toppan Holdings Limited (“Toppan”), engaged a third-party contractor to carry out those works (which Abbey paid for on behalf of Toppan).

Both Toppan and Abbey subsequently brought separate adjudications against Simply seeking to recover sums paid in connection with the works to remediate the fire safety defects. 

Decisions were issued on 30 April 2021 whereby Toppan and Abbey were awarded circa £1,000,000 and £869,500 respectively. 

Simply refused to pay either sum and at enforcement Toppan was granted summary judgment of its claim, however, the court refused to do so in respect of Abbey’s claim. 

Mr Martin Bowdery QC (sitting as a Deputy High Court Judge) decided that the collateral warranty in favour of Abbey was not a construction contract within the meaning of the 1996 Act, and in turn the adjudicator lacked jurisdiction to make an award. 

The Court of Appeal

The Court of Appeal disagreed making a distinction between a situation where a warrantor was merely providing “a guarantee in respect of a past state of affairs”, and a scenario where a party warranted that it was “carrying out and would continue to carry out construction operations.” 

In the former situation, the court held that a collateral warranty should not be considered as being a construction contract. Conversely, if future obligations were being warranted, then a collateral warranty was capable of being construed as such. 

Coulson LJ placed significant weight on the wording in the Abbey collateral warranty that Simply “has performed and will continue to perform” its obligations under the building contract, and in turn found that it was a construction contract under the 1996 Act. 

Simply appealed the Court of Appeal’s judgment and the case then found itself before the Supreme Court where it was heard on 29 April 2024. 

Supreme Court Judgment

The Supreme Court found that for a collateral warranty to be an agreement for the carrying out of construction operations, and in turn a construction contract: 

“…there needs to be a separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract”.

Whilst Simply warranted to Abbey that it had “performed and will continue to perform diligently its obligations under the Contract”, the Supreme Court determined that this promise was merely a derivative one. In common with the vast majority of standard form collateral warranties, Simply was warranting that it would adhere to the obligations which it already owed to its Employer – i.e., that it will comply with the terms of the building contract. 

Crucially, the court found, the warranty did not contain any distinct obligation from Simply to Abbey, which in itself gave rise to construction operations. 

In its judgment, the Court of Appeal found that an important indicator as to whether an agreement is one for the carrying out of ‘construction operations’, and in turn is a construction contract, is whether there is a promise “which regulates (at least in part) the ongoing carrying out of construction operations”.

In Abbey, the Supreme Court found that a promise to a beneficiary that a warrantor will merely comply with its obligations under the building contract did not give a beneficiary any ability to regulate the construction operations. 

In illustrating this point, the Supreme Court used the example of the interim payment cycle and in respect of which, absent any step-in rights, a beneficiary has no construction related payment obligations. 

Takeaways

The Supreme Court’s decision provides much needed clarity to the construction industry in this area, particularly for those parties who frequently assume obligations under collateral warranties.    

In light of this decision, a beneficiary to a collateral warranty will not be able to argue that it is a construction contract simply on the basis that a contractor warrants to a beneficiary that it has performed, and will continue to perform, its obligations under the building contract.   

Going forward, in the event parties to a collateral warranty would like adjudication to be available to resolve any disputes arising under it, they will need to either: 

1. expressly provide for that in the collateral warranty; and / or
2. draft the collateral warranty such that the warrantor owes a distinct and separate construction obligation to the beneficiary.

Further, it is likely that to qualify as a construction contract, such an obligation will have to involve an element of giving a beneficiary the right to “regulate” some aspect of the carrying out of the construction works.