The Courts have been deciding over the last year or so whether collateral warranties are a "construction contract" if the warranty is executed after completion of the works – first in the Technology and Construction Court and now the Court of Appeal. But what is the final outcome and what does it actually mean for the construction industry?

The Court of Appeal settles the matter

The Court of Appeal (CoA) has just handed down judgment in the case of Abbey Healthcare v Simply Construct.

Here, the CoA considered whether a collateral warranty could be a "construction contract" under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) if the collateral warranty had been entered into after the works were completed.

The CoA held that the collateral warranty in this case was indeed a construction contract under the Construction Act; and that the amount awarded by the adjudicator, at the start of the dispute, stood.

This meant that the CoA overturned the Technology and Construction Court's (TCC) earlier decision at first instance - where the TCC had held that the collateral warranty was not a construction contract - because the CoA said the timing of the execution of the collateral warranty was not a determinative factor. However, the CoA also made it clear that, whilst there is to be a broad construction of the definition of a construction contract under the Construction Act, not all collateral warranties will be a construction contract.

If you would like the detail of the first instance and appeal decisions to better understand the issues considered by the TCC and CoA, we have set this out further below for you.

What does this mean for construction?

The CoA's decision matters, because if your collateral warranty is a "construction contract" under the Construction Act, then adjudication will automatically become a dispute resolution option for you – and this is a much quicker and less expensive way of resolving disputes than through litigation in the courts.

Some further thoughts from us on the CoA judgment and its impacts are:

  • The CoA's decision emphasises the need for those who benefit from collateral warranties to ensure that the wording of those warranties comes within the Construction Act if they definitely want to have the option of adjudication. Otherwise, express wording allowing adjudication will be needed
  • Parties should also review any wording being introduced into draft forms of collateral warranties with an eye to ensuring that the wording does not take the warranty outside the scope of the Construction Act – the CoA's decision makes it clear that the wording of the collateral warranty is the determinative factor as to whether the warranty is a construction contract under the Construction Act or more akin to a product guarantee
  • Parties should keep on top of the production and execution of warranties generally.

You can find our more detailed reflections on the impacts of the CoA's decision further below, after the case analysis.

For those who like a more detailed case summary and analysis…

Background

In 2015, Sapphire Building Services Limited engaged Simply Construct (UK) LLP (Contractor) pursuant to a JCT Design and Build Contract 2011 form of contract with amendments (Building Contract) for the construction of a care home. Abbey Healthcare (Mill Hill) Ltd (Tenant) is the tenant of the care home. Practical Completion of the main works was achieved in 2016 and in 2017 the Building Contract was novated over to Toppan Holdings Limited (Freeholder).

The Building Contract required the Contractor to provide a collateral warranty in favour of the Tenant but this was not done at the time. The Freeholder discovered fire safety defects in 2018 and requested that the Contractor rectify them. As the Contractor did not do so, the Freeholder engaged a third party to carry out the remedial works.

In October 2020, four years after Practical Completion of the main works, and eight months after completion of the remedial works, and following proceedings having been issued by the Freeholder against the Contractor for specific performance, the Contractor provided an executed collateral warranty in favour of the Tenant. By way of the collateral warranty, the Contractor warranted to the Tenant that it had performed and would continue to perform diligently its obligations under the Building Contract.

Two sets of adjudication proceedings ensued in parallel to recover losses arising as a result of the fire safety defects, and were commenced by the Tenant and the Employer respectively as against the Contractor. The same adjudicator was nominated for the adjudications. The adjudicator made awards in favour of the Referring Party (ie the Tenant and Employer) in both adjudications. The Contractor challenged enforcement of the Tenant's (the Appellant in this case) adjudication on the basis that the adjudicator did not have jurisdiction as the collateral warranty was not a construction contract for the purposes of the Construction Act.

The first instance decision of the TCC: collateral warranty is not a construction contract as the warranty was entered into after the works completed

Deputy Judge Bowdery QC decided in favour of the Contractor and held that the collateral warranty was not a construction contract within the meaning of the Construction Act.

The key factor in this decision was the timing of when the collateral warranty was entered into. The Judge at first instance could not see how a collateral warranty executed after completion could be regarded as a contract "for the carrying out of construction operations", as defined in the Construction Act.

The Court of Appeal overturns the TCC's decision: collateral warranty is a construction contract; the date of execution is not the determinative factor

The Court of Appeal (in its leading judgment by Coulson LJ) considered the TCC decision on three primary issues:

  1. Can a collateral warranty ever be a construction contract as defined by s.104(1) Construction Act?
  1. 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)?
  1. If the answer to Issue 2 was otherwise Yes, did the date on which the Abbey collateral warranty was executed make any difference?

Coulson LJ stated that a collateral warranty could be a construction contract as defined by s.104(1), but that this will always depend on the wording of the warranty in question. Coulson LJ decided that a warranty which provided that the contractor was carrying out and would continue to carry out construction operations is "a promise which regulates (at least in part) the ongoing carrying out of construction operations" and therefore may indeed be “a contract for the carrying out of construction operations” pursuant to s.104(1). This is in contrast to a product guarantee which would be confirming a fixed state of affairs rather than regulating any future works by that contractor.

Coulson LJ allowed the appeal, on the basis that Deputy Judge Bowdery QC, in considering Issue 3, "was wrong to find that the timing of the execution of the Abbey Collateral Warranty was the determinative factor".

In reaching this decision, Coulson LJ noted that the date on which the Abbey collateral warranty was executed was "ultimately irrelevant", citing the fact that the warranty contained future-facing obligations and was retrospective in effect – "It made a promise both as to the standard of past work and to the future carrying out of work to the same standard". The Abbey collateral warranty was a construction contract within the meaning of the Construction Act.

Lord Justice Stuart-Smith, in his dissenting judgment, distinguished this case from the decision in Parkwood v Laing O’Rourke [2013] EWHC 2665 (TCC) and disagreed that s.104(1) should be construed broadly.

Reflection

Collateral warranties are often executed post-completion of the work to which they relate. The decision clarifies that the wording of the collateral warranty is the determinative factor as to whether the warranty is a construction contract under the Construction Act or more akin to a product guarantee. For example, whether the warranty includes promises regarding future performance of the works and provides for a payment sum (which can be nominal). It is not the date of execution of the warranty which is a determining factor in circumstances where the warranty concerned regulates future works and has retrospective effect.

If a party wishes for a collateral warranty to come within the meaning of the statutory definition of a construction contract, they should be careful to ensure that the factors considered by the CoA are taken into account. Parties should also approach any unfamiliar wording being introduced into draft forms of warranties with caution to avoid providing scope to challenge whether or not the collateral warranty falls within the statutory definition. This decision will be welcomed by those who benefit from collateral warranties.

The decision also emphasises the broad scope of agreements to which statutory adjudication rights may apply, and it is therefore important for those involved in construction projects to consider this when entering into various agreements linked to those particular projects. For those providing collateral warranties (and their insurers), it is crucial to understand the true scope of the agreements to make an informed decision as to risk generally.

For those who wish to benefit from a collateral warranty such as tenants, funders, and purchasers, it is important to keep on top of the timely production of that warranty so that the contractual mechanism is directly available to them as a route to adjudication (if it falls within the definition of the Construction Act) should a dispute arise. Given the uncertain and unprecedented times we are currently experiencing, the endorsement by the CoA of the importance of the availability of the statutory adjudication framework will be welcome news to those keen to have a cheaper and quicker dispute resolution option available to them.