In this article, Peta Dollar examines a UK Supreme Court ruling that collateral warranties are not “construction contracts” under the Housing Grants, Construction and Regeneration Act 1996. As a result, disputes over these warranties cannot be referred to adjudication unless the warranty explicitly allows it. This decision, highlighted in the Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP case, clarifies the legal standing of collateral warranties in construction law.
Case name, reference and Bailii link
Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23
Summary
The Supreme Court has held, overturning previous case-law, that a standard collateral warranty is not a “construction contract” within s104 of the Housing Grants, Construction and Regeneration Act 1996. The beneficiary of such a warranty will not therefore be able to refer disputes to adjudication unless the warranty contains express provisions allowing for this.
Background law
The Housing Grants, Construction and Regeneration Act 1996 applies to “construction contracts” (as defined in s104 of the Act) and provides that where a construction contract does not contain provision for adjudication of disputes, the Act will imply such a right on the basis set out in the Act.
A collateral warranty is an ancillary agreement to a primary contract and runs ‘side by side’ with that contract. It is intended to provide contractual remedies to those who are not party to the primary contract, but who have an interest in the subject-matter of the primary contract, such as parties with an interest in the land and/or building to which the warranty relates. Typically, the beneficiaries are funders, purchasers, and tenants.
A warranty is necessary because, under English law, it is generally not permissible for a party to enforce rights arising out of a contract to which it is not a party, and claims in tort are unsatisfactory, in particular where economic loss has occurred.
In Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), Akenhead J considered for the first time whether or not a collateral warranty could be a “construction contract” for the purposes of the Act. He decided that some collateral warranties (although not all of them) could be construction contracts for this purpose, and that the Act was intended by Parliament to confer a wide definition on “construction contracts” subject to the Act. He differentiated between a collateral warranty where all the works are completed and the contractor is simply warranting a past state of affairs as reaching a certain standard – which he held not to be a “construction contract” for the purposes of the Act – and a collateral warranty that provides for works to be done to a particular standard in the future – which he held would be a “construction contract” for the purposes of the Act.
Facts
Toppan Holdings Limited (“Toppan”) is the freehold owner of a luxury care home in London built by Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (“Augusta”). Following completion of the works, Augusta’s building contract was novated to Toppan, which established a contractual link between those parties. The care home was let to the tenant operator, Abbey Healthcare (Mill Hill) Limited (“Abbey”). A collateral warranty for the benefit of the tenant was not procured from Augusta at the time when the lease began.
After completion of the works and the opening of the care home, construction defects were identified which required remedial works. Certain losses from remedying the defects were incurred by Toppan as landlord and other losses were incurred by Abbey as tenant.
As the building contract had been novated to Toppan, it was able to adjudicate the disputes, since there was a contractual link between Toppan and Augusta. However, there was no contractual link between Augusta and Abbey. Toppan subsequently exercised its right to ask Augusta to execute a collateral warranty for Abbey’s benefit. The Abbey collateral warranty from Augusta was only provided after High Court proceedings for specific performance had been issued against Augusta.
Toppan and Abbey then brought parallel adjudications against Augusta for recovery of their respective losses which were awarded in two separate awards. When Augusta did not pay, the joint enforcement proceedings were issued against them in the Technology and Construction Court. Augusta defended the Abbey claim on jurisdiction grounds, namely that the collateral warranty was not a construction contract within the meaning of s104 of the Act and so the right to adjudicate did not apply.
Issues
Was the Abbey collateral warranty a construction contract within the meaning of s104 of the Housing Grants, Construction and Regeneration Act 1996, so that Abbey could adjudicate their claim against Augusta?
First Instance
The Technology and Construction Court (Mr Martin Bowdery QC (sitting as a Deputy High Court Judge)) noted that while the collateral warranty was for past and future construction operations, it had not been executed prior to practical completion, but following the discovery of the latent defects which had been remedied. Accordingly, the Court held that the collateral warranty was not a construction contract subject to the Act. While express language had been included in respect of future construction operations, the collateral warranty could not relate to future construction operations as it was executed after practical completion.
Although the collateral warranty confirmed that Abbey acquired no greater rights under the collateral warranty than would be available under the building contract, this did not mean that equivalent rights extended to an entitlement to adjudicate. The Court said that documents such as parent company guarantees may also be considered “parasitic” to their underlying contract but are not construction contracts.
As a result, the Court declined to enforce the adjudication decision in Abbey’s favour. However, three further defences raised by Augusta to resist enforcement of the adjudicator’s decisions were rejected. In respect of both Toppan and Abbey, the Court refused to order a stay of execution, being satisfied Toppan and Abbey are sufficiently financially strong so as to repay any award finally determined in Augusta’s favour.
Court of Appeal
On appeal to the Court of Appeal, by a majority (LJ Stuart-Smith giving the dissenting judgment), the Court decided that a collateral warranty could be a construction contract and therefore provided beneficiaries with a statutory right to adjudicate.
Having considered the specific wording of the Abbey warranty, the Court decided that the warranty was a construction contract, and Abbey had the statutory right to bring an adjudication. Coulson LJ specifically confirmed that Akenhead J’s judgment in Parkwood was correct, and said (at para 62 of his judgment):
“Simply Construct were warranting that, not only have they carried out the construction operations in accordance with the building contract, but they will continue so to carry out the construction operations in the future…. therefore, it seems to me that that is “an agreement for the carrying out of construction operations.”
The appeal was allowed, as the judge was wrong to hold that the date of execution of the warranty was determinative.
Decision (Supreme Court)
In a landmark decision, the UK Supreme Court allowed the appeal, narrowly interpreting the reference to “construction contract” in the 1996 Act and reversing the decision in Parkwood.
Lord Hamblen, giving judgment, said that while adjudication provides an expeditious and cost-effective form of dispute resolution, those advantages cannot justify the expansion of the statutory right to adjudication outside its proper province. While the statutory scheme for adjudication is generally regarded as beneficial, Parliament has chosen to impose limits upon it. The Court’s task is to interpret the words of the statute where it refers to a “construction contract” being an agreement “for… the carrying out of construction operations.” That requires an assessment of whether the object or purpose of the agreement is the carrying out of construction operations. The Court said:
“…it is difficult to see how the object or purpose of a collateral warranty is the carrying out of construction operations. The main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work. Whether or not the carrying out of construction operations has to be the main object or purpose of the agreement, it must be necessary for the agreement to give rise to the carrying out of such operations. A collateral warranty that merely promises to the beneficiary that construction operations under the building contract will be performed does not do so. In such a case, it is the building contract that gives rise to the carrying out of the construction operations; not the collateral warranty. Any obligation undertaken to the beneficiary to carry out construction operations derives from and mirrors the obligations already under the building contract. There is no promise to carry out any construction operation for the beneficiary; merely a promise to the beneficiary that the construction operations to be carried out for someone else under the building contract will be performed.”
Accordingly, a collateral warranty will not be an agreement “for” the carrying out of construction operations if it merely promises to perform obligations owed to someone else under the building contract. There must 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.
In terms of how the Abbey collateral warranty should be construed, the Court confirmed that the use of particular words such as “warrants,” “promise” or “undertakes” make no difference. The Court said that following the earlier Court of Appeal judgments, whether a collateral warranty falls within the Act will always depend on the niceties of language. A far more principled and workable approach is for the dividing line to be between collateral warranties which merely replicate undertakings given in the building contract and those giving rise to separate or distinct undertakings for the carrying out of construction operations. That is a distinction which can be easily understood and applied. Adopting such an approach is likely to mean that most collateral warranties will not be construction contracts. There are, however, good policy reasons for reaching that conclusion. It is also in the interests of certainty that there is a dividing line which means that collateral warranties are generally outside the Act rather than everything being dependent on the wording of the particular collateral warranty in issue. The difficulties which may otherwise arise are illustrated by this case and the differing answers given by experienced judges to the issue raised. Two of the judges concluded that the Abbey collateral warranty was a “construction contract” for purposes of the Act, whilst two of the judges concluded that it was not, and differing reasons and rationales were provided by all four of them.
Comment
If the beneficiary of a collateral warranty wishes to have a right to refer disputes to adjudication, it will now be necessary to add express drafting to the collateral warranty. The inclusion or otherwise of adjudication dispute resolution clauses may now become an issue in negotiations relating to collateral warranties.
English 