The wording of a collateral warranty alone will not prevent it being treated as a ‘construction contract’ within the meaning of section 104 of the Construction Act 1996. This widening of the scope of contracts falling within the Act is likely to have a significant impact on the industry.

Background

Section 104(1) and (5) of the Act define a construction contract as an agreement for either “the carrying out of” or “related to” construction operations. If an agreement falls within this definition, the parties have a right to adjudicate any disputes which may arise pursuant to section 108 of the Act; this generally being a more time- and cost-effective way to obtain an interim decision on a dispute.

Prior to Abbey, the primary case on the matter was Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] BLR 589 (TCC). In this case, Akenhead J acknowledged that whether a warranty was a construction contract or not would depend on the precise wording of the warranty in question, and that because this particular warranty included the phrase "warrants, acknowledges and undertakes" it was a construction contract. As a result, and to avoid being considered a construction contract, warranties thereafter tended to be drafted to refer to “warrants” only.

The Case

Then came the case of Abbey Healthcare (Mill Hill) Ltd (‘Abbey’). By way of background, in 2015 Sapphire Building Services Ltd and Simply Construct (UK) LLP entered into a JCT Design & Build 2011 contract in which Simply Construct would carry out the construction of a care home. The contract included a provision for collateral warranties to be provided to Sapphire’s successors in title. The building was subsequently sold to Toppan Holdings Ltd (‘Toppan’), who granted a lease with full title to Abbey. In accordance with the contract, Simply Construct granted a collateral warranty to Abbey though importantly this came around four years after practical completion of the building.

In 2018, it was discovered that the building had fire safety defects. Toppan notified Simply Construct who failed to rectify the issues, resulting in a third party being instructed to resolve the same for which Abbey paid a proportion of the costs. Abbey subsequently brought adjudication proceedings against Simply Construct under the collateral warranty and was awarded £908,495.98 inclusive of VAT. Abbey applied to the High Court for summary judgment to enforce the adjudicator’s decision, whereby Simply Construct argued that the adjudicator did not, in fact, have jurisdiction to decide the dispute as the collateral warranty was not a construction contract and it did not contain any standalone adjudication provisions.

The Decisions

At first instance, the High Court determined that the collateral warranty did not constitute a construction contract on the basis that all works had already been completed and the warranty did not contain the phrases “acknowledges” or “undertakes”. The High Court therefore relied heavily upon the judgment in Parkwood.

Upon appeal however, Mr Justice Coulson overturned the decision and determined that the collateral warranty did constitute a construction contract for the purposes of section 104 meaning that the adjudicator did have jurisdiction. In particular, it was decided that: -

• The absence of the phrase “acknowledges and undertakes” does not make any material difference as to whether a collateral warranty is a construction contract or not.

• In this particular case, Simply Construct warranted that it “had performed and will continue to perform diligently its obligations…” which was an “ongoing promise for the future”. As a result, the warranty was still an agreement for the “carrying out” of construction operations as stated within section 104. Unless a collateral warranty is limited to the standard of work (such as a product warranty) or a past/fixed situation, it will likely fall within section 104.

• If a collateral warranty contains both future-facing obligations and is retrospective, its date of execution is irrelevant for the purposes of section 104; the fact that Abbey’s collateral warranty was signed after practical completion was immaterial. Any other conclusion would make for considerable uncertainty, and would result in an artificial situation where contractors would avoid signing collateral warranties until after they had finished the work.

• Section 104 refers to agreements “related to” construction operations which goes beyond traditional building contracts. The suggestion that there had to be the usual detailed payment provisions as found in such contracts was therefore rejected. A collateral warranty could still be a construction contract without detailed payment provisions; a nominal payment provision may be sufficient, subject to the wording of the warranty.

What does this case tell us?

The decision does not overturn Parkwood, in that the wording of the relevant warranty remains tantamount. However, Abbey has expanded the extent to which collateral warranties will be regarded as ‘construction contracts’ and provides a helpful guide to parties entering into collateral warranties or seeking to enforce them. Careful drafting alone may not prevent a collateral warranty falling within the scope of section 104.

Those granting collateral warranties, or entering into contracts which obliges them to give a subsequent warranty, need to take particular care and would be well placed to seek advice. The approach in Abbey may also now see an avalanche of adjudication claims by those with the benefit of a collateral warranty – and even if a court determines that a particular warranty is not a construction contract, significant wasted costs may still have been spent getting that far.

Likewise, parties need to be aware that if their collateral warranty does constitute a ‘construction contract’ it may also need to comply with the other provisions contained within the Act; if not, implied terms may be imposed into the contract which were not intended by the parties. Parties might be tempted to take the view that a particular collateral warranty is likely to be construed as a construction contract and protect themselves by including, for example, specific adjudication provisions within the warranty rather than relying on the Scheme. How the Court will deal with that remains to be seen.

Need advice on any of the issues raised in this article?

Please get in touch with, Abigail Milner, today on 01482 324252 or via email: aam@gosschalks.co.uk. Alternatively, contact any member of our specialist Construction law team for advice.