Is a collateral warranty a “construction contract”? – Abbey Healthcare (Mill Hill) Limited –v- Simply Construct (UK) LLP

A judgment of the UK Supreme Court has settled the question of whether a collateral warranty can be a “construction contract” for the purposes of the Housing Grants (Construction & Regeneration) Act 1996—the legislation that governs adjudication in construction contracts in GB.

Background

The case arose out of the construction of the Arandale Manor care home in London. Simply Construct was engaged under a JCT Design & Build Contract (the Contract) to carry out the construction of a 65-bed care home in London.

Abbey was the tenant of the care home and had a collateral warranty from Simply Construct. The collateral warranty was entered into in October 2020, over 4 years after practical completion.

Abbey made claims against Simply Construct arising out of fire-safety defects and the cost of necessary remedial work.

Abbey referred a dispute relating to that remedial work to adjudication. Simply Construct took the jurisdictional objection that Abbey’s collateral warranty was not a “construction contract” and it therefore did not have a right to refer any dispute to adjudication.

The key issue for the Supreme Court to determine was whether the collateral warranty was a construction contract.

The Law - Adjudication

The Construction Contracts (Northern Ireland) Order 1997 (the 1997 Order) is the legislation that governs adjudication and payment in "construction contracts" in Northern Ireland.

Under the 1997 Order, a party to a "construction contract" has a statutory right to refer a dispute to adjudication at any time. An adjudicator's decision is binding on an interim basis, that is, until the dispute is finally determined by arbitration, litigation or agreement.

“Construction contract” is a defined term in the 1997 Order, being (amongst other things) an agreement with a person for the carrying out of construction operations. The 1997 Order also provides for a defined list of “construction operations”.

The regime in England & Wales is similar, albeit different legislation applies.

The Law – The Scheme

Abbey’s collateral warranty did not contain any adjudication provisions.

However, if a construction contract does not contain adjudication provisions, then the relevant provisions of the Scheme for Construction Contracts in Northern Ireland will take effect as an implied term. A right to refer a dispute to adjudication will be implied in the construction contract.

Decision

The Supreme Court decided that a collateral warranty is not ordinarily an agreement for the carrying out of construction operations. It is not, therefore, a “construction contract” for the purposes of the Housing Grants (Construction & Regeneration) Act 1996.

In reaching that conclusion, the Court stated:-

“… 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.”

“There is no distinct or separate obligation undertaken to the beneficiary. 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.”

“The disconnect between a collateral warranty which promises that the building contract will be performed and the carrying out of construction operations is highlighted by the fact that the beneficiary has no control over how those operations are performed … The beneficiary “follows the fortunes” of the employer under the building contract but has no employment role or rights.”

A collateral warranty will, however, be a “construction contract” if the contractor or consultant giving the warranty undertakes a contractual obligation to the beneficiary to carry out construction operations. That obligation must be separate and distinct from the obligation to do so under the underlying building contract or appointment.

Carson McDowell view

In a landmark judgment, the Supreme Court has confirmed that a beneficiary of a collateral warranty cannot, subject to its wording, avail of adjudication for resolution of disputes.

The vast majority of collateral warranties do not contain the type of “separate and distinct” obligation to carry out construction operations that the Court considered would be necessary to make a collateral warranty a “construction contract”.

The obligation to actually carry out work or services is ordinarily included within an underlying building contract or professional appointment rather than a collateral warranty. Therefore, most beneficiaries of collateral warranties will not benefit from a right to refer a dispute under a collateral warranty to adjudication.

It will remain open to parties to agree to include adjudication provisions in their collateral warranties where there is a benefit to them in doing so.

If you would like further information on the issues discussed in this article, please contact John Dugdale or another member of the Construction Law team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.