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Adjudication – when is a Collateral Warranty a construction contract?

06 October 2021

Robert Goodlad and Holly O'Brien review the recent decision in Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC), in which Martin Bowdery QC (sitting as a deputy High Court Judge) considered whether to enforce the decisions of an adjudicator, one of which had been reached following adjudication of a dispute arising under a Collateral Warranty.

The Facts

Toppan Holdings Limited ("Toppan") was the freehold owner of a care home in London, with Abbey Healthcare (Mill Hill) Limited ("Abbey") being the occupational tenant and operator of the care home pursuant to a lease with Toppan. Simply Construct (UK) LLP ("Simply") were the contractors who had built the care home.

The Building Contract had been entered into on 29 June 2015 between Simply and another company (Sapphire Building Services Limited ("Sapphire")), with work having previously commenced on 30 March 2015. The Building Contract allowed Sapphire to novate the contract to Toppan at any time and also obliged Simply to execute a collateral warranty, on request, for the benefit of a tenant and in favour of Toppan. Practical completion of the works was achieved on 10 October 2016.

On 13 June 2017, Sapphire and Simply entered into a settlement agreement which resolved certain issues between them, whilst not waiving any claims for latent defects, and requiring Simply to sign the Novation Agreement with Toppan. On 14 June 2017 Sapphire transferred all of its rights under the Building Contract to Toppan pursuant to a Novation Agreement. Abbey's lease of the care home from Toppan was granted on 12 August 2017.

During 2018, Toppan discovered fire safety defects in the care home and commissioned investigative reports on the defects. In 2019 Toppan gave notice to Simply of the defects and requested they were rectified. Toppan ultimately engaged an alternative contractor to carry out remedial works. Toppan asserted that yet further defects were discovered and rectified during the course of the remedial works.

In October 2020, a Collateral Warranty by Simply in favour of Abbey (“the Warranty”) was executed. As part of the Warranty, Simply warranted that (1) it had performed and would continue to perform diligently its obligations under the Building Contract, (2) in carrying out and completing the works and (3) in carrying out and completing any design for the works, it had exercised and would continue to exercise reasonable skill, care and diligence. It is worth noting that the execution of the Warranty was 4 years after practical completion of the original works, over 3 years after the Settlement Agreement and 8 months after the remedial works to the fire safety defects (carried out by another contractor) had achieved practical completion.

In December 2020 Toppan and Abbey served separate notices of adjudication on Simply, and the same adjudicator was appointed to deal with both matters. Toppan claimed for the costs of the remedial works (alleging breach of the novated Building Contract), and Abbey claimed for its lost trading profit (alleging breach of the Warranty). Simply raised jurisdictional arguments during the adjudications, and also defended the claims. Toppan was awarded some £1.07 million and Abbey some £908,000 respectively by the Adjudicator.

Simply resisted enforcement of both the Toppan and the Abbey Decisions. This article considers the jurisdictional arguments that were raised by Simply in order to defeat Abbey's claim to enforce the Abbey Decision. 

The Dispute

The Technology and Construction Court had to consider whether the Warranty was a “construction contract” for the purposes of Section 104(1) of the Housing Grants, Construction and Regeneration Action 1996 (“the Act”), and therefore whether the statutory right to adjudicate could even arise. The Act defines a construction contract as, among other things, an agreement for the carrying out of construction operations.  Simply asserted that the Warranty was not a construction contract, and so, as there was no statutory right to adjudication, the adjudicator did not have jurisdiction.

The Judgment

Martin Bowdery QC (sitting as a deputy High Court Judge) accepted Simply's argument that the collateral warranty was not a "construction contract" and therefore Abbey's claim to enforce the Abbey Decision failed (as the Adjudicator did not have jurisdiction).

In his Judgment, Martin Bowdery QC referred to the previous decision of Akenhead J in Parkwood v Laing O’Rourke [2013] B.L.R. 589, which had considered whether a collateral warranty was a construction contract under the Act. Akenhead J concluded that the collateral warranty in that case was a construction contract, but stressed that it did not follow from his decision that all collateral warranties would necessarily be construction contracts. 

Martin Bowdery QC looked at the language used in the Warranty, noting that it did not include the verbs “acknowledges” or “undertakes” (both of which had appeared in the Collateral Warranty considered by Akenhead J), and (adopting Akenhead J's guidance) that a pointer against a construction contract being found to exist may be that the Contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard. Whilst the Warranty in this case referred to both a past state of affairs and future performance, Martin Bowdery QC concluded that it was not an agreement for the carrying out of construction operations, taking into consideration the fact that the Warranty was executed after practical completion had occurred, after a settlement had been negotiated, and after the latent defects had already been remedied by other contractors. As such, the Warranty could not be construed as a “construction contract” within the meaning of Section 104 of the Act. 

Building on the limited number of previous decisions relating to adjudication under collateral warranties, most notably that in Parkwood, the judgment identifies the following key principles which could be considered when assessing whether a Collateral Warranty is a construction contract:

  1. Both the wording and factual background of the contract should be considered. The timing of the execution of the warranty is an important factor when assessing the facts of the case.
  2. Where a contractor agrees to carry out uncompleted works in the future, that will be a very strong pointer that the collateral warranty is a construction contract and the parties will have a right to adjudicate. 
  3. Where the works have already been completed, and as in this case, latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no contractual right to adjudicate by virtue of section 108(5) of the Act and the implied terms of the Scheme.

Contrary to the submissions of Abbey, by the time the Warranty was executed, it was akin to a manufacturer’s product warranty, not a construction contract.

Comment

Building on the limited number of previous decisions relating to adjudication under collateral warranties, most notably that in Parkwood, the judgment identifies the three key principles above which should be considered when assessing whether a Collateral Warranty is a construction contract. It should, however, be noted that the factual background in this case was unusual in that the Warranty was executed a significant period after the works had been completed and after defects had been both discovered and remedied.  Going forward, given that this decision relates to statutory adjudication under the Act and the default Scheme, it would be open to parties to include express provisions for adjudication in collateral warranties to avoid the jurisdictional issue arising in the future, even if the warranty were to be executed after the completion of construction works. Beneficiaries of warranties may seek to include such provisions in warranties. Careful consideration needs to be given by the warranting party as to whether to agree to an express right to adjudicate, especially if the matters being warranted may have occurred some time ago, and/or may give rise to disputes which are perhaps not best suited to adjudication, for example substantial claims for professional negligence.

For further details please contact the authors:
Holly O'Brien – Trainee Solicitor
Robert Goodlad – Director 

Further Reading