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Toppan v Simply - When is a Collateral Warranty a 'Construction Contract' for the purposes of adjudication?

21 October 2021

In the recent case of Toppan Holdings and Abbey Healthcare v Simply Construct, the Technology and Construction Court ("TCC") held that a collateral warranty (in favour of a tenant, following practical completion) was not a construction contract within the meaning of s.104 (1) of the Construction Act; and as such, there was no statutory right to adjudication, pursuant to s.108 of the Act.

The case seemingly departs from the 2013 decision reached in Parkwood v Laing O'Rourke, where the court held that the warranty in question was a construction contract. The Toppan case provides additional guidance on this topic and highlights the circumstances in which a collateral warranty will, and will not, be considered a construction contract. This article examines the reasoning behind the Toppan decision and considers its implications in the construction industry for construction parties and practitioners.

  • In June 2015, the defendant, Simply, was engaged by the employer, Sapphire, to design and build a new care home pursuant to an amended JCT Design and Build Contract 2011 (the “Building Contract”). 
  • Practical completion ("PC") of the works was achieved in June 2016, however, various defects were subsequently discovered. 
  • In June 2017, Sapphire novated its rights and obligations under the Building Contract to Toppan, the freehold owner of the care home. 
  • In August 2020, Toppan requested a warranty in favour of Abbey as tenant, and the requisite warranty was executed in October 2020 (the "Abbey Warranty") 
  • In December 2020, Toppan and Abbey served separate notices of adjudication on Simply, in relation to  remedial works required and loss of trading profits. 
  • The adjudicator found in favour of Toppan and Abbey awarding £1.07 million and £908,000 in damages respectively.

Simply challenged enforcement of the decisions, and argued the adjudicator did not have jurisdiction to hear Abbey's claim as the Abbey Warranty was not a construction contract, therefore, there was no statutory right to adjudicate pursuant to the Construction Act. 

The issue for the court to determine was whether the Abbey Warranty was an agreement "for the carrying out of construction operations".

Bowdery QC (sitting as a deputy High Court Judge) ruled the Abbey Warranty was not a construction contract, as defined in the Construction Act, and, therefore, the adjudicator did not have jurisdiction to hear the dispute, and the application to enforce the adjudicator’s decision failed. In reaching his decision, he was guided by the judgement in Parkwood, albeit the opposite conclusion was reached in that case.

In Parkwood, Akenhead J held that the particular warranty in question was a construction contract, but it did not follow that all collateral warranties would be.  He advised that the question of whether a collateral warranty amounts to a construction contract needs to be determined "in light of the wording and of the relevant factual background"and "a very strong pointer to that end will be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed.

Bowdery QC quoted these extracts in his judgement before reaching his decision that the Abbey Warranty was not a construction contract. 

The reasons for his decision, and the factors to be considered when determining if a collateral warranty amounts to a construction contract, can be summarised by the 3 following principles:

1. Terms; 
2. Timing; and
3. Factual Background 

Terms – does the warranty include a provision for the performance of future works?

Bowdery QC explained that when there are express terms for the warrantor to agree to carry out uncompleted works in the future, that will be a "very strong pointer" the warranty is a construction contract and the parties have the right to adjudicate. 

In the Abbey Collateral Warranty, there were references to future performance of works. However, despite such terms, the works had already been completed and latent defects remedied at the point the warranty was executed. Which leads to the second principle – timing.

Timing – was the warranty executed after completion of the works? 

It was asserted that where collateral warranties are entered into after practical completion then it is "unlikely" to amount to a construction contract, and this assertion is even stronger where latent defects have been remedied, as was the case with the Abbey Warranty.  So, whilst close attention should be paid to the terms of warranties, it is the timing they are entered into that is decisive in deciding if a collateral warranty amounts to a construction contract, and brings with it the inferred right to statutory adjudication. 

Factual Background 

Finally, the express terms of warranties, should always be construed against the relevant factual background. Applying this to the Abbey Warranty, whilst the warranty did stipulate the performance of future works, it was executed four years after PC of those works and six months after PC of the remedial works. 

Furthermore, at the point of execution, there was no evidence or indication that Abbey or Simply contemplated the possibility of any further works being carried out as a result of any breach of the building contract in question. 

In all circumstances, Bowdery QC considered that by the time the Abbey Warranty was executed, it was a warranty of a state of affairs, akin to a manufacturer's product guarantee, and not an agreement for carrying out construction operations.

Commentary 

It is worth noting the peculiar facts of this case. It is unusual to see tenants adjudicating under collateral warranties and questions have been raised over whether it is appropriate for them to do so. A tenant is less likely to have enough first-hand knowledge to meet the particularly tight timeframes in an adjudication, and if acting for a tenant, we would usually recommend that court proceedings would be the best approach under a collateral warranty, rather than an adjudication. Had Abbey been an independent tenant and not under the same ultimate ownership as the landlord, which brought its own adjudication, then it is unlikely that Abbey would have brought such a claim in the first place.

Whilst this case sheds some more light on the factors the court will take into consideration when determining if a collateral warranty is a construction contract, there is still a large amount of uncertainty that remains and there is concern that the ruling will create a two tier system of warranties:  those entered into before PC and those entered into after.  On a strict interpretation of Toppan, only the former may confer statutory adjudication rights. Even then, it is still not clear whether the defining moment is practical completion or the expiry of the defects liability period. This creates uncertainty for both legal practitioners and construction industry players. Most tenants would not receive warranties until PC, which means that they are likely to need to resort to litigation or arbitration to resolve any disputes over defects at their property.

Ultimately, it remains to be seen what long term implications the decision will have on both the drafting of collateral warranties and the timing of their execution. However, our view is that adjudication under collateral warranties is not usually the preferred course to take (except perhaps for an employer receiving a post novation warranty) so do not believe it is helpful to include an express adjudication clause, except in certain circumstances. 

If you have any questions arising out of this article, please contact Gemma Wilson or Sara Bastekin.

Further Reading