The judgement in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP [2024] UKSC 23 represents a significant development in UK construction law and will be of interest to those who commonly provide or are beneficiaries to collateral warranties.
In making its decision, the Supreme Court considered whether the collateral warranty provided by Simply Construct (UK) LLP ("Simply") in favour of Abbey Healthcare Ltd ("Abbey") qualified as a 'construction contract' under section 104(1) of the Construction Act.
Collateral warranties are commonly used in the construction industry. The purpose of a collateral warranty is to create a contractual relationship between contractors or consultants and third parties who have an interest in construction works, such as purchasers, funders and tenants. By entering into a collateral warranty, third parties (who are not party to the underlying construction contract) are granted contractual rights to bring claims against the warrantor (the contractor or consultant giving the warranty), for example, for costs incurred arising from defects.
Under section 104 of the Construction Act, a 'construction contract' is an agreement with a person "for… the carrying out of construction operations". This is an important distinction, as parties to construction contracts have the statutory right to refer disputes to adjudication. Adjudication is generally the preferred mechanism of dispute resolution in the construction industry as it offers a swift and cost effective means of resolving disputes.
Background
The project involved the construction of a care home carried out by contractor, Simply, under a JCT Design & Build Contract 2011. The works completed in 2016, and in 2017 Abbey was granted a long lease of the care home. Fire safety defects were discovered in 2018 which were rectified by another contractor. Simply later executed a collateral warranty in favor of Abbey, although this was not provided until September 2020. In November 2020, Abbey launched an adjudication for costs relating to the fire safety defects and was awarded the sum of £908,495.98.
When Simply refused to pay, Abbey sought enforcement in the Technology and Construction Court. The Court dismissed Abbey's claim and ruled that the collateral warranty provided to Abbey was not a 'construction contract' under the Construction Act and therefore the adjudicator lacked jurisdiction.
Abbey later appealed to the Court of Appeal. Presiding judge Coulson LJ granted summary judgement in favour of Abbey and held that the collateral warranty was a construction contract. Coulson LJ cited that the wording "the contractor has performed and will continue to perform diligently its obligations under the contract" in the warranty was suggestive of both past and future performance of construction operations. Following this decision, Simply further appealed to the Supreme Court.
The Supreme Court Decision
The Supreme Court overruled the Court of Appeal and unanimously held that the collateral warranty was not a construction contract.
The Supreme Court found that the warranty was not an agreement "for" the carrying out of construction operations under section 104(1) of the Construction Act. The warranty simply guaranteed the performance of obligations already owed to another party under the building contract, not the actual carrying out of those obligations.
Notably, the only exception where a collateral warranty may be recognised as a construction contract is where the contractor undertakes obligations to carry out construction operations which are "separate and distinct" to the obligations under the related building contract.
Commentary
It would be very unlikely for the above exception to ever apply. Accordingly, under most collateral warranties, the parties will not be entitled to launch adjudication proceedings (unless expressly agreed to by both parties) where a dispute arises, and must instead rely on other means of dispute resolution, such as arbitration or litigation. In the circumstances, if a beneficiary of a warranty thinks it may want the option of referring a claim to adjudication, it will need to request an express amendment providing for adjudication. However, in practice, for most beneficiaries, we are not sure this is really necessary and is unlikely to be appropriate in most cases for the following reasons:
- It is very unlikely to be acceptable to PI insurers, and they would tend to want conduct of any claims for defective works etc. caused by a design fault.
- The very short timeframe for adjudication is not likely to be suitable for most claims a beneficiary would bring under a warranty.
Equally, in the unlikely scenario where a warranty is provided which undertakes obligations separate to the original construction contract, and either party doesn’t want the automatic entitlement for the other party to adjudicate, then this would need to be expressly carved out.
However, a warrantor would be unlikely to have any claims under a warranty anyway, except where a clause giving the warrantor equivalent rights of defence (as it would have had to any claims brought by its original employer under the related contract) does not carve out counterclaims or set off from such equivalent rights of defence. It is market norm for such clauses to include this type of carve out of any rights of counterclaim or set off that the warrantor may have, so we think this scenario is less likely to arise, but it is something to be aware of if including an express adjudication clause and you are a beneficiary to a warranty.
