Is a Collateral Warranty a “Construction Contract”?

The relevance of the question is to decide whether a party has the option of the many advantages of adjudicating a dispute arising from a collateral warranty, or not.

Adjudication is a rapid and costs-minimising method of obtaining an interim enforceable decision. It is a procedure available to parties under the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) if they are subject to a “construction contract”, or by agreement (for instance under contract).

A collateral warranty allows a party who is not a party to a contract to obtain the protection and rights of the contract against one of the contracting parties.

There have not been many judgments on this issue but the recent case of Toppan Holdings Ltd v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC) goes against the previous line that in principle disputes relating to collateral warranties (in particular ones which include the common wording that the builder or consultant warrants that it has “carried out and shall carry out and complete” services) can be referred to adjudication, although the specific facts are relevant to the decision.

The Facts

• Sapphire Building Services Limited (Sapphire) was the employer in a contract with Simply Construct (UK) Limited (Simply) to design and build a new care home (the Works)
• Toppan Holdings Limited (Toppan) was the freehold owner of the care home and was subsequently novated as employer under the building contract
• Abbey Healthcare (Mill Hill) Limited (Abbey) subsequently became the tenant of the care home
• Abbey became the beneficiary of a collateral warranty (the Warranty)

Defects arose in the Works and Abbey and Toppan proceeded to adjudication:

• The Toppan adjudication was commenced under the Building Contract
• The Adjudicator awarded Toppan damages for remedial works and professional fees alongside interest and VAT (the Toppan Decision)
• The Abbey adjudication was commenced under the Warranty
• Abbey was awarded damages for loss of trading profit alongside interest and VAT (the Abbey Decision).

In the subsequent High Court enforcement proceedings Simply resisted enforcement of both the Toppan and the Abbey Decisions on various grounds including whether the Warranty was a ‘construction contract’ for the purposes of the Act.

The Judgment

There has previously been no hard and fast rule as to whether a collateral warranty constitutes a ‘construction contract’. In this instance, the court decided that the Warranty was not a ‘construction contract’ and there was therefore no implied right to adjudicate under the Act.

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.

The works reached practical completion on 10 October 2016; the Warranty was executed on 23 October 2020. Consequently the court found that:

“Contrary to the submissions of Abbey, by the time the Abbey Collateral Warranty was executed it was a warranty of a state of affairs past or future akin to a manufacturer’s product warranty”.

The court enforced the Toppan Decision but not the Abbey Decision.

The Implications

It is emphasised 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. Given that this decision relates to statutory adjudication under the Act 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, if they thought it appropriate.

Careful consideration needs to be given by the warranting party as to whether to agree to an express right to adjudicate however, 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.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.