Blog Authors: AIDAN STEENSMA; MATTHEW TAYLOR; CHRIS HALLAM; STEVEN WILLIAMS – CMS CAMERON MCKENNA NABARRO OLSWANG LLP
In a decision issued in July, the Supreme Court has found that collateral warranties and other contracts which are merely derivative or reflective of primary building contracts do not fall within the Construction Act. In addition to overturning the Court of Appeal’s decision on this point, the judgment also overrules an earlier decision by the TCC in 2013 which had found collateral warranties to be capable of falling within the Act depending on their wording. The Supreme Court’s decision will have significant implications for the enforcement of collateral warranty rights in the future and may render adjudications previously decided under collateral warranties to be invalid for want of jurisdiction.
Collateral warranties and the Construction Act
The Housing Grants Construction and Regeneration Act 1998 (as amended) (the “Construction Act”) applies to “construction contracts”, defined as being (among other things) a contract “for … the carrying out of construction operations”. One of the consequences of a contract falling within this definition is that the mandatory adjudication provisions of the Act will apply. These require the contract to provide a right for the parties to adjudicate “at any time”. If the contract does not provide such a right, the adjudication provisions of the Scheme for Construction Contracts are implied.
Up until now, the only case which had considered whether collateral warranties fell within the definition of a “construction contract” was Parkwood Leisure v Laing O’Rourke. The collateral warranty in that case was executed part way through the works and provided that the contractor “warrants, acknowledges and undertakes that it has carried out and shall carry out and complete the Works in accordance with the Contract.” The court in that case emphasised the promissory nature of the word “undertakes” and found that the collateral warranty amounted to a contract for the carrying out of construction operations.
The Parkwood case, and the potential for beneficiaries under a collateral warranty to benefit from the adjudication provisions of the Construction Act, marked an important point of distinction between collateral warranties and third-party rights granted under the Contracts (Rights of Third Parties) Act 1999. In Hurley Palmer Flatt v Barclays Bank, the TCC found that the beneficiaries of third-party rights under a construction contract could not take advantage of the adjudication provisions in the construction contract. However, this is a difficult area of law and questions remain as to how third-party rights relate to express adjudication provisions in a building contract and the precise circumstances in which holders of third-party rights would be able to bring adjudication proceedings.
Abbey Healthcare (Mill Hill Limited) v Simply Construct (UK) LLP: a recap
The appeal in this case arose out of a claim by Abbey (a tenant) to recover losses from Simply (a contractor) in respect of fire safety defects at a care home. Abbey brought adjudication proceedings against Simply pursuant to a collateral warranty and obtained a successful adjudication decision. The collateral warranty provided (among other things) that:
“The Contractor warrants that (a) the Contractor has performed and will continue to perform diligently its obligations under the Contract; (b) in carrying out and completing the Works the Contractor has exercised and will continue to exercise … reasonable skill care and diligence …”
A summary judgment application was made by Abbey to enforce the adjudication decision. However, it was refused by the TCC on the basis that the collateral warranty did not meet the definition of a “construction contract” under the Construction Act. Strong emphasis was placed on the fact that the collateral warranty had been executed approximately 4 years after practical completion and that its wording suggested it was no more than a warranty of a past state of affairs.
In a split judgment, the Court of Appeal overturned the TCC’s decision, with the majority finding the wording of the warranty sufficiently broad to include a promise to carry out future construction operations. The belated execution of the warranty was of no consequence, as if the warranty otherwise contained a promise for the carrying out of construction obligations, execution after completion of work would mean only that the warranty was to be given retrospective effect.
For a more detailed review of the TCC and the Court of Appeal decisions, please see our earlier Law- Nows here and here.
The Supreme Court
In a unanimous decision, the Supreme Court has now overturned the Court of Appeal’s judgment, finding that the Abbey warranty did not fall within the Construction Act, but on different grounds to the original TCC decision.
The Supreme Court considered that Parkwood had been wrongly decided and was to be overruled. In the Court’s judgment, the emphasis given in Parkwood, and by the Court of Appeal and the TCC in this case, as to whether the warranty contained promissory language was misplaced. Whether or not a contract was one “for … the carrying out of construction operations” depended on the object or purpose of the agreement. In the Court’s judgment, for the object or purpose of a contract to be the carrying out of construction operations:
“it must surely be necessary for the agreement to give rise to the carrying out of such operations. A collateral warranty that merely promises to the beneficiary that the construction operations undertaken under the building contract will be performed does not do so. In such a case, it is the building contract that gives rise to the carrying out of the construction operations; not the “collateral” warranty. Any obligation undertaken to the beneficiary to carry out construction operations derives from and mirrors the obligations already undertaken under the building contract.”
A collateral warranty will not, therefore, fall within the Construction Act if it merely promises to perform obligations under the original building contract. There must be a separate or distinct obligation to carry out construction operations for the beneficiary under the warranty, “not one which is merely derivative and reflective of obligations owed under the building contract.” The Court acknowledged that this approach would mean that most collateral warranties will not fall within the Construction Act.
Conclusion and implications
The Supreme Court’s judgment represents a fundamental change in this area of the law and reverses the legal position which has held sway since the decision in Parkwood almost 11 years ago. The assumption will now be that collateral warranties do not fall within the Construction Act, save for special cases where separate and distinct obligations to carry out work are agreed within the warranty. Collateral warranties which contain step-in rights may fall into this category as and when step-in rights are exercised.
The most immediate impact of the Supreme Court’s judgment will be on adjudication decisions in collateral warranty disputes which have been obtained in reliance on the law as it previously stood. Where no right to adjudicate would now exist based on the Supreme Court’s reasoning, such decisions are likely to have been invalid for want of jurisdiction. Any parties who have made payments as a result of such decisions may wish to consider whether they may call for the return of these amounts.
The decision is also likely to influence negotiations for collateral warranties and third-party rights on future projects. The difference between collateral warranties and third-party rights as regards statutory adjudication is now more difficult to discern. Employers and funders may press for the inclusion of express adjudication clauses in collateral warranties. Contractors and consultants may resist this, citing the reasoning in the Supreme Court’s judgment. This may then encourage parties to find ways of securing rights of adjudication through the drafting of third-party rights provisions. Time will tell where the balance will be struck.
KEY CONTACTS
Aidan Steensma, Of Counsel London. T +44 20 7367 2137
Matthew Taylor, Partner, London. T +44 20 7524 6341
Chris Hallam, Partner, Manchester. T +44 161 393 4757
Steven Williams, Partner, Co-head of the Infrastructure, Construction and Energy Disputes Group London. T +44 20 7524 6713
References
Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665
Hurley Palmer Flatt Ltd v Barclays Bank PLC [2014] EWHC 3042 (TCC)
Abbey Healthcare (Mill Hill Limited) v Simply Construct (UK) LLP [2022] EWCA Civ 823
