When is a Collateral Warranty a Construction Contract? – Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP  EWHC 2110 (TCC)
In a recent decision, the Technology and Construction Court (“TCC”) was asked to consider whether a collateral warranty provided by a contractor to the tenant occupying the building where works had been carried out was a “construction contract” within the meaning of s.104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”). The question in this case was relevant to the issue of whether or not a dispute arising under the collateral warranty could be referred to adjudication pursuant to s.108 of the Construction Act – a right reserved for parties to construction contracts as defined in s.104.
Simply Construct (UK) LLP (“Simply”) were contractors who constructed a care home pursuant to a JCT Design and Build Contract 2011 (with amendments) (the “Building Contract”). Following practical completion of the works on 10 October 2016, Simply entered into a settlement agreement with the employer dated 14 June 2017 settling all claims under the Building Contract save in respect of latent defects.
Toppan Holdings Limited (“Toppan”) was the freehold owner of the care home and the party to whom the employer’s rights and obligations under the Building Contract were transferred by a novation agreement dated 14 June 2017. Abbey Healthcare (Mill Hill) Limited (“Abbey”) was the tenant and operator of the care home under a lease granted by Toppan dated 12 August 2017. Abbey and Toppan were both under the same ultimate ownership.
According to Toppan and Abbey, fire safety defects were discovered at the care home in August 2018 and remedial works were carried out by a new contractor between September 2019 and February 2020.
On 23 October 2020, a collateral warranty was executed between Simply, Abbey and Toppan (the “Collateral Warranty”) pursuant to a requirement in the Building Contract. Under the Collateral Warranty Simply warranted, amongst other things, that:
- It has performed and will continue to perform diligently its obligations under the Building Contract;
- It has exercised and will continue to exercise reasonable skill, care and diligence in carrying out and completing the works; and
- It has exercised and will continue to exercise reasonable skill, care and diligence in carrying out and completing any design for the works.
Toppan and Abbey served notices of adjudication on Simply in December 2020 seeking damages in excess of £8.8m and £5.5m respectively in relation to the remedial works and loss of trading profits. Abbey asserted that the Adjudicator had jurisdiction to decide the matter under the Collateral Warranty but Simply argued that the document was not a construction contract under s.104 of the Construction Act.
The Adjudicator found in favour of Toppan and Abbey and determined (on a non-binding basis) that he had jurisdiction in relation to Abbey’s claim. The Adjudicator awarded Toppan damages of £852,093 plus VAT and interest in respect of the remedial works and professional fees and he awarded Abbey damages of £869,500 plus interest for loss of trading profit. However, the question of jurisdiction under the Collateral Warranty fell to be considered again before the TCC during Toppan and Abbey’s application to enforce the Adjudicator’s decisions.
The Judge’s Decision
Martin Bowdery QC (sitting as a deputy High Court Judge) determined that the Collateral Warranty was not a construction contract within the meaning of the Construction Act and therefore that the Adjudicator did not have jurisdiction to hear Abbey’s claim. In coming to his decision, the judge considered the guidance of Akenhead J in Parkwood v Laing O’Rourke  BLR 589 (TCC) in which his Lordship acknowledged that a construction contract did not have to be wholly or even partly prospective, and that the definition of a construction contract under s.104 of the Construction Act was a broad expression. However, his Lordship made clear that not all collateral warranties given in connection with construction developments would fall within the definition under s.104. His Lordship held :
“One needs primarily to determine in the light of the wording and of the relevant factual background each such warranty to see whether, properly construed, it is such a construction contract for the carrying out of construction operations. 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 that may be that all the works are completed and that the Contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard.”
Following this guidance (which was noted with approval in the 4th Edition of Coulson on Construction Adjudication at para. 2.21), Martin Bowdery QC considered the wording of the Collateral Warranty against the relevant factual background and determined that it was not a construction contract.
Unlike the collateral warranty in the Parkwood case, the Collateral Warranty did not contain the verbs “acknowledges and undertakes”. The operative verb in the Collateral Warranty was that the contractor “warrants” its past and future performance.
The factual background in this case was significant:
- The works had been completed four years prior to the execution of the Collateral Warranty.
- The remedial works to the alleged defects had been completed eight months before the execution of the Collateral Warranty.
- There was no evidence that Abbey or Simply contemplated the possibility of any further construction operations being carried out as a result of any breach of the Building Contract and/or the 2017 settlement agreement.
The fact that works had been completed and, in the present case, latent defects had been remedied before the execution of the Collateral Warranty pointed against this being a contract “for… the carrying out of construction operations” within the meaning of s.104 of the Construction Act. By the time it was executed, the Collateral Warranty was a warranty of a state of affairs, past or future, akin to a manufacturer’s product warranty.
Martin Bowdery QC refused Abbey’s application for permission to appeal.
The decision provides useful guidance on the issue of collateral warranties and adjudication under the Construction Act, an area in which there has been very little judicial commentary since Parkwood in 2013.
Whether any particular collateral warranty is a construction contract for the carrying out of construction operations will turn on the wording construed against the relevant factual background. The factual background in the present case was somewhat unusual in that the Collateral Warranty was executed not only long after the works had been completed but after latent defects had come to light and been remedied. Indeed, the timing of the Collateral Warranty suggests that it was obtained in order for Abbey to bring adjudication proceedings against Simply to recover losses associated with the remedial works. This scenario is a long way removed from the underlying aim of the Latham report of 1994 (which led to the Construction Act) for disputes to be resolved, quickly and cheaply, while works are ongoing.
Whilst the Collateral Warranty warranted both past and future performance, it did not contain any undertaking for Simply to carry out any future works. Further, the settlement agreement, entered into three years and four months prior to the Collateral Warranty, meant that Simply’s performance obligations under the Building Contract had effectively been exhausted long before the Collateral Warranty was entered into.
In these circumstances, it is unsurprising that the Judge reached the conclusion that the Collateral Warranty was not a contract for the carrying out of construction operations. Consequently, there was no right to adjudication under s.108 of the Construction Act and any remedy would need to be sought via litigation in the Courts.
The judgment can be viewed here.