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Adjudication and Collateral Warranties – Court of Appeal reverses TCC decision in Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] EWCA Civ 823

On 21 June 2022, the Court of Appeal handed down judgment in Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] EWCA Civ 823 overturning the decision of Mr Martin Bowdery QC in the TCC: [2021] EWHC 2110 (TCC). The Court allowed the appeal by a majority (Coulson and Peter Jackson LJJ, Stuart-Smith LJ dissenting).

The Court of Appeal judgment provides guidance, for the first time at appellate level, on the meaning of “an agreement… for… the carrying out of construction operations” in s.104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”).  As well as providing welcome clarity on the use of adjudication to resolve disputes under a collateral warranty, the judgments provide detailed analysis of the interpretation of obligations under such contracts more broadly.

 

Background

At first instance, Martin Bowdery QC refused to enforce an adjudication decision made against Simply Construct (UK) LLP (“Simply”) in favour of Abbey Healthcare (Mill Hill) Limited (“Abbey”) on the basis that the adjudicator lacked jurisdiction to consider the dispute referred to him. Abbey had referred a dispute based on a breach of a collateral warranty granted by Simply (the “Abbey Collateral Warranty”) to adjudication. When construed against the factual background, the Judge found that the collateral warranty was not a construction contract within the meaning of s.104(1) of the Construction Act. Specifically, the judge gave weight to the fact that the Abbey Collateral Warranty had been executed four years after construction works under the main building contract had been completed, and a number months after rectification of allegedly defective works had taken place. Following the guidance of Akenhead J in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] BLR 589 (TCC) (“Parkwood”), Martin Bowdery QC concluded that at the time of execution, the Abbey Collateral Warranty was akin to a warranty as to a state of affairs, both past and future, rather than a contract “for…the carrying out of construction operations” under s.104(1) of the Construction Act.[1]

Abbey obtained permission to appeal on the ground that Martin Bowdery QC was wrong to have found that the Abbey Collateral Warranty was not a construction contract under the Construction Act. Simply argued by way of Respondent’s Notice that the first instance decision should be upheld for different reasons – namely that collateral warranties should not generally be regarded as construction contracts under s.104(1) of the Construction Act and to the extent that the judgment of Parkwood found otherwise, it was wrongly decided.

[1]  For full details of the background of the case and the reasoning of Martin Bowdery QC, please see the article here.

 

The Court of Appeal’s Judgment

Despite the dissenting judgment from Stuart-Smith LJ, there was some agreement between the judges on the following issues:

  • Parkwood was correctly decided and, therefore, a collateral warranty may be capable of being a construction contract within the meaning of the Construction Act.
  • A collateral warranty is capable of having retrospective effect, in the sense that the parties may have agreed that it would be effective from a date prior to the date on which it was executed.

It was therefore held that it was not possible to find that collateral warranties “generally” were not construction contracts and that the timing of the execution of the Abbey Collateral Warranty was not material or, at least, was not determinative the question of whether or not it was a construction contract.

However, Coulson and Stuart-Smith LJJ differed significantly in their analysis and conclusions as to whether the collateral warranty in question was a “construction contract”. Coulson LJ made the following key findings:

  • 104(1) of the Construction Act should be construed broadly, drawing support from s.104(5), which is concerned with hybrid contracts and uses the wider phrase “relates to construction operations”.
  • The statutory purpose of the Construction Act, specifically in enabling parties to two different construction contracts to refer disputes involving the same or similar underlying factual issues to the same adjudicator, supported a broad construction of s.104(1).
  • The definition in s.104(1) was not limited to the “primary” building contract on any construction project or to contracts which contained detailed payment provisions.
  • The fact that the Abbey Collateral Warranty did not, by comparison with the warranty under consideration in Parkwood, contain the words “undertakes” or “acknowledges” did not prevent it from being a construction contract. Coulson LJ considered any difference, in this context, between the words “warrants” and “undertakes” as “hair-splitting”.
  • The timing of the execution of the Abbey Collateral Warranty was not determinative of whether or not it was a construction contract, as the obligations were future-facing and retrospective in effect.

In his detailed dissenting judgment, Stuart-Smith LJ found against Abbey for the following reasons:

  • The word “for” in s.104(1) has a clear and well understood meaning, which is “to denote the purpose or object (or, I would add, intended outcome) of the agreement… It carries with it the implication that a party to a contract “for” the carrying out of construction operations (typically the contractor) undertakes a direct contractual obligation to the other party (typically the employer) to carry out the construction operations.
  • The use of the words “relates to” in s.104(5) does not add to or inform the meaning of the word “for” in s.104(1) (a point on which Peter Jackson LJ evidently agreed).
  • The possible procedural advantage of being able to refer multiple disputes that raise the same issues but arise out of different contracts to parallel adjudications does not justify departing from the clear meaning of s.104(1).
  • The natural and ordinary meaning of the word “warrants” is to confer a binding promise or to guarantee a state of affairs. A liability for breach of such a warranty is conceptually different from a liability for breach of direct obligations owed in respect of the underlying state of affairs: it rests simply upon the fact that the warranting person’s promise is found to be broken.
  • Under the Abbey Collateral Warranty, Simply warranted the performance of all the obligations it owed to the employer under the building contract. Simply did not undertake a separate and direct obligation to Abbey to carry out works and, consequently, the Abbey Collateral Warranty was not an agreement “for… the carrying out of construction operations”.
  • There was nothing in the wider context of the Abbey Collateral Warranty, the building contract or any “overall purpose” of the Abbey Collateral Warranty that would merit a departure from the ordinary meaning of the words in the operative clauses of the Abbey Collateral Warranty.
  • The collateral warranty in Parkwood could be distinguished from the Abbey Collateral Warranty in two respects. Firstly, the fact that the warranty in Parkwood used the words “warrants, acknowledges and undertakes” indicated that the contractor undertook and assumed direct obligations to the warrantor, whereas Simply did not. Secondly, the wording of the collateral warranty in Parkwood expressly recognised the existence of free-standing obligations and duties owed directly to the beneficiary, whereas the Abbey Collateral Warranty did not.

 

Comment

Construction practitioners and adjudicators will welcome the clarity provided by the Court of Appeal’s judgment. While the Court expressly stated that not all collateral warranties would be considered to be construction contracts, the broad interpretation of s.104(1) advocated by the majority, and the reluctance to engage in “hair-splitting” on the question of the wording of contractual obligations, mean that beneficiaries of collateral warranties will now feel more secure in referring their disputes to adjudication.

Coulson LJ’s judgment is also notable for the importance placed on the statutory purpose of the Construction Act and the desirability of related disputes to be resolved in the same forum (i.e. through adjudication), in particular at [41]:

…the 1996 Act was intended both to improve the payment regime in the construction industry, and to improve the dispute resolution mechanisms available to those involved in construction disputes. One way in which it achieved that latter purpose was ensuring the availability of a swift and inexpensive adjudication procedure. If there are disputes between parties to two different construction contracts (for example, an employer and a main contractor, and the main contractor and the relevant sub-contractor), but the underlying factual issues are the same or very similar, the same adjudicator will usually be appointed to decide those disputes, thereby ensuring consistency of approach and outcome, and a reduction in duplicated costs. The idea that a dispute between a contractor and an employer arising out of allegedly defective work is heard by an adjudicator, whilst the same dispute between the employer and the warrantor has to be litigated, may be said to be contrary to the intended purpose of the 1996 Act.

Far from being a rough-and-ready form of justice reserved for specific cases, adjudication now seems by many to be the preferred form of dispute resolution in construction cases.  This decision may prove to extend the availability of adjudication to a wider class of persons involved with construction projects.

Michele De Gregorio and Sahana Jayakumar, instructed by Kai von Pahlen of VWV, appeared on behalf of the Respondent.

The judgment can be viewed here.



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