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Supreme Court rules Collateral Warranty is not a Construction Contract

On 9 July 2024 the Supreme Court handed down judgment in the case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23, providing welcome clarity on the question of whether a collateral warranty is a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (the “Act”). In short, the collateral warranty in issue was not and most collateral warranties will not be construction contracts.

The underlying dispute concerned alleged fire safety defects at a care home in North London, constructed by the appellant, “Simply”. The respondent, “Abbey”, was the tenant and operator of the care home. Simply provided Abbey with a collateral warranty (the “Abbey Collateral Warranty”) warranting, amongst other things, that Simply “has performed and will continue to perform diligently its obligations under the [Building] Contract”.

The issue on appeal was whether the Abbey Collateral Warranty was a construction contract within the meaning of the Act, thereby giving Abbey a right to adjudicate the dispute. At first instance, Mr Martin Bowdery QC (sitting as a Deputy High Court Judge) held that it was not: [2021] EWHC 2110 (TCC). The Court of Appeal, by a majority (Peter Jackson and Coulson LJJ; Stuart-Smith LJ dissenting), found that it was: [2022] EWCA Civ 823. Simply appealed to the Supreme Court.

In a unanimous judgment, the Supreme Court allowed Simply’s appeal. Lord Hamblen (with whom Lord Briggs, Lady Rose, Lord Richards and Lady Simler agreed) gave the judgment of the Court. As to the definition of a “construction contract” in section 104(1) of the Act, the Court held that:

(1) A collateral warranty will be an agreement “for … the carrying out of construction operations” if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor’s obligation to do so under the building contract.

(2) A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement “for” the carrying out of construction operations.

It followed that the Abbey Collateral Warranty was not a construction contract. Simply’s promise that it “has performed and will continue to perform” its obligations under the Building Contract was an entirely derivative promise. It did not in itself give rise to any construction operations. Simply did not promise anything that was not already promised to the employer under the Building Contract.

This is a significant decision. The only other reported case on this issue is Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] BLR 589 (TCC), in which Akenhead J held that the collateral warranty in that case was a construction contract under the Act. The Supreme Court held that the decision in Parkwood could not be satisfactorily distinguished and should be overruled. The outcome should not turn on the niceties of the language used, for instance the use of the word “warrants” or “undertakes”, which would be likely to lead to fine distinctions being drawn and to disputes on the drafting and interpretation of collateral warranties.  Therefore, there were both principled and practical grounds for overruling the decision and reverting to the position as it was generally understood to be before Parkwood.

The Supreme Court decision provides welcome clarity and certainty. As Lord Hamblen noted:

  • This approach is likely to mean that most collateral warranties will not be construction contracts.
  • There are, however, good reasons for concluding that, in general, such warranties were not intended to fall within the scope of the Act. The payment provisions of the Act are simply inapplicable to collateral warranties and one of the twin purposes of the Act – improvement of cash flow – is not furthered by its application to collateral warranties.
  • It is in the interests of certainty that there is a dividing line which means that collateral warranties are generally outside the Act rather than being dependent on the wording of the particular collateral warranty in issue.
  • A far more principled and workable approach is for the dividing line to be between collateral warranties which merely replicate undertakings given in the building contract and those which give rise to separate or distinct undertakings for the carrying out of construction operations. That is a distinction which can be easily understood and applied.
  • If the parties wish to have a right to adjudication, that can always be provided for. However, adjudication on collateral warranties will be voluntary rather than mandatory.

The judgment can be found here.

Michele De Gregorio of Crown Office Chambers and Anneliese Day KC of Fountain Court were instructed by Nick Hillyard and Kai von Pahlen of DAC Beachcroft for the successful appellant.

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