A collateral warranty is not a construction contract: lessons from a recent Supreme Court case
The Supreme Court has clarified that a collateral warranty is not a construction contract under s104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the Act) and therefore a beneficiary of a collateral warranty does not have a statutory right to refer a dispute to adjudication unless it has separate and distinct obligations. In this briefing, partner Pippa Beesley explores the background to the decision and what it means in practice.
Background
The case of Abbey Healthcare (Mill Hill) Ltd (Abbey) v Augusta 2008 LLP (formerly Simply Construct UK LLP) relates to the construction of a London based 65 bedroom care home (Avondale Manor). Simply Construct was engaged to construct the care home under a JCT design and build contract. In September 2016 Abbey was granted a lease of the care home and in October 2016 practical completion was achieved.
The freeholder of the care home requested Simply Construct execute a collateral warranty in favour of Abbey, under which Simply Construct warranted that it “has performed and will continue to perform diligently its obligations under the contract”.
In 2018, alleged fire safety defects were discovered at the property. As a result, Simply Construct was informed of the defects but did not go on to correct them and another contractor was engaged to rectify the defects.
The freeholder and Abbey consequently referred a dispute to adjudication and both were awarded sums against Simply Construct by the adjudicator and applied to the Court for summary judgment to enforce the adjudicator’s awards. Simply Construct objected to Abbey’s application, claiming that the collateral warranty was not a “construction contract” under s104(1) of the Act and consequently could not be referred to adjudication and the adjudicator therefore had no jurisdiction.
In practice, this will mean that most collateral warranties will not be considered construction contracts under the Act, as they do not give separate and distinct obligations to carry out construction operations."
Decision
The Supreme Court has recently reached the decision that this collateral warranty was not a "construction contract”, as in this instance the contractor is merely warranting its performance of obligations owed to the employer under the building contract. However, if the contractor had given a collateral warranty undertaking a contractual obligation to a beneficiary to carry out specific construction obligations, that were separate from those under the underlying contract this could be different.
In practice, this will mean that most collateral warranties will not be considered construction contracts under the Act, as they do not give separate and distinct obligations to carry out construction operations. In order for adjudication to be available as a method of dispute resolution, provisions will need to be specifically drafted into the collateral warranty.
Please do get in touch using the details below if you have any construction related queries or would like any advice in relation to drafting which could be inserted into a collateral warranty following this case.
Pippa Beesley is a partner in the real estate, planning and construction team. She specialises in non-contentious construction, advising developers, purchasers, tenants, funders, contractors and consultants.
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If you would like to speak with a member of the team you can contact our real estate planning and construction solicitors; Holborn office (Email Holborn) +44 (0)20 3826 7523; Kingston office (Email Kingston) +44 (0)20 3826 7518; Putney office (Email Putney) +44 (0)20 3826 7518 or complete our form.
