The Supreme Court has clarified that a collateral warranty in traditional form is not a construction contract under the Housing Grants (Construction and Regeneration) Act 1996 and, therefore, does not engage the payment or adjudication provisions of the Act.
Background
The case concerned fire safety defects to a care home in Mill Hill, London. Abbey Healthcare (Mill Hill) Limited ("Abbey") is the tenant of the care home and the beneficiary of the collateral warranty provided by Augusta 2008 LLP (formerly Simply Construct (UK) LLP) ("Simply").
The dispute between the parties arose in 2018, following which remedial works began in 2019 and were completed in 2020. Later in 2020, Simply provided a collateral warranty in which it warranted it "has performed and will continue to perform diligently its obligations" under the building contract.
In 2020, Abbey referred to adjudication, a claim against Simply regarding the defects, which was decided in favour of Abbey. Simply unsuccessfully argued that the adjudicator could not decide the dispute and later resisted enforcement of the decision. This was on the basis that the collateral warranty was not a construction contract under the 1996 Act, therefore, adjudication was not available.
The matter was heard at the Technology and Construction Court (the "TCC") and the Court of Appeal (the "CoA"). The TCC held the collateral warranty was a not a construction contract under the Act, which the CoA overturned. Simply then appealed to the Supreme Court.
Supreme Court decision
The Supreme Court held the collateral warranty was not a construction contract under the 1996 Act. Lord Hamblen stated the purpose of collateral warranties generally provided a right of action regarding defective works rather than the "carrying out of such works".
Lord Hamblen stated that if a collateral warranty "merely promises" that the construction operations under the building contract will be undertaken, then "it is the building contract that gives rise to the carrying out of the construction operations; not the "collateral" warranty". A collateral warranty will only be a construction contract under the Act if the warranty undertakes to provide construction operations for the beneficiary which are not "merely derivative and reflective of obligations owed under the building contract".
In summary, the court concluded:
- A collateral warranty that involves a contractor undertaking an obligation to a beneficiary to perform construction operations that are distinct from the building contract, will be a construction contract for the purposes of the 1996 Act.
- A collateral warranty in the traditional form that involves a contractor warranting its obligations under the building contract will not be.
Key take aways
- Most collateral warranties will likely not be considered construction contracts under the Act.
- Adjudication will not be automatically available for disputes under collateral warranties.
- Adjudication provisions should be drafted into collateral warranties for an adjudication to be an applicable remedy for disputes under collateral warranties.
- The Supreme Court was concerned about certainty – there is now a dividing line "between collateral warranties which merely replicate undertakings in the building contract and those which give rise to separate or distinct undertakings for the carrying out of construction operations".
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