Collateral warranties and the right to adjudicate – 'construction contracts' after all?
Published on 23rd Jun 2022
Court of Appeal reverses first instance decision in Abbey Healthcare v Simply Construct, finding that a collateral warranty was in fact a 'construction contract' within the meaning of the Construction Act, notwithstanding the fact that the construction work itself had long since been completed
In a significant decision for the construction industry, likely to be welcomed by construction project stakeholders, the Court of Appeal has held by majority that a collateral warranty entered into in respect of construction works completed four years before does in fact constitute a “construction contract” under the meaning of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act). As such, the beneficiary of the collateral warranty had a statutory right to adjudicate.
The appeal arose out of enforcement proceedings for a tenant's successful adjudication award against a contractor, the tenant's claim having been brought under a collateral warranty for defective works relating to the construction of a care home.
At first instance, the adjudication award was not enforced, with the court finding that the collateral warranty did not amount to a "construction contract" and that the adjudicator had lacked jurisdiction.
The key rationale was that, because no further construction works were to be carried out at the time when the collateral warranty was entered into, it amounted to a warranty of a state of affairs, akin to a manufacturer’s product warranty, rather than a "construction contract". Put simply, the timing of the execution of the collateral warranty was deemed to be a determinative factor when assessing the collateral warranty's status as a "construction contract".
Court of Appeal decision
In his lead judgment, Coulson LJ disagreed with the court at first instance, finding that the timing of the execution of the collateral warranty after the works were complete bore little relevance. This was because the collateral warranty was clearly intended to have retrospective effect, as demonstrated by its wording (which contained both future-facing obligations and warranties guaranteeing the standard of past work) and the wider context.
Moreover, it was seen as counter-intuitive as a matter of statutory interpretation for the timing of the collateral warranty to be so crucial. If that was the case, then contractors would be encouraged to delay entering into collateral warranties until after practical completion on the basis that they could avoid the collateral warranty being categorised as a "construction contract" for the purposes of the Construction Act and so circumvent being the subject of a claim in adjudication.
Instead, the wording and interpretation of the collateral warranty was found to be paramount. In answering the general question of whether a collateral warranty can ever be a construction contract as defined by section 104(1), Coulson LJ found as follows (emphasis added):
"The short answer is that it will always depend on the wording of the warranty in question. To determine the nature of any contract, the express words and the substantive rights conferred must be construed in their proper context…
So a warranty which provided a simple fixed promise or guarantee in respect of a past state of affairs may not be a contract for the carrying out of construction operations pursuant to s.104(1). Something that said 'We completed these works two years ago and we warrant that they were completed in all respects in accordance with the Building Regulations', is a promise about the quality of something which has been completed. It does not recognise or regulate the ongoing carrying out of any future work. It may therefore not be a contract for the carrying out of construction operations. It is more akin to a product guarantee.
On the other hand, a warranty that the contractor was carrying out and would continue to carry out construction operations (to a specified standard) may well be 'a contract for the carrying out of construction operations' in accordance with s.104(1). That is because, unlike a product guarantee, it is a promise which regulates (at least in part) the ongoing carrying out of construction operations."
Coulson LJ also stressed the procedural benefit of hearing related disputes, that is, those concerning the same construction defects, but between different parties and under different contracts, in the same forum, before the same adjudicator. He highlighted the illogical proposition of a dispute concerning defects arising out of a main building contract being adjudicated where a dispute concerning the same defects under a related collateral warranty has to be litigated instead, stating that such an outcome may be contrary to the intended purpose of the Construction Act.
Osborne Clarke Comment
The decision is likely to be well received by construction project stakeholders such as funders, freeholders and leaseholders whose contractual recourse for defective construction work is often in the form of ancillary construction pack documents like collateral warranties.
While the decision in large part ratifies the 2013 decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd (2013), the Court of Appeal has provided further clarity as to the criteria necessary for such documents to amount to construction contracts, effectively widening the scope of parties able to take advantage of the adjudication regime under the Construction Act.
The benefits of adjudication are well known, offering an expedited and cost effective method of dispute resolution which promotes cash flow; something which has become increasingly important in the current economic landscape. Our own experience of multi-party parallel adjudications is that the theoretical benefit identified by Coulson LJ is often not realised.