29 September 2021
Under Construction - Q4 2021 – 2 of 5 Insights
A recent decision in the TCC has provided guidance as to whether a collateral warranty is considered to be a construction contract under the Construction Act.
In Toppan Holdings and Abbey Healthcare v Simply Construct (2021), the court decided that a collateral warranty executed four years after completion of the original works was not a construction contract but operated as a warranty for past performance.
Certain fire safety defects were discovered in a care home after practical completion. The contractor, Simply, was asked to rectify those defects, but when they failed to do so, the freeholder, Toppan, and the tenant, Abbey, employed a separate contactor to carry out the remediation work.
A collateral warranty was provided by the contractor to Abbey but only after Toppan has issued proceedings for specific performance for delivery of the collateral warranty as was required under the building contract. Under the warranty, the contractor warranted that the contractor "has performed and will continue to perform diligently its obligations under the Building Contract".
Toppan and Abbey then brought parallel adjudication proceedings against the contactor to recover their respective losses following the remediation work which were awarded in two separate awards. At the enforcement hearing of the adjudicator's decision, the central issue in the Abbey claim was whether the collateral warranty constituted a construction contract. If it was not a construction contact, as the contractor argued, the adjudicator has no jurisdiction to make and award in Abbey's favour and the decision would be unenforceable.
The court placed particular reliance on the decision of Akenhead J in Parkwood Leisure v Laing O'Rourke where Akenhead J was of the view that:" A very strong pointer … will be whether or not the relevant contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed and that the contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard."
In this case, the fact that the collateral warranty had been executed four years after completion of the original works and 8 months after the remedial works were carried out by separate contractor meant that the collateral warranty was not a construction contract since it warranted past performance.
Following this decision, uncertainty arises as to when a collateral warranty will be a construction contract; it is not as simple as to say that all collateral warranties executed after Practical Completion of the works will not be construction contracts.
At paragraph 16, the judgment refers to paragraph 23 of Parkwood which stated:"(a) The fact that the construction contract (if it is one) is retrospective in effect is not a bar to it being a construction contract. It is common for contracts to be finalised after the works have started and to be retrospective in effect back to the date of or even before commencement. If that is what the effect of the parties' agreement is, then that cannot prevent it from being a construction contract for the carrying out of construction operations. Put another way, a construction contract does not have to be wholly or even partly prospective."
Accordingly, it could be said to be of relevance whether or not the underlying construction contract specifically envisaged a collateral warranty being provided to the beneficiary in question.
Furthermore, the wording of the operative clause of the collateral warranty is relevant to whether or not it is a construction contract. In Parkwood the contractor warranted, acknowledged and undertook in the operative clause of the collateral warranty, whereas in Toppan the contractor only warranted. At paragraph 20 of Toppan the judge once more referred to Parkwood referring to paragraph 27(d) that "…A warranty often relates to a state of affairs (past or future); a warranty relating to a motor car will often be to the effect that it is fit for purpose. An acknowledgement usually seeks to confirm something. An undertaking often involves an obligation to do something. It is difficult to say that the parties simply meant that these three words were absolutely synonymous." Accordingly, it is clear that the specific wording of a collateral warranty may impact whether or not it is deemed to be a construction contract.
Furthermore, it is likely that where a contractor agrees to carry out uncompleted works in the future that will be a very strong pointer that the collateral warranty is a construction contract and the parties will have a right to adjudicate; whereas where the works have already been completed, and even if latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate.
Accordingly, this decision, which is subject to appeal, adds to the debate of when a collateral warranty will be a construction contract, but does not reach clear conclusions which are widely and simply applicable. It should, however, be noted that whether or not a collateral warranty is deemed to be a construction contract for the purposes of the Construction Act will not impact a party's right to commence court proceedings for breach of contract.
by Ralph Wood