Author
Rebecca May

Rebecca May

Senior Associate

Read More
Author
Rebecca May

Rebecca May

Senior Associate

Read More

28 July 2022

Under Construction - Q2 2022 – 1 of 5 Insights

When is a Collateral Warranty a Construction Contract?

  • Briefing

In Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] EWCA Civ 823 the Court of Appeal has, for the first time, considered the circumstances in which a collateral warranty might be a construction contract for the purposes of the Housing Grants Construction and Regeneration Act.

Why does it matter?

Where a contractual cause of action has been conferred by a collateral warranty, should the warrantor breach its obligations to the beneficiary, the beneficiary will have a breach of contract claim for damages which it can pursue through the courts. This point does not turn on whether or not the collateral warranty is also a construction contract for the purposes of HGCRA.

What turns on whether the collateral warranty is a construction contract is whether adjudication will also be an available forum of dispute resolution.

First Instance

At first instance, the judge had focussed on the date of execution of a collateral warranty being potentially determinative of whether the collateral warranty was a construction contract. The court decided that execution occurring after Practical Completion of the works was likely to indicate that the collateral warranty was not a construction contract.

Can a collateral warranty ever be a construction contract?

The Court of Appeal was unanimous that a collateral warranty could be a construction contract, although as set out below, the Court of Appeal was not united on exactly what was required for a collateral warranty to be deemed a construction contract.

What terms indicate that a collateral warranty is a construction contract?

Lord Justice Coulson gave the leading judgment and placed emphasis on the following factors:

  • The words of the warranty in question and the relevant background.
  • A distinction did not need to be drawn between the words "warranting" and "undertaking" as using the words warrants "was also a promise and an obligation 'to do something' "(paragraph 67). Further, at paragraph 31 he stated "… a warranty that the contractor was carrying out and would continue to carry out construction operations … may well be a contract for the carrying out of construction operations" in accordance with s.104(1 ) … "unlike a product guarantee, it is a promise which regulates (at least in part) the ongoing carrying out of construction operations."
  • The warranty needed to be forward looking. Paragraph 62 confirms "…It is not a warranty limited to the standard to be achieved; neither is it a warranty limited to a past or fixed situation. It is a warranty as to future performance."

Coulson LJ concluded that the warranty in question was a construction contract.

Lord Justice Peter-Jackson agreed with Coulson LJ that the appeal should be granted, stating that in his judgment "What is critical is the promise to carry out construction operations" (paragraph 159).

Lord Justice Stuart-Smith dissented on the issue as to whether the warranty in question was a construction contract but did provide commentary on when he considered a collateral warranty might be a construction contract.

Stuart-Smith LJ considered that the purpose of the warranty was to provide a right of action for the contractor's performance under the building contract. Whether or not direct obligations to perform were owed to the beneficiary could be determinative. At paragraph 111 he stated, "…There is, in my judgment, nothing in the terms of the sentence that either says or implies that Simply Construct is undertaking direct obligations to Abbey: it is merely warranting its performance of obligations owed to someone else." To further emphasise this point, he stated at paragraph 117 "… they neither say nor imply that Simply undertakes a separate and direct obligation to Abbey to carry out the works either at all or to any particular standard. If Abbey is to have a right of action it will be for breach of warranty, not breach of any direct obligation assumed by Simply Construct to Abbey to carry out the Works."

Stuart-Smith LJ was also quick to dismiss any creative construction to achieve a procedural convenience of being able to refer a dispute under a collateral warranty to adjudication, stating at paragraph 83 "…That possible procedural advantage cannot and does not affect the meaning of s.104(1) of the Act; nor would it justify an otherwise strained interpretation of a clause or agreement so as to conclude that it is a Construction Contract"

Is the date of execution of a collateral warranty determinative?

The Court of Appeal was unanimous in its position that the date on which a collateral warranty was executed would not be determinative of its status of being a construction contract. What was determinative was the terms of the collateral warranty.

Lord Justice Coulson stated at paragraph 73 "…because the Abbey Collateral Warranty contained future-facing obligations and was retrospective in effect, the date of execution was ultimately irrelevant."

Take away

The leading judgment indicated that a collateral warranty could be a construction contract in fairly broad circumstances. Where a collateral warranty counts as a construction contract, adjudication would be available in the event of a dispute. However, in the light of Stuart-Smith LJ's narrower construction of the collateral warranty in this case, if a right to adjudication is desired it may be prudent to specifically provide the right to adjudicate in the terms of the collateral warranty itself.

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