On Tuesday 9 July, the Supreme Court handed down judgment in one of the most anticipated appeal cases of the year to date – Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP), in which in 2022 the Court of Appeal held that the collateral warranty given to Abbey Healthcare was a construction contract for the purposes of Section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 ("Construction Act") and, therefore, it carried the right to adjudication.
Context
In the UK real estate development market, collateral warranty agreements (or "collateral warranties" as they are commonly known) are secondary agreements that give interested third parties contractual rights against contractors (including key sub-contractors) and consultants should defects arise in relation to the works carried out and/or the services performed by them. Under a collateral warranty, the third party is known as the beneficiary and the service provider is the warrantor.
A generation has passed since the landmark judgment of the House of Lords (then the highest court in the UK) in Murphy v Brentwood District Council (1991) that a builder is liable in tort only for damage caused to persons or property by defects in its work but not for the purely economic loss of remedying the defect. The ruling led directly to a proliferation of collateral warranties in the development market and the construction industry, as interested third parties sought to recreate in contract the rights they had lost in tort. It has remained common practice for collateral warranties to be provided to third parties.
In relation to adjudication within the UK construction industry, it is Part II of the Construction Act that gave statutory rights to commercial parties in a construction contract to payment and adjudication. The evolution of adjudication in the quarter of a century that has passed since the Construction Act came into force speaks for itself: adjudication has developed into the most popular and speedy dispute resolution process in the construction industry.
The key issue
The key issue for the Supreme Court to decide was whether the majority of the Court of Appeal was wrong to find that the collateral warranty in this case was a "construction contract" for the purposes of Section 104(1) of the Construction Act.
Facts
The case concerned a care home in North London.
The appellant, Augusta 2008 LLP, is a building contractor that was previously known as Simply Construct (UK) LLP (“Simply”). The respondent, Abbey Healthcare (Mill Hill) Ltd ("Abbey") is the tenant of the care home.
In 2015, Simply was engaged by Sapphire Building Services Ltd, the employer, pursuant to a building contract substantially in the form of the JCT Design and Build Contract 2011, to design and build the care home. The employer was entitled under the building contract to novate the building contract to the freehold owner of the care home, Toppan Holdings Ltd ("Toppan").
In 2017, the building contract was novated from the employer to Toppan, and Toppan granted a 21-year lease of the property to Abbey.
The building contract contained detailed provisions concerning the grant of collateral warranties and rights in favour of purchasers and tenants. Pursuant to the terms of the building contract, Simply executed a collateral warranty in favour of Abbey.
A key term of the tenant's warranty provided that Simply "… has performed and will continue to perform diligently its obligations under the contract … " and " … has exercised and will continue to exercise … " reasonable skill, care and diligence in carrying out and completing the works.
In 2018, Toppan discovered alleged fire safety defects in the care home. Simply was notified of the defects and requested to rectify them. It failed to do so. Toppan subsequently engaged a third party contractor to carry out the remedial works, which were undertaken and completed and paid for by Abbey.
In 2020, Simply provided a collateral warranty to Abbey and Toppan who made claims against the contractor in respect of fire safety defects and the costs of remedial works that had to be undertaken. Simply refused the request that the disputes be dealt with in a single adjudication; each of Toppan and Abbey referred to adjudication a dispute regarding the alleged defects.
The adjudications
The adjudicator issued his decisions in April 2021, and these were in favour of Toppan and Abbey. The contractor did not pay the sums due and Toppan and Abbey commenced legal proceedings to enforce the adjudicator's decisions.
The decisions of the Technology and Construction Court and Court of Appeal
In the Technology and Construction Court (TCC), the judge granted summary judgment in respect of Toppan. In relation to the adjudicator's decision in favour of Abbey, however, the judge dismissed Abbey's application for summary judgment on the grounds that the collateral warranty in favour of Abbey was not a "construction contract" within the meaning of Section 104(1) of the Construction Act – and the adjudicator lacked jurisdiction.
In the Court of Appeal, the judges agreed that a collateral warranty could be a construction contract and a majority held that the Abbey collateral warranty was such a contract.
The ruling from the Supreme Court
More than two years on from the Court of Appeal's decision, the Supreme Court has allowed the contractor's appeal and decided (unanimously) that the collateral warranty given to Abbey is not a construction contract for the purposes of the Construction Act and it cannot, therefore, be subject to statutory adjudication.
The Supreme Court found in favour of the contractor. In doing so, it has resolved an ambiguity by reinstating the traditional view. The ambiguity first appeared following the TCC's decision in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd (2013) in which the TCC was required to determine whether a collateral warranty was a “construction contract” within the meaning of the Construction Act.
The issue had not previously been considered by the courts despite the Construction Act having been in force for 15 years at the time the Parkwood judgment was handed down. In Parkwood, the TCC ruled that whether a given contract was a “construction contract” had to be determined by reference to the terms of the contract itself, and in line with ordinary principles of contractual interpretation. The fact that a contract is retrospective in effect is not a bar to it being a construction contract.
The Supreme Court has ruled that "… there are both principled and practical grounds for overruling the [Parkwood] decision and reverting to the position as it was generally understood to be before Parkwood. This allows parties to contract into the adjudication regime where this is seen as desirable but not to be fixed with an inability to contract out."
Conclusion
At the end of the judgment, Lord Hamblen makes the following distinction:
"(1) A collateral warranty will be an agreement “for … the carrying out of construction operations” if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor’s obligation to do so under the building contract.
(2) A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement “for” the carrying out of construction operations."
The Supreme Court's ruling means that most collateral warranties will not be construction contracts under the Construction Act. The Supreme Court did not, however, rule out the possibility that some warranties may constitute construction contracts for the purpose of the Construction Act.
Lord Hamblen has also provided a useful summary: "It is also in the interests of certainty that there is a dividing line which means that collateral warranties are generally outside the [Construction] Act rather than everything being dependent on the wording of the particular collateral warranty in issue. That will assist those in the construction industry, and those advising them, to know where they stand. Moreover, if it is wished to have a right to adjudication that can always be provided for. Adjudication will, however, be voluntary rather than mandatory."
Contact
If you have any questions arising out of the Supreme Court's decision or you would like to discuss wider issues raised by this briefing, please contact:
Paul Bartter
Michael Chilton
David Cordery
James Huckstep
