Warranties and Adjudication

In the important case of Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP,  judgment was handed down recently by the Court of Appeal. The case concerns collateral warranties and construction contracts. This has been long awaited and gives guidance on when a collateral warranty will be regarded as a contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”).

The facts of the case were fairly simple. Sapphire Building Services Limited (“Sapphire”) engaged Simply Construct to carry out the construction of a care home. The contract was the JCT Design and Build 2011 form, with amendments.

Simply Construct commenced the building works on 11 May 2015 and entered into a collateral warranty in favour of the freeholder, Toppan Holdings Limited on 15 October 2015. Practical completion of the care home was achieved on 10 October 2016.

By a novation agreement dated 14 June 2017, Sapphire transferred all its rights and obligations under the building contract to Toppan. Toppan granted a long lease of 21 years of the care home to Abbey.

Following proceedings for specific performance from Toppan, Simply Construct (who had before then, refused to enter into a collateral warranty), as contractor, gave a collateral warranty to Abbey on 23 October 2020.

In or around August 2018, Toppan discovered fire-safety defects in the care home. It was Toppan’s case that the discovery of these defects prevented a sale of the care home to another freeholder. Simply Construct was notified of the defects and asked to rectify them. They did not do so, so Toppan engaged a third party to carry out remedial works which completed on 14 February 2020.

Toppan and Abbey brought adjudication proceedings for the cost of the fire-defect works against Simply Construct, who did not pay the sums awarded by the adjudicator stating that the collateral warranty was not a construction contract so the adjudicator had no jurisdiction. This was the issue put before the Court.

First Instance

The Judge found that unlike the case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd¸ the collateral warranty did not use the words “acknowledges” or “undertakes” and further that as the collateral warranty had been provided 4 years after practical completion, it was not a construction contract for the purposes of the Act.

Court of Appeal

They have overturned the first instance’s decision, by a 2-1 majority (Coulson LJ, Jackson LJ and Stuart-Smith LJ dissenting). The Court found that:

1. A warranty where the contractor is carrying out and will continue to carry works to a specified standard may well be construction a contract in accordance with s.104(1) of the Act. The Court said this is because, unlike a product guarantee, it is a promise which regulates ongoing carrying out of construction operations.
2. The broad approach of s.104 of the Act is to provide a dispute resolution mechanism and an adjudicator can deal with the same factual disputes under two different contracts.
3. It is important to look at whether the warranty is in respect of the ongoing carrying out of construction works or is in respect of a past and static state of affairs, on the other.
4. The use of the wording ‘acknowledges’ adds nothing. Nor did the absence of the word ‘undertakes’ since Simply Construct warranted its work to a specified standard.
5. The date of the execution of the collateral warranty is not relevant since it was retrospective in effect. Determining what is “too long” (as the judge had done at First Instance) was impractical, since how does one determine that.

Discussion

This is an interesting and important decision and is likely to be welcomed by tenants, freeholders and landlords; probably not by contractors or consultants as it could extend their liability. Ultimately, it means that a collateral warranty can be construed as a construction contract for the purposes of the Act and therefore gives the parties the power to adjudicate. Some will view that as beneficial in giving the parties an alternative route to litigation which saves time and money. Where, in many cases, the provider of the collateral warranty will be a professional consultant, others will view the ability to refer disputes to adjudication as a negative given the concern about whether an adjudicator can properly consider allegations akin to negligence in the limited time provided to them.

It will be interesting to see if it will also give parties any other wider rights. It does also provide a stark reminder to make sure you check the wording of collateral warranties carefully since the Court of Appeal did place a lot of emphasis on the fact that Simply Construct warranted its future work, despite not using the word “undertakes”. While Stuart-Smith LJ suggested that the use of those words was in fact important, his was the dissenting judgment. It is possible that the court, in the future, may be asked to look further into the use of these words.

Whether this decision is appealed to the Supreme Court will be interesting to see, as will be whether it could even lead to a reconsideration of the Act itself. Coulson LJ, who was for a long time one of the most highly respected and specialist construction judges within the TCC prior to his appointment to the Court of Appeal, commented that sections of the Act were baffling so a review of this legislation could follow – watch this space.