11th August 2021
The recent case of Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP led to the Technology and Construction Court determining whether a collateral warranty is also a construction contract with a right to adjudicate. Steve McCombe in Thrings’ Construction and Engineering team takes a look.
A judgment of the Technology and Construction Court (TCC)1 has provided further guidance on whether a collateral warranty issued on a construction project is a “construction contract” within the meaning of section 104 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) and whether an adjudication can be pursued under a collateral warranty.
The dispute arose out of the construction of a luxury care home in London by Simply Construct (UK) LLP (Simply Construct) owned by Toppan Holdings Limited (Toppan) and operated by Abbey Healthcare (Mill Hill) Limited (Abbey).
The TCC decided that a collateral warranty executed after the completion of the works was not a construction contract and accordingly the adjudicator did not have jurisdiction in the dispute referred to him. As a result, the TCC refused to enforce the adjudicator’s decision made in Abbey’s favour. The TCC’s decision also has important implications for construction projects and commercial real estate transactions.
The use of collateral warranties developed from the early 1990s after the law restricted the right to recover pure economic losses from physical damage to buildings caused by defects in the absence of a contract. A collateral warranty provides a contractual relationship between two parties - for example between a contractor or a consultant and a third-party beneficiary such as a funder, purchaser or tenant - and provides the third-party beneficiary with a right to sue if problems are subsequently identified with the contractor’s works or the consultant’s services, notably latent defects.
Construction contract and adjudication
If the contract is a “construction contract” under section 104 of the act, i.e. an agreement involving “construction operations” as defined in section 105(1), there is a right implied by section 108 to refer any dispute arising under that contract to adjudication at any time, and even if the contract fails to include any adjudication provisions.
Adjudication is a quick-fix, rough and ready process, and is often quicker and more cost-effective to use than court proceedings. The adjudicator’s decision can be enforced in the courts by way of a summary judgment application if the losing party fails to comply with the decision.
Parkside Leisure decision
The Simply Construct decision is only the second one by the TCC on whether a collateral warranty may be a construction contract. The first was Parkwood Leisure2 in 2013 in which the warranty was given by Laing O’Rourke to Parkwood Leisure, the sub-tenant and operator of the Cardiff International Pool, in connection with Laing O’Rourke’s construction of that facility. The project was largely complete when the warranty was given but practical completion had yet to be certified and post-completion rectification works were required during Parkside Leisure’s occupancy of the site.
The TCC decided that the question of whether a collateral warranty was a construction contract had to be determined by reference to the terms of the warranty itself. The warranty executed by Laing O’Rourke included:
“1. The contractor warrants, acknowledges and undertakes that:
1. it has carried out and shall carry out and complete the works in accordance with the contract…”
As the warranty included a prospective obligation to complete the remaining works, in addition to Laing O’Rourke warranting works already completed, the TCC decided that the warranty was a construction contract “for… the carrying out of construction operations”.
Simply Construct facts
Toppan is the freehold owner of the care home. Following the completion of the works, Simply Construct’s building contract was novated to Toppan which created a direct contractual link between those parties. The care home was let to Abbey as the tenant operator and Abbey did not obtain the benefit of a collateral warranty from Simply Construct at the commencement of Abbey’s lease.
Following the opening of the care home, defects in Simply Construct’s works were discovered and the remedial works completed by another contractor resulted in losses being suffered by Toppan as landlord and by Abbey as tenant.
Toppan issued court proceedings against Simply Construct, with Toppan seeking an order for specific performance of Simply Construct ’s obligation under the novated contract to execute the collateral warranty in favour of Abbey.
The collateral warranty was executed by Simply Construct in which it warranted, amongst other things, that it had performed and would continue to perform its obligations under the building contract. Abbey now had a direct contractual link to Simply Construct as well.
Toppan and Abbey commenced parallel adjudications against Simply Construct in order to recover their respective losses which were included in two separate awards made by the same adjudicator.
Simply Construct failed to pay and Toppan and Abbey jointly commenced enforcement proceedings in the TCC against Simply and applied for summary judgment. Simply Construct’s defence to Abbey’s claim was based on the adjudicator not having jurisdiction because the collateral warranty was not a construction contract within the meaning of the act and so there was no right to adjudicate.
Simply Construct decision
The TCC emphasised the timing of the execution of a collateral warranty as paramount in construing whether it is a construction contract. Whilst the collateral warranty executed in Abbey’s favour referred to past and future performance, it had been executed four years after practical completion and eight months after the remedial works had been completed. At the time of its execution, there was no evidence that Abbey or Simply Construct were considering the possibility of any further construction operations being carried out, for example as a result of any breach of the building contract.
The TCC decided that the collateral warranty was not a construction contract, the adjudicator had no jurisdiction and it declined to enforce the adjudicator’s decision in Abbey’s favour.
Points to consider
1. Both the timing of the execution of collateral warranty and its terms may be relevant in determining whether the warranty is a construction contract. If the warranty is executed and works (construction operations) have yet to be completed, the agreement may be a construction contract (applying Parkwood Leisure). If, however, the warranty is executed
after completion of works to rectify latent defects, it may not be a construction contract, with the emphasis being on the commercial context rather than the express terms of the warranty relating to construction operations (applying Simply Construct).
2. However, it remains uncertain as to whether a dispute can be referred to adjudication under the collateral warranty. Although the Simply Construct decision narrows the circumstances in which a collateral warranty may be a construction contract, if the warranty is executed during construction or indeed after practical completion but a dispute arises out of latent defects which have been or are being rectified, would the beneficiary be entitled to refer that dispute to adjudication?
3. Will it become more difficult for beneficiaries to procure collateral warranties? Some contractors and consultants may seek to delay providing warranties until after the completion of any rectification works, with those parties seeking to avoid any reference to adjudication being made if the warranties are likely not to be construction contracts because the construction operations would have been completed.
4. Certain commercial property transactions, such as funding agreements, are structured in such a way that collateral warranties are only provided after practical completion is achieved. The Simply Construct decision perhaps creates uncertainty as to whether the beneficiaries of such transactions will benefit from the collateral warranties operating as construction contracts, particularly if those beneficiaries may prefer to refer disputes to adjudication rather than court proceedings.
5. If the construction contract creates a right to a funder, purchaser or tenant under the Contracts (Rights of Third Parties) Act 1999 to enforce certain terms of that contract, rather than collateral warranties being provided in favour of such third-party beneficiaries, a third party will not be entitled to refer a dispute arising out of that construction contract to adjudication, as confirmed by the TCC in 20143, unless a term of that contract provides otherwise.
It is understood that Abbey intends to appeal the Simply Construct decision to the Court of Appeal. If so, it is hoped that those involved in construction projects and commercial property transactions will have a clearer understanding of whether and, if so, when a collateral warranty is a construction contract with a right to adjudicate after the Court of Appeal’s judgment has been published. To discuss any of the points raised in this article, please contact Steve McCombe in Thrings’ Construction and Engineering team.
1 Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP  EWHC 2110 (TCC)
2 Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited  EWHC 2665 (TCC)