In this article, 4 New Square Chambers’ Douglas James considers the Supreme Court’s decision in Abbey Healthcare (Mill Hill) Ltd (Respondent) v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (Appellant) [2024] UKSC 23 and its implications for adjudication business.
Collateral Warranties – Introduction
Collateral warranties are issued on almost every construction project. They create direct contractual relationships between contractors and third parties. They give third parties the right to sue a contractor for breach of contract if the contractor fails to perform its contract with its employer – most typically if the works are defective.
Can a collateral warranty be a contract “for…the carrying out of construction operations” under s.104 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”)? This was the question for the Supreme Court in Abbey. The answer has been eagerly anticipated in the construction industry. If the answer were ‘yes’, then disputes under collateral warranties could be referred to adjudication under s.108 of the Act. If the answer were ‘no’, then parties to collateral warranties would have no mandatory access to the industry’s widest-used dispute resolution process.
Lord Hamblen (with whom Lord Briggs, Lady Rose, Lord Richards and Lady Simler agreed) has decided the answer is: “in general”, no. Indeed, “most collateral warranties will not be construction contracts”.
The facts
In June 2015 the appellant, Augusta 2008 LLP, formerly Simply Construct (UK) LLP (“Simply”), was engaged by Sapphire Building Services Ltd (“Sapphire”) to design and build a care home in Mill Hill under a JCT Design and Build Contract 2011 with bespoke amendments (“the contract”).
In October 2016 the works under the contract were completed.
In June 2017 the contract was novated from Sapphire to Toppan Holdings Ltd (“Toppan”). Toppan was the owner of the property.
In August 2017 Toppan granted a 21-year lease of the property to Abbey Healthcare (Mill Hill) Ltd (“Abbey”), the respondent. Abbey ran the care home.
In August 2018 Toppan discovered alleged fire safety defects at the property. Toppan asked Simply to rectify them. Simply did not. Toppan engaged a third party to rectify them. These rectification works were carried out between September 2019 and February 2020. Abbey paid for these works on Toppan’s behalf.
In June 2020 Toppan asked Simply to provide a collateral warranty to Abbey (which Simply was obliged under the contract to provide on notification by Toppan). Simply did not.
In September 2020, after Toppan had begun specific performance proceedings, Simply did execute a collateral warranty in favour of Abbey (“the collateral warranty”). Among other things, the collateral warranty provided that Simply “has performed and will continue to perform diligently its obligations under the [contract]”, and that in carrying the works under the contract, Simply “has exercised and will continue to exercise all the reasonable skill care and diligence to be expected of a properly qualified competent and experienced contractor…”.
Adjudication
In December 2020, Toppan and Abbey each referred to adjudication a dispute regarding the alleged defects and costs of remedial works. Toppan and Abbey sought in excess of £8.8m and £5.5m respectively.
Abbey’s claim was under the collateral warranty. Simply challenged jurisdiction. Simply said the collateral warranty was not a construction contract. The adjudicator rejected that challenge.
In April 2021 the adjudicator decided in favour of Toppan and Abbey. However, Simply did not pay.
The TCC
Toppan and Abbey therefore sought enforcement of the decision in the TCC.
In July 2021 Martin Bowdery QC granted summary judgement in favour of Toppan, but not Abbey: [2021] EWHC 2110 (TCC). In Abbey’s case, the Judge found that the collateral warranty was not a construction contract within the meaning of s.104(1) of the Act, so the adjudicator lacked jurisdiction. Integral to the Judge’s reasoning was that the collateral warranty was executed years after practical completion and months after the remedial works had been completed. In that respect, the collateral warranty was not a contract for carrying out works, but rather a contract warranting what had already been done.
The Court of Appeal
Abbey appealed to the Court of Appeal. Abbey’s appeal was allowed by a majority: [2022] EWCA Civ 823, per Peter Jackson and Coulson LJJ (Stuart-Smith LJ dissenting).
The Court of Appeal held that the timing of a warranty (relative to the works it warranted) could not determine if the warranty was a construction contract.
All three lord justices of appeal held that a collateral warranty could be a construction contract.
However, they disagreed about whether the collateral warranty in this case was a construction contract. Coulson LJ thought it was, mainly because Simply warranted both past and future performance. Peter Jackson LJ also thought it was, mainly because it was a direct promise to Abbey to perform, as opposed to a promise to compensate Abbey if there was a default in the Building Contract. Stuart-Smith LJ thought it was not, because it was not a direct promise to carry out the construction operations, which meant it was not for such operations.
The Supreme Court
Simply appealed to the Supreme Court – essentially arguing that Stuart-Smith LJ was right for the right reasons. Permission was given in December 2022. The appeal raises two issues. First, what is the meaning of an agreement “for… the carrying out of construction operations” in s.104 of the Act? Second, was the collateral warranty properly construed an agreement “for…the carrying out of construction operations”?
As to the first issue Lord Hamblen ruled at [70] “that a collateral warranty will not be an agreement “for” the carrying out of construction operations for the purposes of section 104(1) if it merely promises to perform obligations owed to someone else under the building contract. There needs to be a separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract”.
Lord Hamblen gave various reasons:-
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- First, at [59-62], there was no reason why s.104 of the Act required a broad or narrow interpretation. Nothing was gained from a broader construction or by considering neighbouring statutory provisions. It was wrong to equate contracts ‘for’ construction operation as contracts ‘in respect of’ construction operations.
- Second, at [63-66], the natural meaning of ‘for’ denotes function and purpose. The question, therefore, is whether the object or purpose of a contract is the carrying out of construction operations. It was generally difficult to see how that was a collateral warranty’s object or purpose: “The main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work.” A contract ‘for’ construction operations “must…give rise to the carrying out of such operations”. A mere promise that construction operations will be done is not enough.
- Third, at [67-69], a warranty does not give the beneficiary any rights to regulate how the works are done.
As to the second issue, Lord Hamblen held that the collateral warranty was not an agreement ‘for’ construction operations. The promises in the collateral warranty, though they covered past and future operations, were “entirely derivative”. Simply was promising nothing to Abbey that Simply had not already promised to the employer under the contract.
The second issue allowed Lord Hamblen to explain a new dividing line between warranties that would not fall within the Act and those that would.
Instead of depending on “niceties” of language in each instance, a “far more principled and workable” dividing line is between warranties that, on the one hand, “merely replicate undertakings given in the building contract” and those, on the other hand, that “give rise to separate or distinct undertakings for the carrying out of construction operations”. The former would not fall within s.104. The latter would.
That means that “most collateral warranties will not be construction contracts”. As Lord Hamblen later summed up at [84]:
“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. … 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.”
This dividing line also chimed with the Act’s broad rationale of improving cashflow because the Act’s payment provisions were inapplicable to collateral warranties.
Comments
Lord Hamblen recognised at [78] that the new dividing line would be in the interests of certainty. Knowing that most collateral warranties will be outside the Act will help the industry and its advisers know where they stand, which is obviously advantageous.
In this vein, Lord Hamblen’s judgment restores the industry’s received understanding of collateral warranties before Akenhead J’s controversial decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC). Before Parkwood, it had readily been thought that disputes under collateral warranties could not be adjudicated under the Act. By overruling Parkwood, the Supreme Court has dispelled any doubts that decision sowed.
Lord Hamblen rightly noted that nothing prevents parties to collateral warranties from agreeing to adjudication voluntarily. If parties find it desirable for disputes under building contracts and collateral warranties to be raised and determined quickly, roughly-and-readily, and broadly in step with each other, then they can provide as much. In this sense, the Abbey decision underscores that, quite apart from mandatory adjudication, parties can choose to play what Coulson LJ described in John Doyle v Erith as the “only game in town”.
© Douglas James, 4 New Square Chambers, July 2024
This article is not intended as a substitute for legal advice. Advice about a given set of facts should always be taken.
