Adjudication – when is a collateral warranty a construction contract?
A collateral warranty allows a party who is not a party to a contract the protection and rights of the contract against one of the contracting parties.
So, when does that collateral warranty constitute a construction contract?
There are a limited number of cases on this issue but the recent case of Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP required the Technology and Construction Court having to decide whether a collateral warranty was also a construction contract and carried a right to adjudicate.
Abbey Healthcare was the occupational tenant and operator of a care home constructed by Simply Construct. The contract was an amended JCT Design and Build Contract 2011 with amendments June 2015).
In August 2018, almost two years after practical completion, defects were discovered in Simply’s works and the landowner, Toppan Holdings Ltd, employed a second contractor to repair the works. Four years after all work was remedied, simply executed a collateral warranty in favour of Abbey in which it warranted that it “has performed and will continued to perform diligently its obligations under the building contract”.
On the 29 June 2015 a building contract between Simply and Sapphire Building Services Limited was agreed with initial work having begun on 30 March 2015. The Building Contract permitted Sapphire to novate the contract to Toppan at any time and also obliged Simply to execute a collateral warranty, on request, for the benefit of a tenant and in favour of Toppan. On 10 October 2016 all works were completed.
On 13 June 2017, Sapphire and Simply entered into a settlement agreement and whilst this was not to serve as any indication that claims for defects were relinquished it did resolve several issues and required Simply to sign the Novation Agreement with Toppan. On 14 June 2017, Sapphire transferred all of its rights under the Building Contract to Toppan in accordance with a Novation Agreement. On 12 August 2017 Abbey’s lease of the care home from Toppan was conceded
The following year several fire hazards that would require remedial works were brought to light and Toppan notified Simply of the defects and requested they were rectified. Toppan ultimately decided to take on another contractor to complete the necessary work and in doing so found the need for yet more remedial work.
In October 2020, a Collateral Warranty by Simply in favour of Abbey was implemented. As part of the Warranty, Simply warranted that it had and would continue to work conscientiously under the remit of the Building Contract, in carrying out and completing the works plus finalising any design for the works. The Warranty also endorsed it had exercised and would continue to exercise reasonable skill, care, and diligence. However, it must be noted this warranty was executed 4 years after the practical completion of the original works, over 3 years after the Settlement Agreement and 8 months after the corrective works to fire hazards which had been rectified by another contractor.
In December 2020, Toppan and Abbey commenced adjudication proceedings. Simply objected on jurisdictional grounds maintaining that the collateral warranty was not a construction contract under the Construction Act. The adjudicator rejected that and awarded damages to Abbey for loss of trading profit. Simply resisted enforcement of the adjudication award and sought a stay of execution on the jurisdiction ground, among others.
If a contract is a “construction contract” under Section 104 of the Act, there is an implied right to refer any disputes arising under such a contract to adjudication at any time, even if the relevant contract contains no provisions relating to adjudication.
The Technology and Construction Court had to consider whether the Warranty was a “construction contract” and if so whether the statutory right to initial legal proceedings was permitted. Simply asserted that the Warranty was not a construction contract, and so, as there was no statutory right to adjudication, the adjudicator did not have jurisdiction
In a 2013 case the court ruled that a collateral warranty could be a construction contract for the purposes of the adjudication provisions of the Act, depending on the wording and “relevant factual background” of that warranty.
Mr Justice Akenhead took two main factors into consideration. Firstly, whether the party subject to the warranty gave an undertaking to carry out construction operations. Secondly, whether the works were fully complete.
Martin Bowdery QC accepted Simply’s argument that the collateral warranty was not a “construction contract” and therefore Abbey’s argument failed as the Adjudicator did not have jurisdiction.
Previously, there have been no definitive rules as to whether a collateral warranty constitutes a ‘construction contract’ and as with all of these cases, they remain fact sensitive.
On this occasion however, the court decided that the Warranty was not a ‘construction contract’ and there was therefore no implied right to adjudicate under the Act.
In order to decide whether a Collateral Warranty is a construction contract, the court stated the following must be considered:
- Both the wording and factual background of the contract should be considered.
- Where a contractor agrees to carry out uncompleted works in the future, that will be a very strong pointer that the collateral warranty is a construction contract and thus provide the parties the right to adjudicate.
- Where the works are completed, there will be no contractual right to adjudicate by virtue of section 108(5) of the Act and the implied terms of the Scheme.
Whilst the extended use of adjudication for remedial work compensation is permitted under the Construction Act, even several years after completion, this decision in the case of Toppan and Abbey v Simply shows there is a limit to what the courts will accept and impose.
If a collateral warranty is executed after completion of the construction project, it may not be a contract at all and therefore the beneficiary will have no right to adjudicate under the Construction Act.
Please note. The information provided on this website is NOT LEGAL ADVICE and is for information purposes only. No action or inaction should be taken due to this information or any reliance placed upon this information. Please note where legal advice is required this should be obtained by an appropriate qualified legal practice and no information provided within this website should form the basis of any legal, contract or commercial decision. K J Taylor Consulting Ltd. are commercial quantity surveyors and not construction legal advisors.