Is a Collateral Warranty a ‘Construction Contract’?

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There has been further case law on the issue of whether a collateral warranty is a Construction Contract under Part II of the Housing Grants, Construction and Regeneration Act 1996(Construction Act) i.e., a contract for the carrying out of construction operations. The significance is that, if it is, then the parties to it have a statutory right to refer any dispute under it to adjudication under the Construction Act 1996.

Background

In the Technology and Construction Court (TCC) case of Toppan Holdings Ltd, Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC) (27 July 2021) Simply was engaged by Sapphire Building Services Limited (Sapphire) under a JCT Design and Build Contract 2011 to build a care home in London, with a contract price of £4.7m.

Following practical completion of the works (PC), Sapphire novated the Building Contract to Toppan, the freehold owner of the care home. Abbey was the occupational tenant and operator of the care home. Both Toppan and Abbey were in the same ultimate ownership.

Two years after PC, Toppan discovered fire safety defects. Remedial works were carried out by Luciano Venetian Builders Limited. Six months later, following a request from Toppan, Simply entered into a collateral warranty with Abbey and Toppan.

Just a few months after signing the collateral warranty, further remedial works were required and therefore, two separate notices of adjudications were served on Simply. Toppan and Abbey claimed for the cost of the remedial works and loss of trading profits and they were awarded £1.07 million and £908,000 in damages respectively.

Simply disputed the adjudicator had jurisdiction, arguing that Abbey’s collateral warranty was not a Construction Contract under the Construction Act as it was not an agreement “for the carrying out of construction operations“.

Judgement

The TCC decided that, on the facts of this case, Abbey’s collateral warranty was not a Construction Contract and therefore, the adjudicator did not have jurisdiction to determine a dispute under it.

Comment

The authority that a collateral warranty is capable of being a Construction Contract is the TCC case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665.

In the Parkwood case, where it was decided in the alternative, the TCC determined that there were 3 important factors to take into account to decide if a collateral warranty is a Construction Contract:

  • Terms: express terms for the person giving the collateral warranty to agree to carry out uncompleted works in the future would be a “very strong pointer” that the collateral warranty is a Construction Contract
  • Timing: if the collateral warranty is entered into after practical completion, then it is unlikely to be a Construction Contract. If latent defects have already been remedied, then this is even stronger evidence that is it not
  • Factual background: express terms must be interpreted in light of the facts. Whilst the drafting provided for future works, as Abbey’s collateral warranty had been executed 4 years after PC and 6 months after remedial works had been carried out, it was not anticipated at the time that further works would be required; it was more of a warranty of state of affairs.

Whilst this case provides more detail on whether a collateral warranty is a Construction Contract, ultimately the decision will still turn on the facts of each case.

As tenants usually only receive collateral warranties following practical completion when works have been completed, as a rule of thumb, it is less likely that they will have a right to adjudicate disputes under their collateral warranties, unless there is an express right to adjudicate written into their collateral warranties.