When is a Collateral Warranty a Construction Contract?

Published 20 marzo 2023

In Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP , the English Court of Appeal helpfully provided guidance on the subject of whether a collateral warranty constitutes a construction contract. In Abbey the Court made it clear that collateral warranties which provide for future obligations will be deemed to be a construction contract, even if they are executed post-commencement or post-execution of the works.

Previous Case Law

The Court had previously considered the question of whether a collateral warranty constitutes a construction contract in Parkwood Leisure Ltd v Laing O'Rourke . Close consideration was given by the Court to the wording of the warranty, and reference to future obligations was a strong indicator that a collateral warranty constituted a construction contract.

Later, in Toppan Holdings Ltd, Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP , the Court focussed on the timing of execution of the collateral warranty. The Court noted that if the Contractor was warranting a past state of affairs, and if the works were already completed when the collateral warranty is executed, the warranty was unlikely to be a construction contract. If the warranty was not a construction contract, there was no right to adjudicate. The Court noted as follows when considering whether a collateral warranty which was executed after the works the subject matter of the building contract is a construction contract:

A pointer against [a collateral warranty being held as a construction contract] may be that all the works are completed and that the Contractor is simply warrantying a past state of affairs as reaching a certain level, quality or standard.

The Legislation

The definition of a construction contract under the law in England and Wales is set out in the Housing Grants (Construction and Regeneration) Act 1996 in S104 as follows; “construction contract” means an agreement with a person for any of the following-

(a) the carrying out of construction operations;

(b) arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise;

(c) providing his own labour, or the labour of others, for the carrying out of construction operations.

In Ireland, the definition is similar, and is set out pursuant to the Construction Contract Act 2013 as follows at S1(1);

“construction contract” means… an agreement (whether or not in writing) between an executing party and another party, where the executing party is engaged for any one or more of the following activities:

(a) carrying out construction operations by the executing party;

(b) arranging for the carrying out of construction operations by one or more other persons, whether under subcontract to the executing party or otherwise;

(c) providing the executing party’s own labour, or the labour of others, for the carrying out of construction operations…

Both pieces of legislation define agreements for architectural and surveying services as construction contracts.

The Abbey Decision

The appellant in the proceedings Abbey Healthcare (Mill Hill) Ltd (“Abbey”), sought to rely on a collateral warranty as a construction contract, against the respondent (“Simply Construct”). Simply Construct was engaged by Sapphire Building Services Limited (“Sapphire”) as design and build contractor for a luxury care home in London, Aarandale Manor. At completion, Sapphire novated its rights under the design and build contract to Toppan Holdings Limited (“Toppan”), who was the freehold owner of Aarandale Manor. Toppan then leased the care home to Abbey. A number of defects were discovered with the original works, and remedial works were necessary.

Simply Construct was obliged pursuant to the design and build contract to execute a collateral warranty for Abbey, and duly obliged in doing so.

Abbey then brought adjudication proceedings against Simply Construct, and was awarded a sum, which it then sought to enforce by way of summary judgment against Simply Construct. The question of whether or not the collateral warranty constituted a construction contract, was important for the parties, as if it was held a construction contract, then the dispute as between the parties came within the adjudication regime. Simply Construct resisted the enforcement, on the basis that there was no right to adjudicate in the collateral warranty. The High Court found that the collateral warranty
was not a construction contract, noting that the collateral warranty was signed after the construction and remedial works had completed, therefore finding Abbey had no right to adjudicate.

On appeal to the Court of Appeal, the Court found that the wording of the warranty was important. They noted that if the warranty is that the contractor was carrying out, and would continue to carry out construction operations, then this could be considered a contract for the carrying out of construction operations. In relation to the collateral warranty at issue, they found that as the warranty was not to a fixed or past state of affairs, and there were elements promising future performance, it was a construction contract. The Court also interestingly held that the timing of the grant of the warranty is immaterial.

Future Considerations Arising

• While there has been no ‘Abbey equivalent’ in Ireland at the time of writing, given that the definition of ‘construction contract’ is almost identical in both jurisdictions, Abbey would represent very persuasive authority for the Irish Courts were such a case to come before them.
• The wider the definition of construction contract, the more claims there are which may be adjudicated upon, which may previously have gone down the road of litigation. If the costs associated with adjudication come within the scope of cover provided, Insurers may see a greater volume of correspondence from Insureds regarding adjudication if this avenue of approach becomes more prevalent.
• Contractors and their legal advisors will need to scrutinise such warranties carefully when drafting, as the focus of the Court will likely be on what is being warranted, not necessarily when it is being warranted.