TCC decision provides guidance on collateral warranties as 'construction contracts'
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A recent decision in the Technology and Construction Court (TCC) has provided guidance on whether collateral warranties are 'construction contracts' for the purposes of Section 104 of the Housing Grants, Regeneration and Construction Act 1996 (the Act) and, consequently, whether parties have a statutory right to adjudicate under such a warranty.
Toppan Holdings Limited (THL) is the freehold owner of a care home which was built by Simply Construct (UK) LLP (Simply Construct). The care home was let by THL to Abbey Healthcare (Mill Hill) Limited (Abbey Healthcare).
Following completion of the works, it became apparent that the care home had substantial fire-safety defects with further defects also being discovered during the carrying out of the remedial works which were undertaken by an alternative contractor.
Upon completion of the works, Simply Construct's building contract was novated to THL and THL exercised its right under the building contract to request that Simply Construct execute a collateral warranty in favour of Abbey Healthcare (the 'Warranty'). The Warranty was issued some four years after practical completion of the main works and eight months after the remedial works had been completed.
The Adjudication
Following completion of the remedial works, THL and Abbey Healthcare both commenced adjudication against Simply Construct to recover the losses incurred as a result of the remedial works carried out to the latent defects.
The Adjudicator found in THL's and Abbey Healthcare's favour with Simply Construct required to pay £1.07m to THL and in the sum of £908,000 to Abbey Healthcare. Simply Construct did not pay the sums awarded in the adjudication therefore THL and Abbey Healthcare issued joint enforcement proceedings against Simply Construct in the TCC.
The TCC Proceedings
In the TCC proceedings, THL and Abbey Healthcare sought summary enforcement of the sums awarded to them at adjudication.
In relation to Abbey Healthcare's claim, Simply Construct argued that the Adjudicator did not have jurisdiction to decide the dispute on the basis that the Warranty was not a 'construction contract' for the purposes of the Act and thereby Abbey Healthcare did not have a right to adjudicate.
The Judge, Martin Bowdery QC ruled that THL's award (in the sum of £1.07m) should stand however, Abbey Healthcare's award was struck out as the Judge agreed with Simply Construct's argument that the Warranty was not a construction contract and, therefore, Abbey Healthcare did not have the right to adjudicate – there being no contractual adjudication provisions contained within the Warranty.
In coming to his decision, the Judge considered the guidance set out by Akenhead J in Parkwood v Laing O'Rourke [2013] BLR 589 (TCC), notably Akenhead J's acknowledgement that not all collateral warranties will be construction contracts and, in determining whether any particular collateral warranty is a construction contract, the wording of the collateral warranty should be construed against the relevant factual background.
In this case the factual background was different to Parkwood as the Warranty was executed four years after completion of the works. As such, the Judge ruled that he could not see how a collateral warranty executed so long after completion of the works and the remedial works could be construed as an agreement for the 'carrying out of construction operations'.
The Judge also considered the wording of the Warranty. In Parkwood, the wording of the collateral warranty included the following wording 'warrants, acknowledges and undertakes'. However in this case, the Warranty only included the word 'warrants' in respect of past and future performance. When construed against the factual background, the Judge reached the conclusion that 'by the time the Abbey Collateral Warranty was executed it was a warranty of a state of affairs past or future akin to a manufacturer's product warranty'.
Importance
The TCC decision emphasises the importance of both the terms and the time of entering into a collateral warranty. The decision potentially introduces a 'two-tiered system' for collateral warranties (splitting their standing between those entered before and post completion) which will no doubt create a level of uncertainty within the industry.
In order to avoid any uncertainty, construction lawyers and professions would be well advised to establish, at the outset (and prior to entering into the warranty), whether the warranty confers adjudication rights to the parties prior to entering into a collateral warranty. As set out in the decision, it will be a strong indicator that a collateral warranty is a construction contract if the warranty includes agreement by the contractor to carry out uncompleted works in the future, this in turn will confer the right to adjudicate to the parties. However, if a collateral warranty is entered into where the works have already been completed, a construction contract is unlikely to arise and there will be no right to adjudicate unless this is expressly drafted for.
This decision was overturned by the Court of Appeal on the 21st June 2022. To see our comment on this latest ruling click here.
