It's not you, it's me. Collateral Warranties are no longer invited to the adjudication party. | Fieldfisher
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It's not you, it's me. Collateral Warranties are no longer invited to the adjudication party.



United Kingdom

A Collateral Warranty is not a Construction Contract as confirmed in the Abbey Healthcare (Mill Hill) Limited (Abbey Healthcare) v Simply Construct (UK) LLP (Simply Construct) [2024] UKSC 23.

The Supreme Court (SC) has now reversed the decision of the Court of Appeal (CoA) which, itself, had overturned the earlier decision of the Technology and Construction Court (TCC) to confirm that a collateral warranty (and other ancillary contracts) is not "Construction Contract" for the purposes of section 104(1) of the Construction Act.

For more detailed commentary on the background of this case and its progress through the courts, you can follow the following links to both earlier decisions

  1. TCC: TCC decision provides guidance on collateral warranties as 'construction contracts' | Fieldfisher
  2. CoA: So Collateral Warranties ARE Construction Contracts after all… | Fieldfisher

In this, the final instalment from this case, the SC reached its conclusion on the basis that a party providing a collateral warranty for the benefit of a third party does not undertake "construction operations" (as defined by Section 105 of the Construction Act) pursuant to the terms of the collateral warranty. A collateral warranty, in the absence of express wording to the contrary, merely warrants that one party has carried and/or will carry out its obligations under an entirely separate contract.

In those circumstances, a beneficiary under a collateral warranty does not have a statutory right to refer any dispute arising under that collateral warranty to adjudication. That is, as we know, a right reserved for Construction Contracts only.

There is however, one small qualification to this insofar as paragraph 84 of the SC judgment confirms that:

"…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".

While this judgment may close the door to future adjudications arising out of conventional collateral warranties, it may pave the way for alternative drafting which does impose a standalone obligation for the contractor to provide construction operations thus preserving the right to adjudicate under a collateral warranty and any other ancillary contract. Alternatively, the parties to a collateral warranty may elect to include adjudication as a contractual dispute resolution forum.

More broadly, this may also be seen as a step to narrow the scope of the Construction Act and, presumably, reduce the number of adjudications commenced. However, excluding collateral warranties and other ancillary documents from the scope of the Construction Act may increase the load on an already overloaded court system.

While some may argue that this judgment may restrict cash flow and therefore conflicts with one of the overriding objectives of the Construction Act, i.e. to preserve cash flow, the SC's approach to this issue appears to be that the Construction Act was never intended to apply to collateral warranties and/or that the provisions of the same are inapplicable to collateral warranties.

Therefore, the broad position is now that a collateral warranty falls outside of the Construction Act.

The full judgment can be found here: