So Collateral Warranties ARE Construction Contracts after all…
Locations
The facts
The case stems from Abbey Healthcare's initial claim to recover losses from fire safety related defects at a care home. Abbey Healthcare (the tenant) referred the dispute to adjudication against Simply Construct (the contractor) under a collateral warranty that had been executed after the works had been completed.
Although Abbey Healthcare was successful at adjudication, Simply Construct did not pay the award to Abbey Healthcare and Abbey Healthcare started proceedings in the TCC to enforce the award.
The TCC did not enforce the adjudicator's award on grounds of jurisdiction, including because the warranty was signed some four years after the construction works had finished. The Court of Appeal has now found by majority that was the wrong decision.
For a full summary of the facts, please refer to our previous article: link here.
The Appeal
In its decision overturning the earlier TCC ruling, the Court of Appeal provides some helpful guidance into the meaning of a 'construction contract' for the purposes of Section 104(1) of the Housing Grants, Regeneration and Construction Act 1996 (the Act).
The Court of Appeal's decision suggests that 'construction contract' for the purposes of the Act has a wider meaning than the agreement under which the construction works and services were paid and performed (i.e. the underlying contract) and confirms that there can be more than one contract for the same 'construction operations'.
One of the reasons for the TCC decision was that the date of execution (being about 4 years after Practical Completion) meant that it 'was a warranty of a state of affairs past or future akin to a manufacturer's product warranty'. The Court of Appeal's decision reinforces the fact that the date of execution is in fact immaterial.Indeed, the Court of Appeal held that where the wording of the warranty includes an obligation to carry out and continue to carry out 'construction operations', this includes a promise regulating the ongoing carrying out of construction operations. As such, the inclusion of this wording would promote the fact that a contract is a construction contract for the purposes of the Act. That position is to be distinguished from a product guarantee, which only warrants a past state of affairs.
The Decision
Applying the law to the facts in the case, the collateral warranty between Abbey Healthcare and Simply Construct was found to be a 'construction contract' for purposes of the Act.
This, in turn, meant that Abbey Healthcare did have the right to adjudicate and thereby the adjudicator's decision would be enforced.
We also understand that the Court of Appeal refused permission to appeal the decision to the Supreme Court.
Importance
This is the first time that the Court of Appeal has considered the meaning of a 'construction contract' under Section 104(1) of the Act for adjudication purposes.
The implications of the decision could be far reaching within the construction industry. Not only does the decision confirm adjudication to be a widely available alternative to expensive and time-costly litigation, but also enforces that the courts will look to enforce an adjudicator's decision. Looking forward, we anticipate that parties may seek to apply the principles laid out by the Court of Appeal to other third-party agreements (such as funding agreements).