The Ayes have it - Collateral Warranties can be a ‘Construction Contract’
On 21 June 2022, the Court of Appeal handed down its judgment in the case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP  EWCA Civ 823 deciding by a majority (LJ Stuart-Smith giving a dissenting judgment) that a collateral warranty granted in favour of Abbey (“Abbey Warranty”) was a ‘construction contract’ within the meaning of Section 104 of the Housing Grants (Construction and Regeneration) Act 1996 (“Construction Act”).
Given that the wording contained in the Abbey Collateral Warranty (or similar), is used throughout the industry this case has wide-reaching implications.
This decision has overnight provided beneficiaries of compliant warranties with a quick and cost-effective dispute resolution mechanism through adjudication, but also greatly increased the exposure of providers of compliant warranties to such adjudications. We await to see whether the case will be appealed to the Supreme Court (the Court of Appeal refused leave to appeal) but in the meantime, it will be interesting to see whether the market develops wording which attempts to move warranties outside the definition of a construction contract or whether alternative standard forms of product-style ‘warranties’ appear on the market.
The factual circumstances of the case can be found in our analysis of the first instance decision, but the key to the decision in the Court of Appeal was the wording of the Abbey Collateral Warranty that:
“The Contractor warrants that:
- the Contractor has performed and will continue to perform diligently its obligations under the Contract;
- in carrying out and completing the Works the Contractor has exercised and will continue to exercise all the reasonable skill care and diligence to be expected of a, properly qualified competent and experienced contractor experienced in carrying out and completing works of a similar nature value complexity and timescale to the Works...”
And s 104 of the Construction Act:
- “In this Part a “construction contract” means an agreement with a person for any of the following—
- the carrying out of construction operations;
- arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise;
- providing his own labour, or the labour of others, for the carrying out of construction operations…
- References in this Part to a construction contract include an agreement—
- to do architectural, design, or surveying work, or
- to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, in relation to construction operations…
- Where an agreement relates to construction operations and other matters, this Part applies to it only so far as it relates to construction operations.”
ISSUE 1: CAN A COLLATERAL WARRANTY EVER BE A CONSTRUCTION CONTRACT AS DEFINED BY S.104 THE CONSTRUCTION ACT?
Having considered the various points Coulson LJ concluded that a collateral warranty could be a construction contract if it fell within the definition of section 104(1) of the Construction Act. Coulson LJ noted that “an agreement…for…the carrying out of construction operations” is a broad expression, seemingly placing significant emphasis on whether the warranty contained an obligation in respect of the future undertaking of works rather than a warranty in respect of “past state of affairs” in respect of works carried out. Coulson LJ suggested that the broad interpretation of s104(1) was supported by s104(5) which confirmed that a contract for both “construction operations” and “other matters” would fall within the definition of s104(1).
Coulson LJ also noted that there was no requirement that the contract refers only to the primary building contract in any situation, nor whether the contract contained detailed obligations on the beneficiary to make payments direct to the contractor (another key requirement for a construction contract under the Construction Act). The suggestion being that (what is commonplace) a nominal payment of £1 or £10 by the beneficiary to the contractor would suffice for the purposes of the Construction Act.
Coulson LJ concluded that unless the wording of a warranty fell outside the broad interpretation of s104(1) and/or was materially different to the collateral warranty in the case of Parkwood (which we have discussed previously), a collateral warranty will be a construction contract.
ISSUE 2: DID THE TERMS OF THE ABBEY COLLATERAL WARRANTY MAKE IT A CONSTRUCTION CONTRACT?
The key wording in the Abbey Collateral Warranty was Simply Construct’s obligation that it:
“…has performed and will continue to perform diligently its obligations under the contract…”
Coulson LJ considered that this warranty covered two separate obligations/requirements.
Firstly, it set out the standard to which the construction obligations would be carried out i.e. by reference to the terms of the building contract. Secondly and more importantly, Coulson LJ considered that Simply Construct were warranting that it had carried out its obligations under the construction contract but also that it will carry out construction operations in the future, concluding:
“As a matter of common sense, therefore, it seems to me that that is ‘an agreement for the carrying out of construction operations.”
Simply Construct argued that because the Abbey Collateral Warranty was executed after the works had achieved practical completion it could not fall within the definition of s104(1). However, Coulson LJ dismissed this argument noting that a construction contract which fell within the definition of s104(1) could suddenly fall outside the definition simply because of the date on which it was executed.
ISSUE 3: DID THE DATE ON WHICH THE ABBEY COLLATERAL WARRANTY WAS EXECUTED MAKE ANY DIFFERENCE?
At the first instance, the judge decided that the fact Abbey executed the warranty after the completion of the works made it more akin to a manufacturer’s warranty and therefore (regardless of the wording of the warranty) excluded it from the definition of a construction contract.
The Court of Appeal rejected this analysis. The court noted that the warranty was intended to have retrospective effect, noting that the cause of action for defective works arose at the date of practical completion. The Court of Appeal also rejected this approach on a number of policy grounds. Firstly, there would be no certainty at what point in time after completion of the works a warranty no longer became a construction contract and secondly, it may well encourage contractors to avoid executing warranties for as long as possible to avoid certain works being covered/considered to be a construction contract.
THE DISSENTING VIEW
LJ Stuart-Smith agreed that obligations contained within a collateral warranty could fall within the definition of a construction contract under s104(1) of the Construction Act but the wording of each agreement had to be reviewed on the basis of the wording alone.
LJ Stuart-Smith rejected the suggestion that the wording of s104(1) was required to be interpreted “broadly” or indeed that it should be interpreted “broadly”.
In his analysis, the Abbey Collateral Warranty wording did not make it a construction contract.
The key to his analysis is the wording:
“…has performed and will continue to perform diligently its obligations under the contract..” as set out in the Abbey Collateral Warranty; and
“…an agreement… for… the carrying out of construction operations” as set out in s104(1) of the Construction Act.
LJ Stuart-Smith emphasised that the wording of the Abbey Collateral Warranty was simply a promise in relation to its obligations to a third party under the building contract. There was nothing in these words or anywhere else in the collateral warranty which suggested that Simply Construct was undertaking direct works for Abbey. Simply Construct was “merely warranting its performance of obligations owed to someone else.” For this reason, he considered that there was no agreement for the carrying out of construction operations.
To emphasise the point he contrasted the warranty under clause 4 of the Abbey Collateral Warranty with Simply Construct’s direct obligations to Abbey to maintain professional indemnity insurance under clause 5 of the warranty (“the Contractor shall maintain Insurance…”).
LJ Stuart-Smith also distinguished the Abbey Collateral Warranty and the collateral warranty in the Parkwood case, noting that the warranty in Parkwood provided a direct obligation from the Contractor to the beneficiary to perform the works through warranting that:
“It has carried out and shall carry out and complete the Works in accordance with the Contract;…”
If you would like more information on collateral warranties, please contact Patricia Nathan-Amissah or Michael O’Connor or your usual Charles Russell Speechlys contact.