Supreme Court overturns Court of Appeal decision: Statutory adjudication will not apply to a typical collateral warranty

In the case of Abbey Healthcare (Mill Hill) Ltd (Respondent) v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (Appellant)[2024] UKSC 23, the Supreme Court has overturned the Court of Appeal's decision, finding that the collateral warranty in question was not an agreement "for" the carrying out of construction operations for the purposes of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 ('Construction Act').

Background

The Construction Act is a pillar of the ever-evolving field of construction law, giving parties to a ‘construction contract’ a statutory right to prompt and more economical resolution of disputes through statutory adjudication with a decision:

• due within 28 days of the adjudicator’s appointment (though the period may be extended); and
• binding on the parties until the dispute is finally resolved through the courts (or arbitration where applicable) or settled by mutual agreement.

Procuring collateral warranties in favour of third parties (funders, purchasers, tenants etc) is common practice in construction projects following the decision in Murphy v Brentwood District Council [1991] [1991] 1 AC 398 which restricted the ability for third parties to recover their economic losses resulting from defective works.  They give third parties a contractual right of recourse against contractors, subcontractors and professional consultants in the event that building work is defective.

Whether a collateral warranty qualifies as a construction contract under the Construction Act and grants the parties adjudication rights is the central point of the appeal in question.

Back in June 2022, in a majority decision, the Court of Appeal decided in this case that a collateral warranty which included a warranty as to the future performance of the work could be a construction contract, therefore providing the parties to such collateral warranties with a statutory right to refer disputes to adjudication.  Some parts of the industry questioned whether this was the right outcome.

Supreme Court’s Decision

Taking, thankfully, a simple approach, Lord Hamblen concluded with the unanimous agreement of the four other judges, that:
 
"(1) 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.
 
(2) A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement "for" the carrying out of construction operations."
 
The benefits of applying a statutory scheme for adjudication to collateral warranties, particularly if applied to the same factual disputes arising under both a building contract and a collateral warranty, was not enough to tempt the Supreme Court to agree to broaden the application of the Construction Act.  

The Supreme Court recognised the mischief which could be caused by focusing on the niceties of the language used in the warranty e.g did the warranty contain a promise that the contractor "has performed and will continue to perform" obligations under the building contract, indicating some warranty as to future performance, or something less; with the risk of it leading to fine distinctions being drawn and to disputes in relation both to the drafting of collateral warranties and to their proper interpretation.

Instead, the Supreme Court agreed with Simply Construct's argument that a far more workable approach is for the dividing line to be between collateral warranties which merely replicate undertakings given in the building contract and those which give rise to separate or distinct undertakings for the carrying out of construction operations.  The Supreme Court did not address the question of whether, in that scenario, the ‘replicated’ undertakings would themselves be adjudicable.

The Supreme Court also concluded, respectfully, that the decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC); [2013] BLR 589, the first case to indicate that a collateral warranty could be a construction contract under the Construction Act, was wrongly decided.  

Of course, those wishing to include a right to have disputes under a collateral warranty referred to adjudication may choose to include drafting to that effect in their collateral warranty.  

Whilst the language in this judgment refers to building contracts and therefore collateral warranties given by contractors, it is expected that this decision will equally apply to collateral warranties given by professional consultants.