Collateral Warranties – Are they also a ‘Construction Contract’?

The 2013 decision by the Technology and Construction Court (TCC) in Parkwood Leisure Limited v Laing O'Rourke Wales and West Limited [2013] (Parkwood) resulted in some controversy when it ruled that collateral warranties could form a ‘construction contract’ under the Housing Grants, Construction and Regeneration Act 1996, as amended (Construction Act). It opened the possibility of beneficiaries to collateral warranties having a statutory right to refer a dispute to adjudication.

Further guidance on this issue has now been given in the recent case of Toppan Holdings Ltd (Toppan Holdings) and Abbey Healthcare (Mill Hill) Ltd (Abbey) v Simply Construct (UK) LLP (Simply) [2021] (Toppan).

Statutory right to adjudicate under the Construction Act

Under the Construction Act, any party to a ‘construction contract’ has the statutory right to refer a dispute to adjudication at any time, regardless of the terms of the contract.

A ‘construction contract’ is defined in Section 104 of the Construction Act as being an agreement with a person for any of the following:

1. the carrying out of construction operations;
2. arranging for the carrying out of construction operations by others; and
3. providing his own labour, or the labour of others, for the carrying out of construction operations.

There are some general exceptions to the definition, but these were not relevant to the considerations of the court in either Parkwood or Toppan. The question for the court in both cases was whether the agreement entered into by the parties (the collateral warranty) could be construed as a ‘construction contract’ within the above definition.

The Parkwood Decision

Key to the decision in Parkwood was the wording in the collateral warranty stating that the contractor ‘warrants’, ‘acknowledges and undertakes’ in respect of the carrying out of the works of the project. Justice Akenhead reasoned that such wording in the collateral warranty was not just a guarantee of a past state of affairs, but instead signified that the contractor had undertaken to ‘carry out’ and complete the works to the standard in the underlying building contract.

Such reasoning followed logically from the fact that the collateral warranty was executed while the works of the project were in progress. Justice Akenhead also acknowledged that not all collateral warranties would form an agreement to ‘carry out construction operations’ as per the wide definition contained within the Construction Act.

Facts in Toppan decision

In 2015, Simply entered into a building contract with Sapphire Building Services Limited (Sapphire) to design and construct Arandale Manor, a luxury care home in Mill Hill, North London (the Building Contract). The care home was to be owned by Toppan Holdings and operated by its tenant Abbey. The project reached practical completion in October 2016 and in 2017, Sapphire had novated all its rights and obligations under the Building Contract to Toppan Holdings.

In 2018, fire safety defects were uncovered within the care home, which were remedied by another contractor. Simply were also notified of these defects in 2019.

In 2020, Simply entered into a collateral warranty in favour of Abbey in which it warranted that it had ‘performed’ and would continue to perform its obligations under the Building Contract (the Abbey Collateral Warranty). 

Shortly after, Toppan Holdings and Abbey brought parallel adjudications against Simply.  Abbey brought the proceedings under the Abbey Collateral Warranty seeking loss of profits arising from the defects and their rectification.

Toppan Holdings brought the proceedings against Simply under the Building Contract, seeking recovery of the cost of the remedial works. Abbey and Toppan Holdings both succeeded in the adjudications and were awarded approximately £908,000 and £1 million respectively, by the same adjudicator.

Simply refused to pay either sums awarded and enforcement proceedings were brought by both Abbey and Toppan.  Simply disputed the enforcement proceedings brought by Abbey on grounds that the Abbey Collateral Warranty was not a construction contract and, in any event, sought a stay of enforcement.  Simply also sought a stay of enforcement to Toppan’s proceedings.  The stay of execution of both claims was sought on the basis that both Abbey and Toppan Holdings would be unable to repay the sums awarded.

Was the Abbey Collateral Warranty a ‘construction contract’?

The relevant wording within the Abbey Collateral Warranty was much narrower than the warranty in Parkwood.

The Abbey Collateral Warranty contained no wording in relation to ‘acknowledging or undertaking’ various matters within the warranty. The Abbey Collateral Warranty only expressly included a reference to a ‘warrant’ to complete various duties. This strongly indicated that the warranty was to represent a past state of affairs not of future obligations. In the words of Justice Bowdery QC, this made the Abbey Collateral Warranty more akin to a ‘manufacturer's product warranty’ rather than a ‘construction contract’.

Justice Bowdery QC also highlighted that the Abbey Collateral Warranty was entered into at a substantially different period in time compared to the warranty in the Parkwood case.  The judge noted practical completion had occurred four years before its execution. Similarly, remedial works had been completed by a different contractor in the intervening period.

Taking a commercial view of the case, Justice Bowdery QC ruled that:

• in light of the wording of the warranty; and
• the fact the Abbey Collateral Warranty had been executed four years after practical completion and several months after remedial works had been completed (by a third-party contractor),

the Abbey Collateral Warranty could not be regarded as a ‘construction contract’ setting out an agreement to carry out ‘construction operations’ as defined under the Construction Act.

In respect of the enforcement proceedings brought by Toppan, the judge refused the stay of execution.

Going forward

The decision against Abbey shows how key timing is when considering whether a collateral warranty can be a ‘construction contract’ and that careful consideration is required in respect of the wording used in warranties. Should the works be ongoing at the time of the execution of the warranty, then it is a ‘strong pointer’ toward the contractor warranting to carry out uncompleted works in the future. With such a warranty it is likely to be construed that the contractor is warranting to carry out construction operations and the warranty may therefore fall within the definition of a ‘construction contract’ under the Construction Act.

Conversely, where collateral warranties are granted following practical completion and certainly a significant period of time post practical completion and resolution of latent defects, this would suggest that the contractor is not warranting to carry out any construction operations and therefore the warranty is unlikely to fall within the ambit of the Construction Act.

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If you would like more information on Collateral Warranties please contact Michael O'Connor, Antony Vundi, or your usual Charles Russell Speechlys contact.