Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] EWCA Civ 823
| Update 05/01/2023: It has been reported that permission to appeal has been granted by the Supreme Court. We will issue further updates once further information becomes available. |
In a significant decision for the construction and development sector, the Court of Appeal has recently held that a collateral warranty constituted a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Act). The decision is likely to have major implications for parties providing, and receiving, collateral warranties.
The Act provides that a party to a ‘construction contract’ has the right to refer a dispute under the contract to adjudication at any time. Adjudication can be a useful and quick dispute resolution method, with disputes often being determined within a matter of weeks as opposed to court proceedings which can take months, or even years, to conclude. Section 104(1) of the Act provides that a construction contract includes an agreement for ‘the carrying out of construction operations’. The Act then sets out a lengthy definition of construction operations and activities that are excluded from the definition.
The question of whether a collateral warranty constitutes a construction contract with the associated right for the parties to adjudicate previously came before the courts in 2013. In the case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), Mr Justice Akenhead concluded that the collateral warranty in question was a construction contract. He focussed heavily on the wording of the warranty which stated that the warrantor “warrants, acknowledges and undertakes” that, amongst other things, “it has carried out and shall carry out and complete the works in accordance with the Contract”. The Judge considered that “An undertaking often involves an obligation to do something” and that “The undertaking primarily goes to the execution and completion of the remaining works”.
Following the judgment (as is indeed noted in a footnote to the judgment in the current case) some industry commentators expressed surprise at the decision.
However, the issue has now been decided, arguably beyond doubt, by the Court of Appeal (albeit with a 2-1 majority).
In 2015, Simply Construct was engaged by Sapphire Building Services Limited under a JCT Contract to design and build the Aarandale Manor care home. After the works had been completed, Sapphire and Simply Construct agreed a Settlement Agreement which included a requirement for the building contract to be novated to Toppan Holdings, the freeholder of the care home, with Toppan effectively becoming the ‘substitute employer’. Toppan later granted a lease of the care home to Abbey Healthcare.
In 2018, Toppan identified fire-safety defects in the care home and undertook remedial works, some of which were paid for by Abbey. In September 2020, some 4 years after the works were carried out, Simply Construct executed and delivered a collateral warranty to Abbey as it was required to do under its JCT contract.
Amongst other things, Simply Construct warranted in the collateral warranty that it “has performed and will continue to perform diligently its obligations under the Contract”.
Toppan and Abbey both successfully brought adjudications against Simply Construct seeking to recover the costs of the remedial works.
Simply Construct did not pay the sums awarded and Toppan and Abbey brought joint proceedings in the Technology and Construction Court to enforce their respective decisions.
The Judge dismissed the application brought by Abbey, holding that the collateral warranty was not a construction contract with the result that Abbey did not have the right to adjudicate and the adjudicator did not have jurisdiction in respect of the decision which they were seeking to enforce. The Judge held that the collateral warranty was not an agreement for the ‘carrying out of construction operations’ within the meaning of s.104(1) of the Act. In particular, he noted that the collateral warranty was executed 4 years after practical completion of the works and considered that it did not make commercial sense for the warranty to be construed as a construction contract for the purposes of the Act. The Judge’s approach was not inconsistent with the Parkwood case where one pointer as to the status of the collateral warranty as a potential construction contract was whether there were still any works to be done at the time that the warranty was given. Abbey appealed to the Court of Appeal.
The questions before the Court of Appeal were as follows:
In answering the first question, Lord Justice Coulson, giving the leading judgment, held that a collateral warranty can be a construction contract depending on the wording of the warranty in question. A warranty which ‘provided a simple fixed promise or guarantee in respect of a past state of affairs’ perhaps more akin to a product guarantee, may not be contract for the carrying out of the construction operations but a warranty that the warrantor was carrying out and would continue to carry out construction operations may well be a construction contract. This is because it is a ‘promise which regulates (at least in part) the ongoing carrying out of construction operations’.
Lord Justice Coulson considered that the wording in the Act (‘an agreement … for .. the carrying out of construction operations’) is broad and not confined to a traditional building contract.
With regard to question 2, the court looked at the wording of the warranty. Simply Construct warranted that it “has performed and will continue to perform diligently its obligations under the contract”. Lord Justice Coulson considered this was a warranty of both past and future performance of the construction operations. The court did not consider the inclusion or otherwise of the words ‘acknowledges and undertakes’ (which the Judge in Parkwood had placed importance on) to make any material difference.
The court went on to find that the fact that the warranty was executed long after the works were complete was of ‘little relevance to its categorisation under s.104(1)’ because it was retrospective in effect.
The court considered that the conclusion adopted by the judge at first instance, based on the date of execution, could give rise to difficulties and uncertainty. For example, at what point would execution be too late for the warranty to constitute a construction contract? In this case the warranty was executed 4 years after practical completion, but what about a warranty executed 2 years or one year post practical completion? Where would the line be drawn?
Furthermore, if this approach was adopted then, depending on the timing of execution, it may be that on any particular project some warranties would be construction contracts and others would not. This could also lead to the unhelpful prospect of warrantors deliberately delaying the execution of warranties.
The Court (albeit with Lord Justice Stuart-Smith dissenting) concluded that the collateral warranty was a construction contract and Abbey succeeded on its application for summary judgment.
The Court of Appeal’s decision will have wide implications for the construction industry. It brings clarity that collateral warranties can, depending on their terms, constitute ‘construction contracts’ for the purposes of the Act resulting in a statutory right to adjudicate.
The decision may well be welcomed by beneficiaries of warranties (landlords, tenants, funders and so on) but could cause concern amongst warrantors (and their insurers) who may fear an increase in claims given the timely and, sometimes, cost-effective nature of adjudication.
For more information on the article above please contact Patrick Blake and Lianne Edwards.
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