CONSTRUCTION JOURNAL

Can collateral warranty holders adjudicate?

What are the implications of a recent Court of Appeal decision on the availability of adjudication to holders of collateral warranties?

Author:

  • James Ladner

20 September 2023

Overhead shot of Cardiff city

Historically, the humble collateral warranty is a feature of almost all commercial building projects, providing the holder or beneficiary with direct contractual rights against the giver of the warranty.

Collateral warranties are commonly given by contractors, subcontractors and professional consultants to third parties such as funders, purchasers and tenants.

They provide a direct contractual promise to a beneficiary that the contractor, subcontractor or consultant has and will comply with the building contract, subcontract or professional appointment.

2013: court rules adjudication available

The question of whether a warranty holder could enforce those contractual rights through adjudication first came before the courts in 2013 in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC).

In this case, the judge decided that the collateral warranty was a construction contract, meaning that adjudication was available to the tenant of Cardiff's international swimming pool.

For something to be a construction contract, it must be 'an agreement for the carrying out of construction operations', as defined by section 104 of the Housing Grants, Construction and Regeneration Act 1996.

In Parkwood, the judge analysed the wording of the warranty and identified that the contractor warranted, acknowledged and undertook to the warranty holder to perform its duties under the building contract.

The judge decided that this was a construction contract because it was one in which the contractor promised that it would carry out future construction operations. He indicated that the use of the forward-looking words 'acknowledge' and 'undertake' were key to the warranty being a contract for carrying out construction operations.

However, he added that, where the giver of a warranty was simply warranting a past state of affairs, this would not be for construction operations and adjudication would not apply.

It is fair to say that this decision got a fair degree of negative press, with commentators suggesting that it was a fiction to suggest that any construction operations were carried out under the warranty when in truth it was the building contract which mattered.

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Court of Appeal reviews whether adjudication available

By 2022, the decision in Parkwood had despite the initial criticism been long accepted.

This brings us to Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) Llp [2022] EWCA Civ 823, a case that concerned the construction of a care home in London by contractor Simply Construct on behalf of Employer Sapphire. The contract sum was £4.7m.

Toppan was the freeholder and later, by novation, became the Employer in place of Sapphire, while Abbey Healthcare was to be the tenant that intended to use the building as a care home. Toppan and Abbey had the same ultimate owner. Both Toppan and Abbey were entitled to warranties from the contractor.

Practical completion was achieved in 2016, and some years later fire safety defects were discovered in the works. At this point, sometime in 2020, Abbey as tenant wanted to claim directly from Simply Construct and realised that it did not have the contractor's collateral warranty.

Simply did not provide it, likely knowing that Abbey wished to make use of the fast-track and cost-effective nature of adjudication. Following court action, Simply eventually provided the warranty as the building contract required.

Both Toppan and Abbey then adjudicated. Abbey brought its claim under the collateral warranty and it is this decision that is of interest. Toppan was awarded just over £1m for its remedial works costs, and Abbey just over £900,000 for its lost trading profit.

Simply refused to pay and, in relation to the Abbey award, said that a collateral warranty given some four years after practical completion wasn't a construction contract. Therefore, it argued, there was no right to adjudicate, and in consequence the adjudicator's decision was void.

Simply also pointed out that their wording was different, unlike the Parkwood warranty, they had only warranted, they had not acknowledged or undertakenwhich were the forward-looking obligations said to be key in the Parkwood collateral warranty being a construction contract.

Abbey took its adjudication award to the Technology & Construction Court (TCC), part of the High Court, seeking enforcement of the decision.

The judge, an experienced construction King's Counsel, agreed with Simply and found that, as the warranty had been given more than four years after practical completion, it could not be a contract for carrying out construction operations. He determined that it was all historic – warranting what the judge in Parkwood had called 'a past state of affairs'.

That meant that this warranty holder could not use adjudication, and the adjudicator's decision was void.

Appeal prompts dissenting judgment on terminology

Abbey appealed the decision and Simply cross-appealed, reopening the argument from Parkwood as to whether a collateral warranty could be a construction contract at all.

The three judges in the Court of Appeal were not of one mind. The second judge disagreed with the leading judge, and the third judge even criticised the leading judge's textbook on adjudication.

Where they all agreed, however, was that Parkwood had been correctly decided and that a collateral warranty could be a construction contract, and may therefore give a right to adjudicate disputes.

This left two main questions.

  • Did the 'reduced' wording of Simply's warranty make it a construction contract?
  • Did the fact that it was signed nearly four years after practical completion make a difference?

On the wording, whether it was 'warranting' or 'undertaking and acknowledging' to do these things was, according to two of the three Appeal judges, just 'splitting hairs' as to the extent of the obligation.

However, the minority, dissenting judgment of Lord Justice Stuart-Smith is highly persuasive. He points out that, for adjudication to apply, section 104(1) requires the contract to be 'for construction operations' – and that means that the relevant contract must have as its purpose, object or intended outcome those construction operations. He pointed out that a warranty is usually much narrower than this, and means to provide a promise about a fact, circumstance or outcome.

He explained: 'By clause 4(1)(a) Simply Construct warranted that it "has performed and will continue to perform diligently its obligations under the Contract".

'This is a promise in relation to Simply Construct's obligations […] owed to someone else and not to Abbey. That is made clear by the last words of the sentence: what Simply Construct warranted was that it had performed and would perform its obligations "under the Contract", i.e. the obligations it owed to Sapphire and later Toppan under the building contract.

'There is, in my judgment, nothing in the terms of the sentence that either says or implies that Simply Construct is undertaking direct obligations to Abbey: it is merely warranting its performance of obligations owed to someone else.'

He contrasted this with Parkwood, where the contractor warranted, acknowledged and – in particular – undertook to carry out and complete the works in accordance with the building contract. He emphasised that undertaking involved an obligation to do something, and hence that was why Parkwood's warranty was a construction contract and, in his view, Abbey's wasn't.

The dissenting judge also noted that it would have been very easy for the drafters of the warranty to have placed direct obligations on the contractor to do the work; or agreed, or deemed, the warranty to be a construction contract, and that adjudication would then be available. But they did neither.

Adjudication allowed pending Supreme Court decision

Lord Justice Stuart-Smith made clear, however, that it was the terms of the collateral warranty as a whole and not just whether it was a warranting or undertaking obligation that mattered.

He did not rule out a situation where a warranty that merely used the word 'warrant', when read as a whole, could give rise to a direct obligation to perform construction operations, and which would thus be subject to adjudication.

This, perhaps, is a practical reason why the majority decision in this case is preferrable: such a detailed review of the terms of warranties is difficult in the confines of adjudication and it could lead to court challenges, derailing the effectiveness of the process.

The three judges all agreed on the timing issue, however, finding that the warranty made both retrospective and future promises, so it could be a contract for carrying out construction operations whenever it was executed.

The court thought it ridiculous that two identically worded warranties could make adjudication available or not according to the dates when they were signed.

While the Court of Appeal's judgments are detailed and learned, it is not the end of the road. Simply Construct has appealed, and the Supreme Court has agreed to review the case and it is listed for hearing in late January 2024.

But for now, collateral warranties promising to comply with the building contract are almost certainly construction contracts, meaning that disputes may be referred to adjudication.

The only exception to this will be if the warranty is drawn very narrowly – for instance, 'We completed these works two years ago, and we warrant that they were completed in accordance with the Building Regulations'. However, such wording is far from usual and is thus of little practical help.

Looking ahead, while the strength of Lord Justice Stuart-Smith's intellectual argument in his dissenting judgment is persuasive, the practical implications would be to put more cases in the court and to deny key warranty holders' access to adjudication.

Doing so would be contrary to the judiciary's long-time support for adjudication, so I do not believe the Supreme Court will reverse the position. But I wouldn't warrant it.

James Ladner is a legal director with Pinsent Masons

Contact James: Email

Related competencies include: Legal, Procurement and contracts

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