A case with big implications for collateral warranties

Peter Vinden is chief executive of corporate advisory firm Gateley Vinden

Conventional thinking on the rights of beneficiaries seeking redress under collateral warranties has shifted dramatically, following a landmark Court of Appeal judgement handed down in the case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP on 21 June.

The long-awaited outcome has caused something of a stir in the UK construction and insurance industries due to the significant impact that this case will have in framing how disputes under collateral warranties can be resolved.

Background to the case

The case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP concerned the rectification of fire-safety defects in a care home.

In 2020, an adjudication took place with Abbey Healthcare, seeking the recovery of financial compensation for trading, and other losses, which it claimed from Simply as a result of defects and required remedial works to a building it occupied as a tenant. The claim was brought under a collateral warranty that Abbey Health Care had entered into with Simply.

“The adjudicator, however, decided on a non-binding basis that the collateral warranty entered into by the parties was a construction contract”

In the ensuing adjudication, the appointed adjudicator received a threshold challenge to his jurisdiction. Simply argued that the collateral warranty entered into by the parties was not actually a construction contract.

The adjudicator, however, decided on a non-binding basis that the collateral warranty entered into by the parties – an agreement associated with another primary contract – was a construction contract.

As a result, a dispute under that warranty could be adjudicated under the statutory scheme and, in his decision, the adjudicator ordered Simply to make a payment of £869,500 plus interest to Abbey Healthcare. Simply refused to pay the amount decided, so Abbey Healthcare issued court proceedings to enforce the adjudicator’s decision.

In the first instance, the High Court judge concluded that Abbey Healthcare’s collateral warranty was not a construction contract and refused to apply the adjudicator’s decision. However, the Court of Appeal judgement has now reversed the High Court’s judgement from 2021 and enforced the adjudicator’s original decision.

A significant outcome

Although there have been many court cases about adjudication, very few have addressed the issue of defining what a ‘construction contract’ is, and how section 104(1) of the Housing Grants Construction and Regeneration Act 1996 should be interpreted and applied.

The main findings raised from the Court of Appeal reversing the original High Court judgement are:

  • Clarification on the definition of collateral warranties, and whether they could be classed as a construction contract, depends entirely on the actual words used in the warranty.
  • Failure to include detailed payment provisions normally associated with building contracts does not mean that the collateral warranty is not a construction contract.
  • Although it might make commercial common sense for any collateral warranties to be treated in the same way as the underlying building contracts they relate to, the question of whether the warranty will be defined as a construction contract will depend on its interpretation, and not by the importing rights from the building contract.
  • The date of execution of a collateral warranty, which was previously believed to be an important consideration concerning when the works were to be carried out, is an immaterial consideration. The warranty and the rights thereunder apply retrospectively, and if the warranty is defined as a construction contract the parties have the right to adjudicate.
  • If a contractor or consultant states in a collateral warranty that it was carrying out, and will continue to carry out, construction operations – including the promise of regulating ongoing construction work – it is more likely to be deemed a construction contract for the purposes of the act. This is different from a product guarantee, which only warrants a past state of affairs.
  • The collateral warranty between Abbey Healthcare and Simply was a construction contract for purposes of the act. This means Abbey Healthcare did have the statutory right to adjudicate and the adjudicator’s original decision would be enforced.

The future of adjudication cases

The adjudication process and Court of Appeal judgement have brought clarity to the interpretation of section 104(1) of the Housing Grants Construction and Regeneration Act 1996. It emphasises an extension of liability for contractors and consultants, and provides that all end-users with an interest in the quality or future performance of a finished building may well have similar rights to the parties involved with the original construction works when it comes to adjudication.

I believe this case will lead to a run of adjudications under collateral warranties and, consequently, the ruling has significant implications for contractors and consultants who have entered warranties – and, of course, insurers will be very interested in this judgement too.

This case emphasises that the adjudication process is invaluable for the swift and cost-effective resolution of construction contract disputes. Moving forward, more focus will be placed on the wording of collateral warranty contracts – especially those regarding promises of future performance – to avoid any frustrating or delayed outcomes in how these disputes are resolved.

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