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Legal case

In what circumstances does collateral warranty constitute as a construction contract and what does the decision mean for the industry as a whole?

Summary

Collateral warranties are a common feature of construction projects. They often contain obligations to the effect that the construction professional or contractor concerned have undertaken their primary contractual obligations with all reasonable skill, care and diligence and/or that the quality of the design produced or the construction works undertaken on site have achieved specified standards. In this case, the Technology and Construction Court (TCC) held that despite containing features that mirrored obligations under the primary contracts, a collateral warranty executed by a contractor in respect of work completed under a design and build contract was not to a ‘construction contract’ for the purposes of the Housing Grants, Construction and Regeneration Act 1996 Pt II s.104(1)(a). Therefore, there was no contractual right to adjudication under s.108.

Background

The collateral warranty had been executed by Simply in favour of Toppan and Abbey some four years after practical completion and three years after a settlement agreement between Simply and Sapphire Building Services Ltd (‘Sapphire’) — who had engaged Simply to undertake work under a Joint Construction Tribunal (JCT) Design and Building Contract — settling all claims save those in respect of latent damage, and eight months after the completion of works to remedy the latent damage.

The claimants were Toppan, the freehold owner of a care home, and Abbey, the occupational tenant and operator pursuant to a lease with Toppan. The defendant, Simply Construct (“Simply”), was a Scottish limited liability partnership construction contractor which built the care home, pursuant to a JCT Design and Build Contract with amendments with Sapphire Building Services Limited (the employer). The amended contract obliged Simply, on notification by Toppan, to execute a collateral warranty for the benefit of a tenant and in favour of Toppan.

In March 2015, Simply commenced works and in October 2016, practical completion was achieved. In June 2017, Sapphire and Simply reached an agreement to settle all claims for defective works save all those in respect of latent damage.

By a novation agreement in June 2017, Sapphire transferred all of its rights and obligations under the Building Contract to Toppan. In August 2018, Toppan discovered defects in the care home. In January 2019, Toppan notified Simply of the defects and requested that they rectify them. In September 2019, Toppan engaged another party to carry out remedial works, during which further defects were discovered and rectified. In July 2020, Toppan sent Simply a Pre-Action Protocol letter requesting that they execute a collateral warranty in favour of Abbey, and in August 2020 Toppan issued a Part 8 claim seeking specific performance of the obligations under a clause in the Building Contract to execute a collateral warranty in favour of Abbey. In September 2020, Simply executed the Abbey collateral warranty. In October 2020, Toppan and Abbey executed the collateral warranty (‘The Abbey Warranty’).

In December 2002, the claimants served separate notices of adjudication on Simply claiming damages consequent on the discovery of defects in 2018, including damages for undertaking the required remedial works and loss of profits. In April 2021, the Adjudicator issued decisions in both adjudications. Simply failed to comply with those decisions and resisted enforcement on a number of grounds, including, most importantly, that the Adjudicator did not have jurisdiction to determine the disputes because the Abbey Warranty was not a construction contract as defined by s.104 of the Housing Grants, Construction and Regeneration Act 1996.

The decision

The court considered Parkwood v Laing O’Rourke [2013] BLR 589, in which Mr Justice Akenhead had to determine whether a collateral warranty was a construction contract, holding that it turned on the terms of the warranty in issue. In that case, Mr Justice Akenhead derived three points of principle:

  • the fact that the contract would be retrospective in effect was not a bar to it being a construction contract
  • the definition of a ‘construction contract’ in the Act, namely an agreement for “the carrying out of construction operations”, was broad
  • a warranty that provides that a party undertakes to carry out and complete construction operations will generally be considered to be a construction contract.

Mr Justice Akenhead noted that not all collateral warranties given in connection with construction developments would be construction contracts. The decision must be made in light of the wording and relevant factual background to see whether, properly construed, it is a contract for the carrying out of construction operations. One consideration against the contract being a construction contract was that the works were completed, rather than yet to begin or ongoing.

Bowdery QC (sitting as a deputy high court judge) concluded that on its wording, the Abbey Warranty was not a construction contract for the purposes of the Act. In the judge’s view, Abbey Warranty did not constitute a construction contract as the works had been completed four years prior to the warranty being executed, the remedial works had been undertaken prior to the warranty being executed and it did not contemplate any further remedial works being undertaken.

Conclusions

This offers reassurance and added certainty to construction professionals and their insurers, clarifying the factors a court will consider in determining whether a collateral warranty constitutes a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 and thus whether arbitration is a contractual right. Bowdery QC rightly noted that the fact that a collateral warranty is parasitic on a building contract does not mean that the warranty itself is a building contract.

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