Return to normality

One of the most anticipated judgments of the year (for construction lawyers) was handed down this week.

In a unanimous decision, the Supreme Court allowed the appeal in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23, and held that a collateral warranty (in the form generally used in construction projects at least) was not a construction contract for the purposes of section 104(1) of Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) and, therefore, the parties had no right to adjudicate (unless the collateral warranty expressly allowed it). As stated in the judgment, this was the general understanding of most construction lawyers (and those in the construction industry) before the Abbey Healthcare case and will be viewed by many as a return to normality and a common-sense decision.

Background

Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (Simply) was appointed to design and build a care home in London. The works were completed in 2016 and the building contract was later novated to Toppan Holdings Ltd (Toppan), the freeholder of the care home. Toppan granted a long lease of the care home to Abbey Healthcare (Mill Hill) Ltd (Abbey), who became the tenant of the care home. In 2018, Toppan discovered fire safety defects, with Toppan and Abbey arranging remedial works. In 2020, at the request of Toppan, Simply executed a collateral warranty in favour of Abbey (Abbey collateral warranty).

The relevant clause of the Abbey collateral warranty states, at clause 4.1(a), that the Contractor (Simply) warrants that it “has performed and will continue to perform diligently its obligations under the [building] Contract”.

Toppan and Abbey both commenced adjudications against Simply, under the novated building contract and the Abbey collateral warranty respectively, to recover the costs of the remedial works. Simply refused the request for both disputes to be dealt with in a single adjudication, and challenged the jurisdiction of the adjudicator on the basis that the Abbey collateral warranty was not a construction contract under the Construction Act 1996 and not subject to the statutory adjudication regime – the challenge was rejected. The same adjudicator was appointed in both adjudications, and he found Simply liable to pay damages to both Toppan and Abbey (although less than claimed in both cases).

Simply did not pay the sums due and both Toppan and Abbey issued proceedings in the Technology and Construction Court (TCC) to enforce the decisions by way of summary judgment.

TCC Decision

On 27 July 2021, the judge handed down judgment in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC), granting summary judgment in favour of Toppan, but dismissing the summary judgment application in respect of Abbey. The judge held that the Abbey collateral warranty was not a construction contract within the meaning of the Construction Act 1996 and, therefore, the adjudicator lacked jurisdiction.

Court of Appeal Decision

The Court of Appeal granted permission to appeal in late 2021 and the case was heard in 2022, with the Court of Appeal handing down judgment on 21 June 2022 in Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2021] EWCA Civ 823. The Court of Appeal allowed the appeal by a majority, deciding that a collateral warranty can be a construction contract, and that the Abbey collateral warranty was such a contract.

Despite the previous decision in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), the construction industry was surprised by the Court of Appeal’s decision and many described it as simply wrong (and not in line with the established position). In the judgment, the majority judges relied heavily on the “will continue to perform” and “warrants” wording, together with the language of the Construction Act 1996.

Supreme Court Decision

The Supreme Court granted Simply permission to appeal in late 2022 and the case was heard in April 2024, with the Supreme Court handing down judgment on 9 July 2024 in Abbey v Simply (see citation above). The Supreme Court unanimously allowed the appeal.

The parties agreed that the matter of whether the Abbey collateral warranty was a construction contract raised two issues for the court to consider:

1. Statutory interpretation: what is the meaning of an agreement “for … the carrying out of construction operations” in s104(1) of the Construction Act 1996?

That is whether, in principle, a collateral warranty can be a construction contract.

2. Contractual interpretation: how should the Abbey collateral warranty be construed and, so construed, is it an agreement “for…the carrying out of construction operations”?

That is applying the principle, once established, to the facts of the case.

In relation to the first issue, the court considered that this was dependent on the object or purpose of the collateral warranty – there needs to be a separate or distinct obligation to carry out construction operations for the beneficiary, not simply a promise to perform obligations owed to another party under the building contract. It disagreed with the opinion of Mr Justice Coulson in the Court of Appeal, who expressed the critical question as being whether the warranty was “in respect of” construction operations. Therefore, although a collateral warranty could still be a construction contract in theory, it follows that they will not generally be construction contracts.

In relation to the second issue, the court held that the Abbey collateral warranty was not a construction contract as it was not an agreement for the carrying out of construction operations. The court acknowledged that the relevant clause was a “promise to carry out the works”, but that this was an entirely derivative promise, that is a promise based on another source – the contractor is not promising anything that is not already promised to the employer under the building contract, and it does not in itself give rise to any construction operation.

The Supreme Court further noted that the language of the relevant clause in the Abbey collateral warranty had been critical to the majority decision in the Court of Appeal, where they considered that because the clause contained a warranty as to future performance, it could be a construction contract. The court disagreed with this approach - it placed too much weight on a few words, which was likely to lead to disputes about the niceties of language used and whether the clause in question was similar enough to the relevant clause in this case. The court considered that a clear dividing line would assist those in the construction industry to know where they stand and stated:

“a far more principled and workable approach is for the dividing line to be between collateral warranties which merely replicate undertakings given in the building contract and those which give rise to separate or distinct undertakings for the carrying out of construction operations.  That is a distinction which can be easily understood and applied.”

The court recognised that, by adopting such an approach, most collateral warranties would not be construction contracts. It also went on to consider that there were good reasons for concluding that collateral warranties were not intended to fall within the scope of the Construction Act 1996, for example that the payment provisions of the legislation were largely inapplicable to collateral warranties (with the consideration typically being nominal, such as the £1 in this case).

Finally, the Supreme Court also considered and overruled the earlier case of Parkwood, which was the first case to decide that a collateral warranty could potentially be a construction contract, and was relied on heavily by the Court of Appeal majority decision. The court refers to the pre-Parkwood “general understanding in the construction industry…that the 1996 Act did not apply to collateral warranties” and the lack of evidence produced to suggest otherwise. Based on the reasons given in this appeal, there was no alternative but to conclude that the judge’s decision in Parkwood was wrong.

Conclusion

This decision returns the position to the pre-Parkwood state of affairs, which will surely be a huge relief to most of the construction industry. The conclusion of Lord Hamblen sets out the position clearly:

“(1) A collateral warranty will be an agreement “for … the carrying out of construction operations” if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor’s obligation to do so under the building contract.

(2) A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement “for” the carrying out of construction operations.”

As Lord Hamblen states, it will “assist those in the construction industry, and those advising them, to know where they stand”, with a clear understanding that most collateral warranties will fall outside the remit of the Construction Act 1996. If parties wish to include a contractual right to adjudicate in their collateral warranty, this can be included in the drafting (and they could still refer to the provisions in the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649)), but the Construction Act 1996 will not imply a right to adjudicate.

Remember that each agreement is different and should be reviewed carefully – it is the starting position that has changed (not (usually) a construction contract), with the conclusion still to be determined.

Authors: Alyson Cowan, Corinna Whittle

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.