Reversing the findings of the court of first instance, in the recent case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP , the Court of Appeal decided that a collateral warranty is capable of comprising a construction contract and so subject to the statutory adjudication regime.
What is a collateral warranty?
In general terms, only the parties to an agreement can bring a contractual action to enforce the terms of that agreement. However, in construction projects, it is not unusual for third parties – including, for example funders, purchasers and tenants - to have a clear interest in the compliant completion of the works. If such third parties are not party to the underlying building contract, it is likely to be difficult for such third parties to recover any losses incurred due to breach of that building contract by the contractor.
This is where collateral warranties can assist.
Under a typical collateral warranty, the contractor warrants to the third party that it has fulfilled its obligations under the underlying building contract. In this sense, a collateral warranty acts as a ‘bridge’ by creating a contractual relationship between the third party and the contractor, thereby providing the third party with a right of recourse in the event of a breach of contract by the contractor.
Abbey -v- Simply Construct: Key facts
In June 2015, Sapphire Building Services Limited (“Sapphire”) entered into a building contract with Simply Construct (UK) LLP (“Simply Construct”) for the construction of a new care home. Under the terms of the building contract, Simply Construct was under an obligation to (amongst other things) enter into a collateral warranty with the Purchaser and/or Tenant, if requested by Sapphire.
Practical completion of the works was achieved in October 2016.
In June 2017, Sapphire novated the building contract to Toppan Holdings Limited (“Toppan”) and shortly after this, Toppan then granted a long lease of the newly constructed care home to Abbey Healthcare (Mill Hill) Limited (“Abbey”), as Tenant.
In June 2020 - at which point, defects in the works had been identified - Toppan requested that Simply Construct enter into a collateral warranty with Abbey. After Simply Construct failed to respond, Toppan was eventually forced to apply for an order for specific performance. After further delays, Simply Construct eventually entered into the requested warranty with Abbey on 23 October 2020 pursuant to which Simply Construct warranted that it (as contractor) "has performed and will continue to perform diligently its obligations under the contract".
First instance decision
Pursuant to the collateral warranty, in December 2020 Abbey commenced adjudication proceedings against Simply Construct in respect of defects in the works. Abbey was successful in those proceedings, and was awarded £908,495.98. After this sum went unpaid, Abbey commenced enforcement proceedings in the Technology and Construction Court (“TCC”).
During the enforcement proceedings  , Simply Construct argued that the collateral warranty was not a “construction contract” for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”).
Briefly, a “construction contract” is defined under the Construction Act as an agreement with a person “for the carrying out of construction operations”  which could include, for instance, construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings.
Under the Construction Act, a party to a construction contract may refer a dispute arising under such a contract to adjudication .
As the statutory right to adjudicate under the Construction Act only applies to construction contracts, Simply Construct maintained that the adjudicator made his decision without the necessary jurisdiction, and accordingly, that the adjudication decision should not be enforced.
The TCC agreed with Simply Construct, finding that the collateral warranty between the parties was not for “the carrying out of construction operations” and instead was merely “a warranty of a state of affairs past or future akin to a manufacturer’s product warranty”. A key consideration that led the TCC to this decision was that, at the time the collateral warranty was executed, Simply Construct had no further construction works to perform. The court concluded therefore that the warranty did not meet the requirements of the Construction Act. Accordingly, the adjudication award was not enforced.
Court of Appeal Judgment
Presumably dissatisfied with the TCC’s decision, Abbey commenced appellant proceedings.
The Court of Appeal issued its judgment on 21 June 2022. In a landmark decision, the Court affirmed the earlier decision of the Court in Parkwood , finding that, as a matter of principle, a collateral warranty may amount to a construction contract. The reasoning of the Court of Appeal included the following:
- The Construction Act defines a “construction contract” as “an agreement… for… the carrying out of construction operations”. There is no reason to limit such wording only to the primary building contract in any situation. Such words are broad and have regularly been construed as such.
- Traditional views about what comprises a building contract or a collateral warranty are of limited value. However, the importance of collateral warranties to the ultimate owners/occupiers who were not involved when the building contract was originally agreed is a relevant background factor.
- The idea that a dispute for defective works between an employer and contractor could sit in adjudication whereas the same dispute between employer and warrantor was only open to litigation was contrary to the intention of the Construction Act.
- The fact that a collateral warranty does not contain detailed remuneration obligations on the part of the beneficiary is not determinative as to whether such an agreement comprises a construction contract. Collateral warranties usually contain an agreement to pay a single amount, and often a nominal sum. Under the Construction Act, the parties are free to agree the amounts of any payments and so are entitled to agree payment of a nominal sum.
- A collateral warranty may, therefore, be capable of being a construction contract. What may be critical is whether the warranty is in respect of the ongoing carrying out of construction operations, on the one hand or is in respect of a past and static state of affairs, on the other.
The Court of Appeal went on to find that the collateral warranty in favour of Abbey was a warranty in respect of both the past and future performance of construction operations. It was “an agreement for the carrying out of construction operations” and therefore a construction contract. The appeal was therefore allowed.
This significant judgment provides much awaited clarity for beneficiaries of existing collateral warranties, and for the industry when drafting and negotiating such agreements. For beneficiaries under collateral warranties, this judgment confirms the availability of adjudication as an alternative to litigation, the latter of which which can be both costly and time consuming.
In addition, the ruling signals once more that the court will implement the widest possible interpretation of the Construction Act in order to give effect to its intention of protecting the invaluable right to adjudicate in construction disputes.
You can read the full judgment here.
This article was written by Jessica Evans and Kayla Urbanski.
  EWCA Civ 823
  EWHC 2665 (TCC)
 Section 104(1) of the Construction Act
 Section 108(1) of the Construction Act
 Parkwood Leisure Limited v Laing O'Rourke and West Limited  EWHC 2665 (TCC)
 Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP  EWCA Civ 823, paragraph 58(e).
“A collateral warranty may, therefore, be capable of being a construction contract for the purposes of s.104(1) [of the Construction Act]. What may be critical is whether the warranty is in respect of the ongoing carrying out of construction operations, on the one hand, or is in respect of a past and static state of affairs, on the other”  .