Collateral warranties – to be, or not to be, a construction contract?

Section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the Act) provides that a ‘construction contract’ is “an agreement for carrying out construction operations, arranging the carrying out of construction operations by others or providing labour or the labour of others for carrying out of construction operations, amounts to a construction contract.”

In 2013, the case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd considered this definition and established that a collateral warranty can be a construction contract within the meaning of Section 104(1) of the Act. It was not confirmed however that all collateral warranties would amount to a construction contract for the purposes of the Act, only that those collateral warranties which are drafted to include future works (e.g. remedial works) would fall within this definition.

The decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd was critical, as it meant Parkwood was entitled to rely on the benefits associated with being party to a ‘construction contract’; principally the right for Parkwood to refer its dispute with Laing to adjudication.

This issue was considered again by Martin Bowdery QC, who handed down his Judgment in Toppan Holdings Ltd and another v Simply Construct (UK) LLP last week.

The facts

The Defendant (Simply) had carried out works to a care home owned by the First Claimant (Toppan) and operated by the Second Claimant (Abbey). Practical Completion was achieved in the autumn of 2016 and in January 2019 Toppan notified Simply of certain defects which had appeared in the works, and requested that Simply return to rectify them. These defects were subsequently rectified by another company between September of that year and February 2020. In December 2020, some four years after practical completion of the works, and 8 months after the latent defects had been rectified, the parties entered into a collateral warranty under which Simply warranted to Abbey, inter alia, that “[it] has performed and will continue to perform diligently its obligations under the Contract”.

Disputes were referred to adjudication against Simply, one by Toppan to deal with the costs of the remedial works and the other by Abbey for lost trading profit. The same adjudicator awarded Toppan £1.07m and Abbey £908,000 respectively.

Simply resisted enforcement of the adjudicator’s decisions and sought a stay of execution. A key argument Simply sought to run was that the adjudicator did not have jurisdiction in respect of the claim by Abbey, on the basis that the collateral warranty was not a ‘construction contract’ for the purposes of the Act.

The decision

The court agreed with Simply. In reaching his decision, Martin Bowdery QC held that:

“I reach that conclusion because whilst construing the section widely I do not consider the agreement between Abbey and Simply was an agreement for “the carrying out of construction operations “. As Mr Justice Akenhead stated in Parkwood :

“A pointer against may be that all the works were completed and that the contractor is simply warrantying a past state of affairs as reaching a certain level, quality or standard.”

Mr Justice Akenhead accepted that not all collateral warranties will be agreements for the carrying out of construction operations but he seemed much exercised by the timing of the warranty being executed before practical completion so that it partly relates to future works.”

In contrast, the Simply collateral warranty was executed four years after PC, over 3 years after a settlement agreement had been entered into and 8 months after the remedial works had been completed. The only matter left outstanding after the settlement agreement was entered into was liability for any potential latent defects, and the only latent defects discovered after the date of the settlement agreement were remedied months before the execution of the collateral warranty.

As such, it was held that if there are uncompleted works to be completed in the future agreed as part of the collateral warranty, the collateral warranty is likely to be considered a construction contract. However, where works have already been completed, and no further works are anticipated, a collateral warranty is more akin to a product warranty and therefore unlikely to amount to a construction contract. In consequence, there will be no right to adjudicate.

Conclusion

The takeaway from the Simply case is to be careful when entering into a collateral warranty if the parties intend for the collateral warranty to amount to a construction contract and therefore provide the benefit of adjudication as a method of dispute resolution It seems that unless the collateral warranty makes reference to an obligation to complete future works, it is unlikely it will amount to a construction contract for the purposes of the Act. Beneficiaries may therefore wish to insist that collateral warranties are provided before practical completion of the works; so as to ensure that the requirement for ‘future obligations’ is satisfied.

For advice on collateral warranties, construction contracts and other construction specific documents please contact our team of specialist construction lawyers.