On 9 July, the Supreme Court ruled on the case of Abbey Healthcare Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) in favour of the Appellant (Simply). This ruling confirmed the decision of Martin Bowdery QC, who handed down his initial judgement in 2021 (for more information on this case see our earlier article here), and has settled the long-running dispute as to whether the collateral warranty provided by Simply to Abbey was a ‘construction contract’ benefitting from the statutory right to adjudicate.
Following the initial ruling by Martin Bowdery QC, the case was taken to the Court of Appeal in 2021, where the majority ruled against the initial decision.
However, Lord Hamblin, sitting in the Supreme Court, considered the judgements made in the Court of Appeal, and agreed with the dissenting judge, Stuart-Smith LJ. He determined : the collateral warranty to Abbey was not a construction contract.
In reaching this decision, Lord Hamblin first considered the meaning of ‘an agreement for the provision of construction operations’.
In addressing this question, Lord Hamblin agreed with the criticism levied at earlier judgments which applied a broad approach to the interpretation of the word ‘for.’ Instead, Lord Hamblin agreed with Stuart-Smith LJ that the natural meaning of the word should be applied. Namely, it is “a word indicating and followed by the purpose of the agreement”.
Applying this approach, Lord Hamblin concluded:
“As a generality, it is difficult to see how the object or purpose of a collateral warranty is the carrying out of construction operations. The main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work.”
In reaching this decision, Lord Hamblin noted that:
- often collateral warranties simply refer to the underlying obligations in the building contract, and do not contain separate and distinct construction operations owed direct to the beneficiary; and
- beneficiaries have no rights to control or regulate how a contractor will comply with his obligation to carry out those construction operations.
Lord Hamblin went on to consider the wording of the collateral warranty provided to Abbey and if its construction resulted in it being an agreement “for… the carrying out of construction operations.” In answering this question, he concluded that the wording of the collateral warranty to Abbey could not constitute an agreement for the provision of construction obligations, since it was limited to a warranty by Simply of past performance of its construction obligations under the building contract.
In making his judgement, Lord Hamblin agreed with Ms Day KCs submission for the Appellant that “a far more principled 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.” He concluded that a collateral warranty could only constitute an agreement for the provision 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.” The earlier decision in Parkwood Leisure was overruled.
Whilst some may be surprised with this decision, Lord Hamblin highlights that in fact many regarded the decision in Parkwood Leisure as a surprise. Instead, he suggests that the present decision is simply reflective of the themes of prompt payment and swift resolution of disputes which underpin the statutory regime applicable to construction contracts. Given that there is typically no requirement for payment under a collateral warranty, other than the nominal consideration, prompt payment is not a concern. As such, Lord Hamblin suggests that it was not parliament’s intention for such contracts to be caught within the ambit of the Act.
Nevertheless, the decision confirms:
- Where parties intend for a collateral warranty to constitute a ‘construction contract’ this is still possible provided that the warranty contains construction operations in favour of the beneficiary which do not simply derive from the provisions of the underlying contract
- The parties can ‘contract in’ to the right to adjudicate, even in warranties which are limited to promises by the contractor of performance of his construction obligations.
As always, precise wording is key. Whilst, absent the right to adjudicate, this may now pave the way for third party rights to be used more widely, for advice on collateral warranties, construction contracts and other construction specific documents please contact our team of specialist construction lawyers.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2024.