The Court of Appeal confirms a collateral warranty can be a construction contract for the purposes of the Housing Grants (Construction & Regeneration) Act 1996 (the “Act”)

Brief Background

In summary, Simply Construct started to carry out building works in respect of a care home in 2015 pursuant to a building contract, which was later novated to the freeholder, Toppan Holdings Limited (“Toppan”) as the other party. Abbey Healthcare (Mill Hill) Limited (“Abbey”) was granted a long leasehold of the care home. Fire safety defects were discovered in the care home in or around 2018 and a third party carried out remedial works, which were practically complete on or around 14 February 2020.

 

The Abbey Collateral Warranty

On or around 23 September 2020 Simply Construct executed and delivered a collateral warranty to Abbey, pursuant to the terms of the building contract. Toppan and Abbey executed the same document on 23 October 2020. The Abbey Collateral Warranty (“ACW”) contained, amongst others, a term that “The Contractor warrants that: the Contractor has performed and will continue to perform diligently its obligations under the Contract”, the “Contract” being the building contract.

 

Previous Proceedings

Toppan and Abbey separately brought adjudication proceedings against Simply Construct in relation to the fire safety defects. The adjudicator awarded Abbey just over £900,000. Abbey applied to the High Court for summary judgment to enforce the adjudicator’s decision. This was refused by the TCC. The TCC concluded that because the ACW had been executed some time after the construction works had been completed, it could not be construed as an agreement for the “carrying out of construction operations”. The TCC held the ACW was not a construction contract in accordance with s104(1) of the Act and so there was no right to adjudicate. Abbey appealed this decision.

 

The Appeal

The Appeal was really about whether a collateral warranty and in particular, the ACW, is a construction contract in accordance with the Act and whether therefore the adjudication machinery in the Act is implied into it.

There were three issues to be decided in the appeal. The first issue was a question of whether a collateral warranty can ever be a construction contract as defined by s104(1) of the Act. All three of the Lord Justices were in agreement that it could be, depending on the wording of the warranty in question. LJ Coulson stated that a warranty which provides a simple fixed promise or guarantee in respect of a past state of affairs may not be a construction contract, whereas a warranty that the contractor was carrying out and would continue to carry out construction operations to a specified standard may well be a construction contract in accordance with s104(1) of the Act as it is a promise which regulates, at least in part, the ongoing carrying out of construction operations.

The second issue was then related specifically to the terms of the ACW and whether those terms made it a construction contract as defined by s104(1) of the Act. LJ Coulson and LJ Peter Jackson were in agreement that the ACW was such a construction contract, whereas LJ Stuart Smith disagreed. LJ Stuart Smith’s dissenting judgment is not considered further for the purposes of this article. LJ Coulson was of the view that Simply Construct was warranting that they had not only carried out construction operations in accordance with the building contract but that they would continue so to carry out the construction operations in the future. He viewed this as a warranty as to future performance, comprising separately actionable obligations to the building contract. He therefore concluded that this was a construction contract under the Act.

The third and final issue was a question as to whether the date on which the ACW was executed made any difference. The three Lord Justices agreed that the judge in the TCC was wrong to find that the date of the execution of the warranty was determinative. LJ Coulson was of the view that as the ACW contained future facing obligations and was retrospective in effect, the date on which the ACW was executed was irrelevant. LJ Peter Jackson was of the view that the judge in the TCC had in error laid decisive emphasis on the fact that the works had been completed without also focusing on the fact that the warranty did not simply concern a past state of affairs.

The appeal was therefore allowed and Abbey was allowed to enforce the adjudicator’s decision through the courts.

 

The Right to Adjudicate

LJ Coulson expressed the view that the present case was what the Act envisaged in that the same underlying dispute about the same defective work, arising under two different contracts, were decided in parallel by the same adjudicator, ensuring access to this swift and inexpensive procedure and consistency of approach and outcome. LJ Peter Jackson and LJ Stuart Smith warned that whatever procedural advantage adjudication brings, this cannot affect the meaning of s104(1) of the Act, nor justify an expansion of the statutory right to adjudicate, nor justify a strained interpretation of a contract so as to conclude that it is a construction contract.

 

Learning Point

The precise terms of any collateral warranty will be very important in determining if it is a construction contract falling within the ambit of the Act. Express contractual terms to this effect may avoid any uncertainty where adjudication is considered appropriate. In the absence of any express adjudication provision, it would ultimately be for the court to decide whether the wording of the warranty brings it within the ambit of the Act or not.