Construction Law Update: Court of Appeal in England & Wales finds that Collateral Warranty was a “Construction Contract” for the purposes of referring a dispute for Statutory Adjudication.
In Ireland, the Construction Contracts Act 2013 allows a party to a “construction contract” to refer for adjudication any dispute relating to a payment arising under the construction contract. The question has sometimes arisen as to whether ancillary documents such as collateral warranties can be “the construction contract” for these purposes.
Though the question of whether a collateral warranty is a construction contract for the purposes of adjudication has not yet arisen in Irish courts, it has been dealt with in England and Wales.
Given that the definition provided for “construction contract” in the UK’s Housing Grants, Construction and Regeneration Act 1996 (the “UK Act”) is substantially the same as in the Irish legislation, this Court of Appeal decision is of interest to practitioners in Ireland, where it could be persuasive authority. It is important to keep in mind however that, under the Construction Contracts Act 2013, an adjudicator in Ireland would have to be satisfied that the dispute referred for adjudication is a “dispute relating to payment” arising under a “construction contract”, whereas the UK Act provides an entitlement for referral of “disputes”. That said, the term “payment disputes” is generally being interpreted broadly in Ireland – most disputes in construction will come down to a form of payment.
The leading UK authority on this question is Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd (2013) in which the Court found that the collateral warranty in question was a construction contract for the purposes of statutory adjudication. Laing had warranted that it carried out and completed, and would carry out and complete, construction works in accordance with a building contract and, in the event of any breach of the warranty, would be liable for reasonable costs of repair, renewal and/or reinstatement of works. Parkwood complained about defects and was able to obtain a declaration from the Court that the collateral warranty was a construction contract for the purposes of initiating an adjudication.
Then, in 2021, a similar question arose in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP. We looked at this case in our previous briefing here. Essentially, the collateral warranty in question was provided four years after practical completion and eight months after completion of remedial works which had been paid for by Abbey, the tenant of the building. Abbey sought to recover its expenses by referring a dispute arising from the collateral warranty (its only contract with Simply) to an adjudicator. The adjudicator issued a decision awarding Abbey a substantial sum. However Abbey could not enforce that decision because the High Court did not consider the collateral warranty to be a “construction contract” for the purpose of the UK Act, meaning that the adjudicator had not had jurisdiction to decide the dispute.
Why did the High Court distinguish Toppan from the earlier case of Parkwood? The timing of the entry into the warranty, after the works, was critical to its decision. The Court in Toppan said that, whilst the wording of the warranty referred to both a past state of affairs and future performance and whilst “construction contract” should be interpreted widely, the warranty was not an agreement for “the carrying out of construction operations” but rather more akin to a warranty of a state of affairs, past or future, akin to a manufacturer’s product warranty.
Court of Appeal disagrees and finds a “construction contract” in Toppan
Abbey appealed to the Court of Appeal. The Court of Appeal (in a majority ruling) has now ruled in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP that the collateral warranty provided to Abbey is a construction contract. The Court considered three questions as follows.
Issue 1: Can a collateral warranty ever be a construction contract as defined under the statutory adjudication legislation?
The answer was yes. However, it will always depend on the wording of the warranty; so a warranty providing a simple fixed promise or guarantee in respect of a past state of affairs may not be a contract for the carrying out of construction operations as defined in the legislation. Couslon LJ elaborated several principles of relevance.
- The wording in the definition of “construction contracts” in the UK Act (“an agreement … for … the carrying out of construction contracts”) is a broad expression and has regularly been construed broadly. It had to be interpreted more broadly than just covering the traditional building contract which might be described as an agreement under which construction operations are carried out.
- Traditional views about what comprises a building contract or a collateral warranty are of limited value. 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 broad approach to interpreting the definition of “construction contract” is supported by other features of the UK legislation, particularly the objective of providing an effective dispute resolution system. The idea that a dispute between a contractor and an employer arising out of allegedly defective work would be heard by an adjudicator, whilst the same dispute between the employer and the warrantor would have to be litigated, was contrary to the intended purpose of the legislation which was to improve the payment regime and dispute resolution mechanisms available to the construction industry.
- There is no reason to limit the words of the statutory definition of “construction contract” to refer only to the primary building contract in any situation. It is not necessary to construe the expression by reference to whether or not the contract contains detailed obligations on the part of the beneficiary to make payments direct to the contractor. Provided the contract or warranty in question complies with section 109 of the UK Act it can be a construction contract. Section 109 of the UK Act provides basic requirements for the payment mechanism to be included in a construction contract. Interestingly, the Court considered that this could be met by a nominal consideration clause in a collateral warranty.
- A collateral warranty may, therefore, be capable of being a construction contract. Notably, Coulson LJ did indicate that 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”.
- Akenhead J’s reasoning at paragraph  of Parkwood was and remains good law.
Issue 2: If the answer to Issue 1 was yes, did the terms of the Abbey collateral warranty make it a construction contract?
The answer was yes. Coulson LJ noted that Simply warranted that it “has performed and will continue to perform diligently its obligations under the contract”. He considered that this warranted two things. First, it warranted the standard to which the construction operations would be carried out. Second, it warranted past and future performance of the construction operations. This was an ongoing promise for the future which made it “an agreement for the carrying out of construction operations” and that differentiated the Abbey collateral warranty from a product guarantee. The obligations under the collateral warranty were “inextricably linked to the carrying out of the relevant construction operations”.
Issue 3: If the answer to Issue 2 was yes, did the date on which the Abbey collateral warranty was executed make any difference?
Here Coulson LJ disagreed with the conclusion of the lower Court. The fact that the Abbey collateral warranty was executed at a time when the works were complete was of little relevance to its categorisation as a construction contract under the UK Act. The reason is that it was retrospective in effect. Per Northern & Shell PLC v John Laing Construction Ltd (2003), a cause of action could accrue at practical completion even if, at that date, the collateral warranty had not been executed. This provided certainty to both contractor and warranty holder. Because the Abbey collateral warranty contained future-facing obligations and was retrospective in effect, the date of execution was irrelevant.
Coulson LJ did not like the approach of making the categorisation of a collateral warranty dependent on its date of execution. He considered that it could lead to outcomes where a collateral warranty could be a construction contract for a construction operation completed on X date but not for construction operation completed on Y date. It could also encourage contractors not to sign collateral warranties until after they had finished as many of the construction operations as they could to avoid being the subject of a claim in adjudication.
Stuart-Smith LJ, in the minority, disagreed. He considered that the decision in Parkwood was correct, but that this case was different for several reasons including the wording in the respective warranties and because, in his view, the Abbey warranty did not include obligations that went beyond warranting past or future performance of obligations owed to others.
Jackson LJ agreed with Coulson LJ and also granted the appeal. Interestingly, somewhat in line with Stuart-Smith LJ, one of his considerations was that the warranty did contain a primary obligation, namely that the warrantor “has performed and will continue to perform diligently its obligations under the Contract”.
Endorsement of the benefits of Adjudication
Concluding, Coulson LJ considered that, unless the particular wording of a collateral warranty brings it outside a broad interpretation of the definition of construction contract in the UK Act, and/or unless it is “materially different” to the collateral warranty in Parkwood, then it is likely to be a “construction contract” for the purposes of adjudication. Coulson and Jackson LJJ were agreed that the date on which the warranty was executed did not prevent it from being a construction contract.
It was interesting to see that the purpose of the UK Act in providing speedy dispute resolution for the construction industry continues to feature in the broad interpretation given by the Courts in England & Wales to the terms of the UK Act. The Court pointed out that “as long as adjudication remains a popular and cost-effective dispute resolution process for those concerned with defective or delayed buildings, parties who are at risk of having to pay money as a result of an adjudicator’s decision will continue to argue, where they can, that the contract in question was not caught by the [UK Act], and therefore did not contain the implied adjudication machinery”.
The Court’s ruling in this appeal means that it remains a strong possibility that beneficiaries under collateral warranties will be able to avail of the entitlement to refer payment disputes for adjudication pursuant to the Construction Contracts Act 2013, should they ever find in themselves in circumstances of seeking to recover loss on foot of a collateral warranty provided in their favour.
The authors would like to thank Jane Reddin and Alexander Sheehan for their contribution to this briefing.