Construction Law Update: When can a Dispute under a Collateral Warranty be referred for Statutory Adjudication?
The Construction Contracts Act 2013 provides an entitlement to a party to a “construction contract” to refer for adjudication any dispute relating to payment arising under the construction contract. When may a collateral warranty be deemed to be a construction contract for these purposes?
This was a question the Technology and Construction Court (TCC) in England and Wales recently looked at again in the case of Toppan Holdings Ltd v Abbey Healthcare (Mill Hill) Ltd and Simply Construct (UK) LLP. The issue has not yet come before the Irish courts. However, “construction contract” is defined in substantially similar terms in the legislation in both jurisdictions, and the TCC has built up a helpful body of authorities which may be persuasive to Irish Courts when considering this question.
The background was that Simply Construct was a contractor engaged by Sapphire Building Services Ltd to construct a care home. At the time of the proceedings, Sapphire Building Services Ltd was in voluntary liquidation.
Toppan and Abbey were sister companies who were, respectively, the freehold owner and the tenant / operator of the care home. Under the building contract, Simply was obliged, on notice from Toppan, to execute a collateral warranty in favour of Abbey.
Practical completion occurred in 2016 following which the building contract was novated to Toppan. In 2018, Toppan discovered fire safety defects and, ultimately, engaged another company to carry out remedial works, during which further defects were discovered and rectified.
After the rectification works were completed, Toppan sought specific performance of Simply’s obligation under the building contract to provide a collateral warranty for the benefit of Abbey, which was duly provided.
Disputes were referred for adjudication by both Toppan (under the building contract) and Abbey (under the collateral warranty). The adjudicator issued decisions requiring Simply to pay both parties substantial sums. Toppan and Abbey applied to Court to enforce the adjudicator’s decisions.
Was the collateral warranty a construction contract?
In the Abbey adjudication, Simply made a jurisdictional objection, which it reiterated in Court, namely that the collateral warranty was not a construction contract and therefore no entitlement to refer disputes to adjudication arose. The Court agreed with Simply.
The Court distinguished the facts here from those in the leading authority on this issue, Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd, in which a collateral warranty had been deemed to be a construction contract. In Parkwood, Laing warranted that it had 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 obtained a declaration that the collateral warranty was a construction contract so that it could initiate an adjudication. One of the guiding statements in Parkwood was that: “Usually and possibly invariably, where one party to a contract agrees to carry out and complete construction operations, it will be an agreement “for the carrying out of construction operations””. The wording in the collateral warranty in question contained this commitment.
In Toppan, however, the warranty was entered into some four years after practical completion of the works and some eight months after the remedial works had been completed. The Court considered that, whilst the wording of the warranty referred to both a past state of affairs and future performance and, whilst it was appropriate to construe the statutory definition of “construction contract” widely, the warranty was not an agreement for “the carrying out of construction operations”. It quoted the dicta in Parkwood: “A pointer against that may be that all the works were completed and that the contractor is simply warranting a post state of affairs as reaching a certain level, quality or standard”.
The Court considered that, by the time the warranty was executed, it was a warranty of a state of affairs past or future akin to a manufacturer’s product warranty. Applying commercial common sense, it could not see how a collateral warranty executed four years after practical completion and months after the remedial works were completed could be construed as an agreement for the carrying out of construction operations.
The Court in Toppan summed up the further guidance (in addition to the guidance in Parkwood) that could be gleaned as follows:
- where a contractor agrees to carry out uncompleted works in the future, that will be a very strong pointer that the collateral warranty is a construction contract and the parties will have a right to adjudicate any disputes arising under the collateral warranty, and
- where the works have already been completed and, as in this case, even latent defects have been remedied by other contractors, the collateral warranty is unlikely to be considered a construction contract and there will be no right to adjudicate.
As remarked by the Court, the collateral warranty has to be construed against the relevant factual background. If this points to there being an agreement for construction works to be carried out (even if the warranty has been executed after works have started), it seems more likely than not that the entitlement to adjudication will arise.
The authors would like to thank Colm Honan for his contribution to this briefing.