Collateral Warranties and the Construction Contracts Act 2013
Collateral Warranties and the Construction Contracts Act 2013
In the recent decision of Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP, the English Court of Appeal has provided further guidance on whether a collateral warranty constitutes a 'construction contract.' If a collateral warranty is a construction contract then disputes thereunder come within the adjudication regime. The decision was eagerly awaited not only because previous authorities on the issue reached different conclusions but also because Coulson J (who delivered the leading judgment) was previously of the view that 'if the underlying contract was a construction contract, it [made] commercial sense for any parasitic warranties to be treated in the same way.'
The decision may be of assistance to the Irish construction sector and may broaden the scope for the use of adjudication because the definition of a construction contract under the legislation in England & Wales is very similar to the definition of a construction contract under the legislation in Ireland. In England & Wales a construction contract is defined as 'an agreement … for … the carrying out of construction operations,' while in Ireland a construction contract is defined as 'an agreement … for ... carrying out construction operations by the executing party.' The executing party is a contractor or sub-contractor. Both in Ireland, England and Wales agreements for architectural design and surveying work are construction contracts. If the court in Ireland were to follow Abbey, parties who previously may have been reluctant to pursue relief in the courts, because of the costs involved may now have an option to seek relief in a cost effective adjudication process.
The development of Case law on Collateral Warranties and Adjudication in England and Wales
In 2013, Akenhead J delivered the first judgment on the topic in Parkwood Leisure Ltd v Laing O'Rourke, finding that the collateral warranty in question was a construction contract. In reaching that conclusion, emphasis was placed on the wording in the warranty. A particularly important indicator of whether a collateral warranty is a construction contract is where one party agrees to 'carry out and complete' the works. To 'carry out and complete' the works relates to past and future obligations and is more than merely warranting a past state of affairs.
Following Parkwood it was thought that the law on whether a collateral warranty was a construction contract was fairly well settled. However, in 2021, Toppan Holdings Ltd, Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP considered that the timing at which the warranty was executed was central, casting doubt on whether many collateral warranties could be adjudicated upon. Abbey was the tenant of a care home constructed by Simply Construct who had provided a collateral warranty in Abbey's favour. Simply Construct warranted that it had 'performed and will continue to perform' its obligations under the contract. The construction was defective and Abbey got an adjudicator's decision in its favour. Simply Construct did not comply with the adjudicator's decision arguing that the warranty was not a construction contract within the definition in the legislation, thus depriving the adjudicator of jurisdiction.
At enforcement proceedings, the court agreed with Simply Construct and held that Abbey's collateral warranty was not a construction contract because it was executed some four years after the works were completed. As such, the contractor was not carrying out construction operations but simply warranting a past state of affairs, akin to a product guarantee. The court indicated that a contractor warranting to carry out uncompleted works in the future is a very strong pointer that the collateral warranty is a construction contract and can be adjudicated upon; whereas, if the works are already completed the warranty is unlikely to be a construction contract and there will be no right to adjudicate.
Abbey successfully appealed the decision to the Court of Appeal. The Court of Appeal held that the collateral warranty was a construction contract. Coulson J delivered the leading judgment and held that the timing of execution of the collateral warranty was of little relevance to its categorisation as a construction contract. The warranty in question made a promise as to the past standard of work and the future carrying out of work to that standard. As such, the warranty regulated the ongoing carrying out of future work. It would be counter-intuitive if, for example, the warranty was a construction contract for one operation (because it was executed before that operation was completed), but not a construction contract for another operation (because it was executed after that operation was completed). Furthermore, if the timing of executing the warranty was important, this would encourage contractors not to execute warranties until after the works were completed, thus avoiding a claim under the adjudication regime.
Implications of Abbey for the Irish construction sector:
The issue of whether a collateral warranty is a construction contract has not been tested before the Irish courts and much will depend on the wording of the warranty. Although, not binding in Ireland, Abbey is important for the following reasons:
If similar reasoning were followed in Ireland, the definition of a construction contract under the Irish legislation may include collateral warranties if there is an obligation in relation to carrying out work. As such, the definition of a construction contract may be broader than many originally envisaged.
If a collateral warranty is a construction contract, then a payment dispute arising thereunder may be adjudicated upon.
It may also open the door for defects claims to be adjudicated upon under a warranty. Say for example, that a contractor has constructed works defectively and a warranty is in place with a tenant warranting that the contractor will 'carry out and complete' the works to a given standard. If the tenant demands payment under the warranty for the defective works, would this constitute a payment dispute under the warranty, which could be adjudicated upon? It would seem, following Abbey, that it might.
Drafters of collateral warranties should be aware that where a collateral warranty contains a provision 'to carry out and complete' the works, this has the potential to trigger the adjudication regime.