News & Events
In his latest article, Martin Collingwood reflects on the recent decision of the Court of Appeal in Abbey Healthcare (Mill Hill) Limited -v- Simply Construct (UK) LLP concerning the question of whether a collateral warranty could be a “construction contract” for the purposes of referring a dispute to statutory adjudication under the Housing Grants Construction and Regeneration Act 1996.
Collateral warranties are commonly requested in development projects for the benefit of third parties who do not have a direct contractual relationship with the contractor, consultants and subcontractors carrying out the scheme.
The significance of a collateral warranty being seen as a “construction contract” for the purposes of the above legislation is that construction contracts have an implied right to refer disputes to statutory adjudication under the legislation, whether or not they contain express adjudication provisions.
Statutory adjudication under the Act provides a relatively quick method of resolving disputes which leads to a decision that is binding on an interim basis; i.e. it must be complied with unless and until a decision contrary to it is reached in whatever is the final dispute resolution method under the Construction Contract; be that litigation or arbitration.
By way of background, the concept of statutory adjudication was introduced as a mandatory right in construction contracts, essentially as a cashflow mechanism, to overcome the practice that had arisen of paying parties withholding money from payees on, sometimes, spurious grounds in circumstances where the only option of the payee to recover that money was to proceed to either arbitration or litigation, whichever method of dispute resolution was referred to in the relevant contract or appointment. Clearly, this was a lengthy and costly exercise, for which many smaller contractors could not contemplate going forward with.
Although the decision in Abbey Healthcare has caused the significant degree of comments, the question of whether a collateral warranty could be a construction contract has previously been addressed in Parkwood Leisure Limited -v- Laing O’Rourke Wales and West Limited in 2013. In this case, the court found that the collateral warranty in question was a construction contract for the purposes of statutory adjudication, given that the contractor had warranted that it carried out, completed and, importantly, would carry out and complete construction works in accordance with the building contract.
In 2021, a similar question arose in Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited -v- Simply Construct (UK) LLP in circumstances where the collateral warranty 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. The matter proceeded to adjudication, but Abbey could not enforce the decision of the adjudicator because the High Court did not consider the collateral warranty to be “a construction contract” for the purposes of the Act, meaning that the adjudicator had not had jurisdiction to decide the dispute.
The timing of the entry into the warranty after the works was critical to its decision and the court 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 was more akin to a warranty of a state of affairs, past or future, akin to a manufacturer’s product warranty.
Abbey appealed to the Court of Appeal and in the current case, the Court of Appeal, by majority, held that the collateral warranty provided to Abbey was a construction contract.
In doing so, it considered three questions as follows:-
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 upon the wording of the warranty.
The wording in the definition of “construction contracts” for the purpose of the Act, i.e. “an agreement… for….the carrying out of construction operations” is a broad expression and has to be interpreted broadly. Traditional views about what comprises a building contract or a collateral warranty were of limited value.
The broad approach of interpreting the definition of construction contracts is supported by other features of the Act, particularly the objective of providing a swift, cost effective dispute resolution system – adjudication is possibly over and done within 35 days from start to finish – subject to agreed extensions.
The court felt there was no reason to limit the words of the statutory definition of “construction contracts” to refer only to the primary building contract in any situation and held that, provided the contract or warranty in question complies with the requirements of Section 109 of the Act, it can be a construction contract. Interestingly, the court held that the basic requirements in Section 109 were a payment mechanism had to be included in the contract could be met by the nominal consideration often expressed in a collateral warranty, i.e. “in consideration of the payment of £1, receipt whereof is hereby acknowledged.”. There was no need for a payment mechanism. Question whether this might apply also to the concept of the “peppercorn” or even the legal fiction that execution as a deed is good consideration?
The majority held that what may be critical is whether the warranty is in respect of the ongoing carrying out of construction operations or, on the other hand, is in respect of a past and static state of affairs.
2. If the answer to issue one was yes, did the terms of the Abbey Collateral Warranty make it a construction contract?
The court, by majority, said yes, because Simply warranted that it “has performed and will continue to perform diligently its obligations under the contract”. The court considered that Simply warranted the standard to which the construction operations would be carried out and it warranted past and future performance and therefore this was an ongoing promise for the future, which made it an agreement for the carrying out of construction operations.
3. If the answer to issue 2 was yes, did the date on which the collateral warranty was executed make any difference?
The court said it didn’t and the fact that it was executed at a time when the works were complete was of little relevance to the categorisation as a construction contract under the Act.
The court concluded that unless the particular wording of a collateral warranty brings it outside a broad interpretation of the definition of a construction contract in the 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.
What did we learn from the judgment?
The important takeaway from the judgment is that all collateral warranties with forward facing obligations will now be a construction contract, even if they are executed after the works or services are performed and hence attract the potential of adjudication.
The judgment brings some long awaited clarity and certainty that collateral warranties can be deemed construction contracts for the purposes of the Act and therefore the statutory right to adjudication will apply.
An important consideration of the statutory right to adjudication, however, is that it does not permit the recovery of legal and experts’ costs incurred in the pursuit of the adjudication, although the adjudicator can allocate his fees between the parties on the normal costs principles of the loser pays. There are however other adjudication rules which do permit such recovery.
The Parkwood case and the “Abbey Healthcare” case mark an important point of distinction between collateral warranties and third-party rights granted under the Contract (Rights of Third Parties) Act 1999. In Hurley Palmer Flatt -v- Barclays Bank. The Technology and Construction Court found that the beneficiary of third-party rights under a construction contract could not take advantage of the adjudication’s provisions in the construction contract, whether they be express or implied by the Act. A separate right of adjudication would need to be agreed in favour of the third party, which is rarely done.
Question marks also arise as to whether other collateral securities to construction contracts, for example, parent company guarantees, may also find themselves unwittingly found to be construction contracts and attract the right to adjudication.
The fundamental question in any case is whether the beneficiary is prepared to contemplate the concept of adjudication which, while quicker and cheaper than litigation, provides an interim binding decision which can be reversed or completely overturned in the final dispute resolution mechanism in the contract, be that arbitration or litigation.
Quite often as well in adjudication, the situation can be found that the “winner” finds that the “loser” does not comply with the adjudicator’s decision, although it is intended that they do so on an interim basis, leaving the “winner” with the right to issue court proceedings to enforce the adjudicator’s award, thereby incurring additional time and cost.
In addition, in adjudication, there is nothing to prevent a party in receipt of a notice of adjudication commencing its own adjudication to determine relevant issues provided it does not trespass upon the scope of disputes in the initial adjudication.
As you can see, the process is far from straightforward and in circumstances where there are cross-adjudications, say, for example, a contractor seeks money and is awarded an amount which it seeks to enforce, but the employer seeks a true value of the account, the courts have held that if the employer loses the contractor’s adjudication, it must pay the adjudicator’s award and cannot withhold payment pending result of its own adjudication.
It is also important not to lose sight of the potential impact of the Building Safety Act 2022 and the increased limitation periods which that legislation brought into force on 28 June 2022.