Collateral Warranties: So Timing Really Is Everything…
Last month, in the case of Toppan Holdings Ltd and another v Simply Construct (UK) LLP  EWHC 2110, the Technology and Construction Court (“TCC”) took a different view on whether collateral warranties should be seen as “construction contracts” for the purposes of the Construction Act (the Housing Grants Construction and Regeneration Act 1996) (the “Construction Act”).
As a reminder, section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the Act) provides that a ‘construction contract’ is “an agreement for carrying out construction operations, arranging the carrying out of construction operations by others or providing labour or the labour of others for carrying out of construction operations, amounts to a construction contract.”
In the earlier case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd from back in 2013, Akenhead J held that the wording in the collateral warranty in which the contractor “warrants, acknowledges and undertakes” to carry out the works in accordance with the building contract was an active obligation and not just a guarantee of existing works. The collateral warranty was therefore found to be a construction contract and therefore the beneficiary had a statutory right to refer its dispute with the contractor to adjudication.
However, in the Toppan case, Martin Bowdery QC came to the opposite view.
The case related to the construction of Aarandale Manor Luxury Care Home in Mill Hill, north London, and the substantial fire-safety defects that came to light after completion. The freehold owner/employer (Toppan) and the leaseholder/beneficiary (Abbey Healthcare) launched a £2m adjudication against the main contractor (Simply Construct) and won.
On applying to the High Court for enforcement of the adjudicator’s award however this was overturned: Martin Bowdery QC struck out the leaseholder’s award on the basis that the parties’ collateral warranty (on which the leaseholder’s claim was based, not being a party to the building contract) was not a construction contract and there was, therefore, no right to adjudicate the dispute. The beneficiary leaseholder would therefore instead have to launch a civil court case if it wanted to make a claim.
Whilst the wording of the obligations in the warranty was indeed narrower than in Parkwood, the case actually turned on the timing of when the warranty was executed. In Toppan, the warranty was executed around four years after practical completion and months after rectification of defects, in stark contrast to the ongoing works in Parkwood. Martin Bowdery QC stated that:
“… by the time the [collateral warranty] was executed, it was a warranty of a state of affairs past or future akin to a manufacturer’s product warranty. Accordingly, I find that the collateral warranty is not a construction contract for the purposes of the Act. There was no contractual right to adjudicate by section 108(5) of the Act and the implied terms of the Scheme.”
Setting out further explanation, he also stated that:
“- 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.
– where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate.”
We understand that Abbey Healthcare plans to appeal the court’s decision. However, in the meantime, this creates quite a dichotomy between how warranties will be interpreted, and indeed drafted, moving forward. It appears that unless the collateral warranty includes an obligation to complete future works, it is unlikely it will amount to a construction contract for the purposes of the Act. Beneficiaries are likely to therefore insist that collateral warranties are provided before practical completion so as to see that this requirement is satisfied; or add adjudication provisions in the collateral warranty. However, there is likely to be some resistance from contractors and subcontractors, who will need some persuasion to sign collateral warranties on live projects (unless they contain step-in rights) as they may not want to attract adjudication rights instead preferring to wait until the project has completed.
If you would like advice on which type of warranties you have on your project, or indeed have queries on the warranties you are being asked to sign, please do not hesitate to get in touch.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: email@example.com