Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP

Construction – Contract – Collateral warranty – Housing Grants, Construction and Regeneration Act 1996 – Appellant contractor executing collateral warranty in favour of  respondent lessee – Respondent commencing adjudication proceedings in respect of latent defects – Court of Appeal finding collateral warranty was “construction contract” under section 104(1) of 1996 Act giving right to adjudication – Appellant appealing – Whether collateral warranty agreement for carrying out of construction operations – Appeal allowed The appellant was engaged to carry out the construction of a care home at Holders Hill Road, Mill Hill, London. In 2017, the respondent was granted a long lease of the property. In 2018, fire safety defects were discovered in the care home. The appellant was notified of the defects and asked to rectify them, which it failed to do. Therefore, the respondent engaged a third-party contractor to carry out the remedial work. In 2020, the freeholder requested the appellant execute a collateral warranty in favour of the respondent. The appellant subsequently executed a collateral warranty, under which it warranted that it “has performed and will continue to perform diligently its obligations under the contract”. The freeholder and the respondent both commenced adjudication proceedings in respect of the defects, and both were awarded sums against the appellant by the adjudicator. They both applied for summary judgment to enforce the adjudicator’s awards. As regards the respondent’s application, the appellant maintained the collateral warranty delivered to the respondent was not a construction contract under section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 so that the adjudicator had no jurisdiction. The judge agreed and dismissed the respondent’s application: [2021] EWHC 2110 (TCC). The Court of Appeal allowed the respondent’s appeal holding (by a majority) that the collateral warranty was a construction contract: [2022] EWCA Civ 823. The appellant appealed. Held: The appeal was allowed. (1) Under the Housing Grants, Construction and Regeneration Act 1996, there was a statutory right to refer to adjudication any disputes which arose under a “construction contract”.  It was common practice in the construction industry for “collateral warranties” to be provided to third parties, such as funders, purchasers and prospective tenants which gave them contractual rights against contractors should defects arise in respect of their works. The central issue was whether the collateral warranty given by the appellant to the respondent was a “construction contract” within the meaning of the 1996 Act so as to give rise to a right to adjudication and specifically whether it was an agreement “for… the carrying out of construction operations” under section 104(1)(a).   The question therefore was whether the object or purpose of the agreement was the carrying out of construction operations. The main object or purpose of such a warranty was to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work. Any obligation undertaken to the beneficiary to carry out construction operations derived from and mirrored the obligations already undertaken under the building contract. There was no distinct or separate obligation undertaken to the beneficiary and no promise to carry out any construction operation for the beneficiary; merely a promise to the beneficiary that the construction operations to be carried out for someone else under the building contract would be performed.    The disconnect between a collateral warranty which promised that the building contract would be performed and the carrying out of construction operations was highlighted by the fact the beneficiary had no control over how those operations were performed. If the building contract was terminated by the employer the beneficiary had no right to require the contractor to continue the works unless step-in rights were exercised. (2) An important indicator of whether there was an agreement for the carrying out of construction operations was whether there was a promise which regulated (at least in part) the ongoing carrying out of construction operations. However, a promise to the beneficiary that the contractor would perform its obligations under the building contract did not give the beneficiary any right to “regulate” the construction operations thereunder. Accordingly, a collateral warranty would be an agreement “for… the carrying out of construction operations” if it was an agreement by which the contractor undertook a contractual obligation to the beneficiary to carry out construction operations which was separate and distinct from the contractor’s obligation to do so under the building contract. A collateral warranty where the contractor was merely warranting its performance of obligations owed to the employer under the building contract would not be an agreement “for” the carrying out of construction operations. The decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC); [2013] 3 EGLR 6; [2013] EGILR was wrongly decided and had to be overruled. (3) It followed that the collateral warranty in the present case was not a construction contract. The promise made by the appellant that it “has performed and will continue to perform” its obligations under the building contract was an entirely derivative promise. The appellant was not thereby promising anything that was not already promised to the employer under the building contract. A collateral warranty had to be expressed in such terms because it needed to cover all the contractor’s obligations under the building contract and it might well be given while the works were still being carried out. It therefore needed to be drafted in terms which covered past and future performance.   (4) Adopting such an approach, it was likely that most collateral warranties would not be construction contracts but there were good reasons for concluding that, in general, such warranties were not intended to fall within the scope of the 1996 Act. It was notable how the various payment related provisions of the 1996 Act (sections 109 to 113) were inapplicable to collateral warranties since the consideration provided by the beneficiary was typically nominal. It followed that one of the twin purposes of the 1996 Act, improvement of cashflow, was not furthered by its application to collateral warranties.  Unless step-in rights were exercised the beneficiary had no construction related payment obligations. It was also in the interests of certainty that there was a dividing line which meant that collateral warranties were generally outside the 1996 Act rather than everything being dependent on the wording of the collateral warranty in issue. That would assist those in the construction industry, and those advising them, to know where they stood. Anneliese Day KC and Michele De Gregorio (instructed by DAC Beachcroft LLP, of Bristol) appeared for the appellant; Alexander Nissen KC and Tom Owen KC (instructed by Watson Farley & Williams LLP) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP