Stuart Pemble examines a recent Court of Appeal decision which has resolved one of the thorniest of issues dividing construction lawyers.
Key points
- Most collateral warranties containing ongoing obligations will be construction contracts
- This means parties to them can resolve disputes by adjudication
Ever since Akenhead J’s judgment in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), construction lawyers have disagreed as to its correctness.
The difference of opinion centred on the question of whether a collateral warranty granted by one of the contractors, sub-contractors or consultants involved in a construction project (in that case, the contractor) was, or could ever be, “an agreement for the carrying out of construction operations” (in other words, a construction contract) for the purposes of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996. The most significant consequence of Akenhead J’s analysis was that the parties to a warranty that is a construction contract can refer any dispute under it to adjudication rather than relying on more expensive and lengthy litigation or arbitration.
I was one of a number of commentators who felt Akenhead J was wrong (“An error of judgment”, www.egi.co.uk/legal/an-error-of-judgment). However, none of those commentators are Court of Appeal judges and, in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2022] EWCA Civ 823, Coulson (who gave the leading judgment) and Peter Jackson LJJ have proven us wrong by robustly upholding Akenhead J’s approach. So, and notwithstanding Stuart-Smith LJ’s dissenting judgment in Abbey, unless the issue is referred to the Supreme Court, Abbey will be the final word on the question for the foreseeable future.
The facts
A was the leaseholder of a care home which had been built by S between 2015 and 2016. S gave a collateral warranty to A in October 2020, just over four years after practical completion.
There were some fire safety defects at the care home which required remedial work. A commenced an adjudication against S and was awarded just under £910,000 in damages. When A applied to enforce that award, Martin Bowdery QC ([2021] EWHC 2110 (TCC)) held that the four-year delay between practical completion and the execution of the collateral warranty (as well as the fact that, by the time the warranty was provided, all of the remedial work had been completed by a different contractor) meant that the warranty was not a construction contract, because all of the construction operations necessary to make it so were complete at the time the warranty was granted. He relied on a passage in Parkwood where Akenhead J had suggested that a pointer against a collateral warranty being a construction contract was that “all the works were completed and that the contractor is simply warranting a past state of affairs as reaching a level, quality or standard”.
Can a collateral warranty ever be a construction contract?
Coulson LJ concluded it could:
- The phrase “an agreement… for the carrying out of construction operations” was to be interpreted broadly, as was the case in Parkwood.
- Traditional views of what comprises a construction contract on the one hand, or a warranty collateral to a construction contract on the other, are of limited value.
- Section 104(5) of the 1996 Act (which refers to an agreement “related to” construction operations supports this broad interpretation, as does the fact that one of the statutory purposes of the Act was to provide a speedy and effective dispute resolution process through adjudication. It would be contrary to that purpose if an employer and contractor could take advantage of adjudication to resolve their dispute, but a warranty beneficiary and contractor would have to resolve their dispute (arising from the same facts) through lengthier and more expensive court proceedings.
- There is no reason to limit section 104(1) to the primary construction contract in any situation (automatically excluding collateral warranties). Nor is it relevant whether or not the warranty contains detailed provisions regarding payment (reforming payment being another primary statutory purpose of the 1996 Act). The actual payment requirements set out in section 109 of the Act can be satisfied by the common provision in warranties that the beneficiary pays a nominal amount to the warranty provider. And, in any event, section 109(3) applies payment provisions into non-compliant contracts if those payment requirements are not met.
- Akenhead J’s analysis in Parkwood was, and remains, good law.
A collateral warranty can therefore be a construction contract, especially if it was “in respect of the ongoing carrying out of construction operations” as opposed to “a past or static state of affairs”.
Was this warranty a construction contract?
Coulson LJ had no difficulty in deciding that a warranty that S “has performed and will continue to perform diligently its obligations under the contract” was, following the approach in Parkwood, a construction contract. The lack of the words “acknowledges” or “undertakes” from that warranty (both were used in Parkwood) made no difference.
Did the delay make a difference?
Coulson LJ, while acknowledging that this was the ratio of the decision at first instance, had no trouble dismissing the effect of the delay. This was partly because S’s barrister conceded the point in the Court of Appeal, but also because the delay was irrelevant given the retrospective effect of the words used. Coulson LJ took comfort from O’Farrell J’s decision in Swansea Stadium Management Co Ltd v Swansea City and County Council and another [2018] EWHC 2192 (TCC); [2018] PLSCS 155, where the cause of action for a claim for defective work brought by a warranty beneficiary was held to have accrued at practical completion even though the warranty had not been entered into at that time.
As a matter of practice, the majority of collateral warranties in construction projects, especially if they contain ongoing obligations, will be construction contracts for the purposes of the 1996 Act and the parties can adjudicate disputes under them.
Stuart Pemble is a partner at Mills & Reeve
