The Supreme Court ruled today that a collateral warranty between a leaseholder and a contractor does not count as a construction contract.
The case is significant because disputes arising from a construction contract automatically go to adjudication, which is faster, cheaper and more private than courtroom litigation.
The court also ruled that most collateral warranties won’t qualify as construction contracts, meaning that any dispute brought under them risks going into extensive, protracted litigation, rather than cheaper, faster adjudication.
Collateral warranties are common in the construction industry. They give third parties a right to take legal action over defective construction work.
However, after examining the statutes involved in the case, the court said these warranties will usually just be promises to carry out obligations owed to someone else, under a building contract.
“It is an entirely derivative promise, and the contractor is not thereby promising anything that is not already owed under the building contract,” said Supreme Court judge Lord Hamblen, giving judgment.
Mills & Reeve partner Stuart Pemble said: “The Supreme Court’s decision is a sensible and pragmatic one. The court decided that most collateral warranties are not, as a matter of statutory interpretation, agreements for the carrying out of construction operations… The only exception will be where there is an express (and separate) obligation to carry out the operations for the beneficiary in the warranty.”
He added: “Pleasingly, the Supreme Court acknowledged a point argued by lots of practising lawyers that warranties were never intended to be caught by the scope of the Housing Grants, Construction and Regeneration Act 1996, not least because the provisions regarding payment and cash flow are not relevant to collateral warranties.”
The dispute at the centre of today’s judgement is between construction company Simply Construct (UK) LLP and care home provider Abbey Healthcare.
Simply Construct built the Aarandale Manor care home, in the north-west London suburb of Mill Hill, in 2016. In 2017, Abbey took on the long lease, and in 2018 fire safety defects were discovered which were rectified by another contractor.
According to an earlier ruling in the case ([2021] EWHC 2110 (TCC)), after pressure from the freeholder Simply entered into a collateral warranty agreement with Abbey, agreeing that it “has performed and will continue to perform” all of its obligations under the original building contract.
Abbey and the freeholder then took Simply to adjudication to cover the costs of the repairs and were awarded close to £1m. Simply refused to pay, saying that the adjudicator could rule on construction contracts but not warranties, so had no jurisdiction.
This led to further litigation and in March 2022 the Court of Appeal agreed that the adjudicator did have jurisdiction as the warranty counted as a construction contract under the terms of the Housing Grants, Construction and Regeneration Act 1996 ([2022] EWCA Civ 823).
Simply appealed the case to the Supreme Court, and today the five-judge panel unanimously backed its argument and overturned the Court of Appeal ruling.
Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP
[2024] UKSC 23
Supreme Court (Lord Briggs, Lord Hamblen, Lady Rose, Lord Richards, Lady Simler) 9 July 2024
