In depth

When is a collateral warranty not a construction contract?

Gateley Vinden

Collateral warranties are a fact of life in the construction industry. A warranty provides a contractual connection between two parties, primarily to allow a beneficiary of the warranty to sue in the event of a problem.

Thus, employers will usually insist on being provided with Collateral Warranties from key sub-contractors on a project, particularly if those key sub-contractors have been involved in providing design.

Section  104  of  the  Housing  Grants,  Construction  & Regeneration  Act 1996(“the Act”) defines construction contracts:

Construction contracts

  1. In this Part a “construction contract” means an agreement with a person for any of the following:

    (a) the carrying out of construction operations;

    (b) arranging for the carrying out of construction operations by   others,   whether   under   sub-contract   to   him   or otherwise;

    (c) providing his own labour, or the labour of others, for the carrying out of construction operations.
     
  2. References  in  this  Part  to  a construction  contract  include  an agreement:

    (a) to do architectural, design, or surveying work, or

    (b) to  provide  advice  on  building,  engineering,  interior  or exterior decoration or on the laying-out of landscape,in relation to construction operations.

If a contract is a “construction contract” as defined in Section 104 of the Act, there is an implied right to refer any disputes arising under such a contract to adjudication at any time.

In Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), Akenhead J held that the parties’ Collateral Warranty was a construction contract. Parkwood had a statutory right to refer its dispute with Laing to adjudication.

It appears that central to the court’s decision in this case was the use of particular words in the warranty which said that Laing "warrants, acknowledges and undertakes" various things including that it would carry out the works in accordance with the building contract. The court concluded that these words meant that the document was not just a warranty or guarantee of a past state-of-affairs, but it also applied to works that Laing had yet to do in respect of the underlying building contract.

However, in Toppan Holdings Limited and another v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC) (“the Toppan case”) the court provided further guidance on whether an adjudication can be brought under a Collateral Warranty. It now appears that the answer to this question is very much dependant not only on the specific wording of the warranty but also on the timing of when the warranty is executed. 

In the Toppan case, the court decided that a Collateral Warranty executed after completion of the works was not a construction contract, and accordingly the adjudicator did not have jurisdiction in one of the two disputes referred to him. The court declined to enforce one of the adjudicator’s decisions on which summary judgment was requested.

Background to the Toppan Case

Toppan Holdings Limited (“Toppan”) is the freehold owner of a luxury care home in London (“Care Home”) built by Simply Construct (UK) LLP (“Simply”). Following completion of the works, Simply’s building contract was novated to Toppan, which established a contractual link between those parties. The Care Home was let to the tenant operator, Abbey Healthcare (Mill Hill) Limited (“Abbey”). A collateral warranty to the benefit of the tenant was not procured from Simply at the time when Abbey commenced its lease.

After completion of the works and the opening of the Care Home, construction defects were identified which required remedial works. Certain losses from remedying the defects were incurred by Toppan as landlord and other losses were incurred by Abbey as tenant. This meant that both Toppan and Abbey required contractual links to pursue their respective losses. 

Because the building contract had been novated to Toppan, it had a direct recourse to adjudicate its dispute with Simply. However, there was no contractual link between Simply and Abbey. Toppan subsequently exercised its right to require Simply to enter into a Collateral Warranty to Abbey’s benefit.

Toppan and Abbey subsequently commenced parallel adjudications against Simply for recovery of their respective losses in separate sets of proceedings. The same adjudicator was appointed to deal with both disputes and decisions were issued in both sets of proceedings on 30 April 2021. 

Simply did not pay out on either of the decisions and the Claimants issued joint enforcement proceedings against Simply in the Technology and Construction Court (TCC). Simply defended the Abbey claim on grounds of jurisdiction, namely that the Collateral Warranty was not a construction contract within the meaning of the Act and so the right to adjudicate did not apply.

The Judgement 

The Court noted that although the Collateral Warranty was for past and future construction operations, it had not been executed prior to practical completion, but only following the discovery of latent defects which had been remedied. Whilst in Parkwood, Akenhead J had noted that:

  1. a construction contract may be retrospective in effect and still fall within the Act – it does not need to be “wholly or partly prospective”;
  2. the Act was intended by Parliament to confer a wide definition on “construction contracts” subject to the Act; and
  3. where the contract is for the “carrying out and completion” of construction operations, it will invariably fall under the Act.

These comments had been tempered by his statement that a pointer against a collateral warranty being a construction contract is that “all the works are completed and that the contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard”.

The timing of execution was key to the finding in this case that the Collateral Warranty was not a construction contract subject to the Act. Whilst express language had been included in respect of future construction operations, the Collateral Warranty could not relate to future construction operations as it was executed after practical completion.

Although the Collateral Warranty confirmed that Abbey acquired no greater rights under the Collateral Warranty than would be available under the building contract, this did not mean that equivalent rights extended to an entitlement to adjudicate. 

As a result, the court declined to enforce the adjudication decision in Abbey’s favour. 

Conclusion 

The Toppan case makes clear that the court will consider the timing of execution of the warranty as a crucial factor, as well as the document’s terms, in deciding whether the Collateral Warranty is a construction contract.  

If the warranty is executed where uncompleted works remain, this will be a “very strong pointer” that the agreement is one which falls under the Construction Act. But, if the warranty is executed after completion of the works, even in the case of latent defects which have been remedied, then the warranty is “unlikely” to be a construction contract.

I understand that Toppan has applied to appeal the judgment and so further guidance and clarity from the court is expected in the months ahead.

Clearly, the judgement in the Toppan case will have caused a degree of uncertainty for the beneficiaries of Collateral Warranties, legal advisers, and the construction industry as a whole. Until this uncertainty is resolved, one way or the other, it would appear that a sensible way forward would be to introduce a contractual right to adjudicate as an express term of the Collateral Warranty.

Contact the expert

This insight was written by Peter Vinden of Gateley Vinden. For more information, please visit www.gateleyvinden.com

To contact Peter directly, please see below. 
T:  01204 362888
M: 07801 021000
Peter.Vinden@gateleyvinden.com

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