Supreme Court rules collateral warranty is not a construction contract
The Supreme Court of the United Kingdom has handed down a significant judgment for the construction industry earlier today (9 July 2024). The central issue was whether a collateral warranty falls under the definition of a "construction contract" under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act), thus enabling disputes under a collateral warranty to be referred to adjudication. The Court of Appeal held it did, which the Supreme Court has overturned.
This means collateral warranties are typically not to be treated as construction contracts under the Construction Act and cannot be referred to adjudication.
The factual background involves Simply Construct, the Contractor, being engaged by Sapphire Building Services Ltd, the Employer, to design and build a 65-bedroom care home. The Building Contract included a clause requiring Simply Construct to execute a collateral warranty for the benefit of tenants. Subsequently, defects were discovered in the care home which necessitated remedial works which were funded by Abbey Healthcare, the Tenant. A collateral warranty was given by Simply Construct to Abbey Healthcare in this regard.
Initially, the Technology and Construction Court (TCC) ruled that the collateral warranty was not a construction contract. However, the Court of Appeal (CA) reversed this decision by majority, holding that the collateral warranty could be considered a construction contract under the Construction Act, regularising the performance of ongoing work to be carried out. Simply Construct then appealed to the Supreme Court.
The Supreme Court examined the statutory interpretation of what constitutes an agreement "for the carrying out of construction operations" under section 104(1) of the Construction Act. The Supreme Court, agreeing with the dissenting judgment in the CA, ruled that the key is whether the particular agreement involves (i) a “direct contractual obligation” (ii) “for” the carrying out of construction operations.
In its judgment, the Supreme Court concluded that collateral warranties which merely warrant performance of obligations under a building contract do not constitute “construction contracts” under the Construction Act. The Court emphasised that for a collateral warranty to qualify as a construction contract, it must entail a separate and distinct obligation to carry out construction operations for the beneficiary. As a result, the Supreme Court allowed Simply Construct’s appeal, ruling that the Abbey Collateral Warranty did not meet the criteria and was therefore excluded from the adjudication provisions of the Construction Act.
This decision also addressed the precedent set by Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), effectively overruling it by clarifying that most collateral warranties do not fall within the scope of the Construction Act unless they bear distinct obligations for construction operations.
This judgment has substantial implications for the construction industry as it provides clarity on the limits of statutory adjudication rights under the Construction Act, and distinction between primary contractual obligations and warranties of performance.
