11/10/2021

Following the decision in Parkwood Leisure Limited v Laing O'Rourke and West Limited [2013], it is widely recognised that a collateral warranty can, but not necessarily will, constitute a construction contract within the meaning of the Housing Grants, Construction and Regeneration Act Construction Act (“the Construction Act”).  In the recent case of Toppan Holdings Limited (“Toppan”) and Abbey Healthcare (Mill Hill) Limited (“Abbey”) v Simply Construct (UK) LLP (“Simply Construct”) [2021], the court helpfully provided further clarification on this point.      

Background 

Construction Contracts

A "construction contract" is widely defined in section 104(1) of the Construction Act as being an agreement with a person carrying out “construction operations”, and includes:

  • To carry out architectural, design or surveying work; and
  • to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape.

If a party is able to establish that they have a construction contract, they have a statutory right to refer any dispute in relation to that contract to adjudication.

Collateral Warranties

Collateral warranties are agreements that are associated with another 'primary' contract. They provide for a duty of care to be extended by one of the contracting parties to a third party who is not party to the original contract, e.g., commonly, a (1) contractor, consultant or subcontractor (warrantor) and (2) a funder or tenant (beneficiary), giving that third party the right to sue the warrantor.

Toppan and Abbey v Simply Construct

Facts

The case concerned the design and construction of a luxury care home located in Mill Hill, London, known as Aarandale Manor.

Toppan is the freehold owner of Aarandale Manor.  Simply Construct was the building contractor engaged under a JCT Design and Build Contract 2011 (with amendments) to build Aarandale Manor in June 2015 for circa £4.7m.  Abbey is the occupational tenant and operator of the care home pursuant to a lease with Toppan dated 21st August 2017. 

Practical completion of the Works occurred on 10 October 2016.

In or around August 2018, nearly 2 years after practical completion, Toppan discovered fire-safety defects in Aarandale Manor, in particular a lack of fire- resistant plasterboards and other protection to confer at least 60 minutes' fire resistance in the structural walls. These defects were notified to Simply Construct in January 2019 and an alternative contractor was engaged to carry out the remedial works, which were completed in February 2020.

On 23 September 2020, nearly 4 years after practical completion and after Toppan engaged in pre-action correspondence with Simply Construct, a collateral warranty was executed under the Building Contract by Simply Construct in favour of Abbey (the “Abbey Warranty”).

Adjudications
Separate but parallel adjudications were brought by Toppan and Abbey against Simply Construct to recover the losses incurred as a result of the remedial works. Mr Peter Vinden was appointed as adjudicator for both and published his decisions on 30 April 2021, awarding £1.07m to Toppan and £908,000 to Abbey.

In the Abbey adjudication, Simply Construct argued that the adjudicator had no jurisdiction to make a decision in the adjudication due to the fact that the Abbey Warranty was not a construction contract; therefore, any decision made by the adjudicator was invalid. It refused to pay the adjudicator’s awards.

Enforcement Proceedings

In the ensuing TCC enforcement proceedings, Martin Bowdery QC ruled that Toppan’s award should stand.

However, in agreement with Simply Construct’s position that the Abbey Warranty was not a construction contract, Abbey’s award was struck out. The Judge reaffirmed the position in the Parkwood case, that not all collateral warranties are construction contracts and that it will depend on the wording of the terms in the collateral warranty.

 Here, the Judge noted that the Abbey Warranty used the wording “warrants”: it did not use the wording “warrants acknowledged and undertakes” as was the case in Parkwood. The Abbey Warranty warranted both past and future performance, but as such did not contain any undertaking for Simply Construct to carry out any future works. 

 As the Abbey Warranty was executed 4 years after practical completion and 8 months after another contractor had remedied the defects, the Judge decided that it was not an agreement for “the carrying out of construction operations” because the construction operations had already been carried out. He stated that although the wording of the Abbey Warranty refers to both a past state of affairs and future performance, by the time the warranty was executed it was a warranty of only a state of affairs and could not be construed as an agreement for the carrying out of construction operations. 

The Warranty was considered more ‘akin to a manufacturer’s product warranty’, rather than as a construction contract. 

Commentary

This is another case that highlights the precise terms of the collateral warranty must be construed in conjunction with the facts, in order to determine whether the collateral warranty constitutes a construction contract under the Construction Act.

The importance of this question turns on whether the parties desire the right to adjudicate under a collateral warranty. Employers and the beneficiaries of collateral warranties are likely to favour adjudication; it is quicker and generally more cost-effective than litigation or arbitration.  However, contractors and consultants should exercise caution as in most cases latent defect claims can be brought up to 12 years post-practical completion and given the nature and complexity of such claims, warrantors might prefer litigation or arbitration.

This case was slightly unusual, given the timing of the execution of the collateral warranty and the likely reason that the collateral warranty was only procured so that Abbey could bring adjudication proceedings.  However, the more time that lapses between completion of the works and the execution of the collateral warranty, the harder it will be to argue that the agreement is for "the carrying out of construction operations".

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