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A "Parasitic" Problem: Are Collateral Warranties Construction Contracts?

10/04/2021 | 10:09am EST

We examine how Toppan Holdings and Abbey Healthcare v Simply Construct has helped clarify when collateral warranties will be considered construction contracts for the purpose of adjudication.

Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC)

The Technology and Construction Court's recent decision in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP provides guidance on whether collateral warranties will be considered "construction contracts" for the purpose of Section 104 of the Housing Grants, Construction and Regeneration Act 1996 (the "Construction Act 1996").

The case has supplied judicial direction on an area of construction law which has not had the benefit of a High Court judgement since Parkwood Leisure v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC). The judgement of Martin Bowdery QC (sitting as a deputy High Court Judge) demonstrates that the wording and the timing of execution of a collateral warranty are the two key factors in determining whether they will be construction contracts, and consequently subject to adjudication.

The Facts and Issues

Simply Construct Ltd ("Simply") had designed and built a care home in Mill Hill for their original employers, Sapphire Building Services. After practical completion in October 2016, a dispute over defects and sums due led the parties to enter into a settlement agreement, which did not settle claims for latent defects.

Sapphire Building Services then novated all its rights and obligations to Toppan Holdings Ltd ("Toppan"), who granted a lease to a firm under the same ownership, Abbey Healthcare Ltd ("Abbey"), to occupy the care home. In 2018, fire safety defects were discovered which Simply failed to rectify, so Toppan engaged another contractor to complete the works in 2019.

In October 2020, four years after practical completion, a collateral warranty was executed between Simply, Abbey, and Toppan (the "Abbey Collateral Warranty") in accordance with the original Building Contract. Adjudication proceedings later began between Abbey and Simply over a loss of trading profits sustained while remedying the fire safety defects. When Simply did not comply with the Adjudicator's decisions, Toppan and Abbey sought to enforce them. Consequently, Simply resisted enforcement and argued that the adjudicator had lacked jurisdiction, on the grounds that the Abbey Collateral Warranty was not a construction contract.

Collateral Warranties and the Law

In order to be referred to adjudication under Section 108 Construction Act 1996, the Abbey Collateral Warranty had to be a construction contract for the purposes of Section 104(1)(a) of the Construction Act 1996. Section 104(1)(a) states that a construction contract is a contract for "the carrying out of construction operations".

The question of whether collateral warranties could ever fall within this definition had previously been answered by Akenhead J in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Limited [2013] EWHC 2665 (TCC). Akenhead J had examined the wording of a collateral warranty executed between the parties, and the time at which it was executed, and came to the conclusion that it could be a construction contract for the purposes of the Construction Act 1996. Toppan and Abbey were thus seeking to rely on Parkwood Leisure as authority that the Abbey Collateral Warranty should also be viewed as a construction contract.

The Decision

In Toppan Holdings, the judge considered Akenhead J's reasoning in Parkwood Leisure and applied it to the present case. Distinguishing the wording of the Abbey Collateral Warranty with that in Parkwood Leisure, and emphasising the importance of its different time of execution, the judge held that the Abbey Collateral Warranty was not a construction contract.

The judge recounted the reasoning in Parkwood Leisure, quoting from Akenhead J's judgement: "One needs primarily to determine in the light of the wording and of the relevant factual background each such warranty to see whether, property construed, it is such a construction contract for the carrying out of construction operations... A pointer against may be 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." He also relayed Akenhead J's statement in Parkwood Leisure that the expression "for... the carrying out of construction operations", as found in Section 104 of the Construction Act, was intended by Parliament to be a "wide definition".

The judge in the present case also noted that Lord Justice Coulson in 'Coulson on Construction Adjudication' did not criticise Akenhead J's decision to examine the wording and timing of the warranty's execution. The judge quoted Lord Coulson's comment that "if the underlying contract was a construction contract, it makes commercial sense for any parasitic warranties to be treated in the same way".

Consequently, the judge considered the Abbey Collateral Warranty in the light of its wording, as suggested by Akenhead J. He observed that the phrase "warrants, acknowledges and undertakes", present in the Parkwood Leisure warranty, was not present in the Abbey Collateral Warranty. Instead, Simply had warranted that it 'has performed and will continue to perform diligently its obligations under the Contract'. Although the judge accepted that this referred to both a past state of affairs and future performance, he quickly indicated that, regardless of the wording, the timing of the warranty's execution was problematic.

The judge then noted that the Abbey Collateral Warranty between Abbey and Simply was executed four years after practical completion, and eight months after the remedial works had been completed. He proposed that "where a contractor agrees to carry out uncompleted works in the future that will be a very strong pointer that the collateral warranty is a construction contract and the parties will have a right to adjudicate... where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate."

The judge stated that he could not see how a collateral warranty which was executed years after Practical Completion, and months after the works were remedied, could be viewed as an agreement for carrying out construction operations. He pointed out that there was no evidence that Abbey or Simply contemplated any construction operations actually being carried out as a result of the warranty. Consequently, he found that the Abbey Collateral Warranty was not a construction contract for the purposes of the Act. Therefore, there was no right to adjudicate and the adjudicator had indeed lacked jurisdiction.

Commentary: The Importance of Wording and Timing

The judgement in Toppan Holdings confirms that there are two factors which are of paramount importance in determining whether a collateral warranty will be a construction contract and subject to adjudication. The main factor will be the factual background of the case, primarily the timing of the warranty's execution in relation to the end of the construction works. Additionally, the wording of the warranty itself will be examined.

Parties executing collateral warranties may thus wish to consider the stage which their construction works have reached, in order to assess the impact which future construction works could have on their right to adjudication. Furthermore, warrantors may want to examine whether their warranty's wording refers to both a past state of affairs and future performance, to avoid being ambushed by later adjudication proceedings. Conversely, if parties are especially desirous of a right to adjudicate, they could expressly include provision for adjudication in the collateral warranty itself.

Toppan Holdings has illustrated again that "parasitic" collateral warranties to construction contracts are by no means guaranteed to be construction contracts themselves. Collateral warranties executed after the construction works have finished will instead be treated as "akin to a manufacturer's product warranty".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ms Sally Wollaston
Gatehouse Chambers
1 Lady Hale Gate
Gray's Inn
Fax: 0207691 1234
E-mail: sally.wollaston@gatehouselaw.co.uk
URL: gatehouselaw.co.uk/

© Mondaq Ltd, 2021 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source Business Briefing

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