A collateral warranty can be a construction contract – adjudication award enforced
The court’s decision provides clarity that a collateral warranty can be sufficient evidence of contractual obligations to seek enforcement of an adjudication award.
On 29 June 2015 Simply Construct (UK) LLP (“Simply Construct”) was contracted to construct Aarandale Manor care home, which completed in October 2016. Abbey Healthcare (Mill Hill) Ltd (“Abbey Healthcare”) became the tenant in August 2017. A year later defects were discovered and Abbey Healthcare paid for “some or all of the remedial works”.
Abbey Healthcare and Simply Construct entered into the collateral warranty in October 2020. Abbey Healthcare raised an adjudication for its losses and was successfully awarded £908,495.98. It then applied for enforcement of the award, which was refused on the basis the collateral warranty was signed years after the construction operations had completed. That decision was appealed.
The Court considered three main issues:
- Can a collateral warranty ever be a construction contract as defined by section 104(1) of the Housing Grants (Construction & Regeneration) Act 1996 (“1996 Act”)?
- If so, did the terms of this collateral warranty make it a construction contract as defined by section 104(1)?
- Does the date on which the collateral warranty was executed make any difference?
Issue 1 – can a collateral warranty be a construction contract?
Yes. A collateral warranty, as a promise to regulate the carrying out of ongoing construction operations, can be “a contract for the carrying out of construction operations” in line with the 1996 Act. It is not restricted to the primary construction contract. There is a necessary entitlement to payment which was present by the agreement to pay a single amount.
The 1996 Act separately provides for hybrid contracts, referring to an agreement “related to” construction operations, demonstrating the Act is to apply “as widely as possible”. The intention of the Act was to improve a number of factors including the resolution methods available in construction disputes, such as the efficiency of adjudications, in order to reduce cost within the industry.
A consistency of approach and outcome is needed, in which there is “the same underlying dispute, about the same defective work, arising under two different contracts but decided in parallel by the same adjudicator”. A broad approach allows the same adjudicator to decide the relevant issues under a collateral warranty and building contract.
Issue 2 – was the collateral warranty a construction contract?
The Court closely considered Simply Construct’s warranty that it “has performed and will continue to perform diligently its obligations under the contract”. There were similar warrants for reasonable skill, care and diligence regarding the works and their design. These covered both past and future performance, creating an ongoing promise to carry out construction operations in accordance with the building contract, therefore the word “undertakes” was not required.
The contract and the collateral warranty were closely linked, as the collateral warranty could not be complied with if Simply Construct had not complied with the relevant construction operations under the building contract. As a promise and obligation “to do something”, the collateral warranty was a construction contract rather than a product guarantee.
Issue 3 – the date of execution was not determinative
The collateral warranty applied retrospectively to give effect to the parties’ intention, shown by clause 7C of the building contract, which stated that, if the owner gave notice to Simply Construct of Abbey Healthcare’s interest as tenant, then within 14 days Simply Construct required to enter into a collateral warranty with and to the benefit of Abbey Healthcare.
The collateral warranty had retrospective effect, otherwise it “would be wholly unsatisfactory”, as contractors would be encouraged to delay signing a warranty until after they had completed most of the works so as to avoid adjudication claims.
Points to take away
- A collateral warranty may be considered a construction contract if it is “for the carrying out of construction operations”, provided it warrants for past and future performance and contains an entitlement to payment.
- The courts will seek to give effect to adjudication decisions. Parties cannot rely on the fact the agreement is a ‘warranty’ to avoid making payments awarded by adjudicators.