This case creates far more certainty as to the circumstances in which a collateral warranty will be viewed as being a ‘construction contract’ for the purposes of the adjudication process under the Construction Act. However, it also sows some seeds of trouble for those construction professionals with more restricted Professional Indemnity (PI) insurance policies.
Summary and key findings
Historically, the industry did not view collateral warranties as ‘construction contracts’ until the 2013 Parkwood Leisure v. Laing O’Rourke case, which challenged this view. Consequently, for the past decade there has been uncertainty as to whether warranties fell under the Construction Act’s mandatory adjudication regime.
The Abbey v Simply decision establishes that the focus will now be on the nature of the warranty with a distinction being drawn between collateral warranties which:
- replicate the undertaking of the underlying contract, which will generally not be considered construction contracts; and
- those that do give rise to separate and distinct undertakings for the carrying out of construction operations, which generally will be.
Although this case considered the interpretation of building contracts and warranties provided by contractors, it can be expected that warranties provided by professional consultants will be dealt with in a similar way.
In practice, this could mean three things:
Fewer adjudications
Whilst it was never a significant feature of the landscape, claims under warranties are significantly less likely to be referred to adjudication. We would regard this as a positive development on the basis that adjudication was meant to be a ‘quick and simple’ way of keeping payments moving. It was not intended to be determinative of liability, given the constraints around the process. Professional negligence claims are complex, and adjudication was never going to be a suitable forum to substantively decide them. PI insurers have long been wary of adjudication as a dispute resolution forum, given the perception that they encourage ‘poor’ claims because of the absence of costs penalties and the inherent problems with defending an adjudication within the strict time limits prescribed by the legislation.
Drafting changes
We may see warranties drafted to fall within the Construction Act’s remit, which requires careful consideration. That may take the form of a contractual right to refer disputes to adjudication, or something more difficult to spot, such as the incorporation of ‘separate and distinct’ obligations. Any ‘new’ warranty to a beneficiary may see the party giving it exposed to liabilities that would have not otherwise existed or have been priced for. As is so often the case with contract drafting, we may see a sledgehammer being swung to crack a nut.
Insurance headaches
Our clients who are not insured via our Scheme policy wordings ought to take particular care. Open market insurance policies may exclude liabilities arising from collateral warranties if they differ from the underlying appointment document. Warranties creating new obligations, or greater or more long lasting liabilities than the appointment, must be approached with legal and insurance advice.
Finally, whilst it was of no relevance to the decision of the court, the case is also interesting from the perspective of the underlying problems: fire safety concerns with the building. Toppan and Abbey sought a combined total of some £14m to resolve the defects, though the adjudicator’s award was considerably less than this. Nonetheless, the amount claimed in respect of a relatively modest 65-bedroom care home, is a cautionary note as to the potential scale of the wider fire safety litigation we can expect in the years to come.
Case Summary
Background
Simply Construct UK LLP was appointed by Sapphire Building Services Ltd to design and build a care home in London. The building contract was a typical JCT form which, amongst other things, required Simply to carry out the works in a proper and workmanlike manner, remedy defects within the rectification period and execute collateral warranties in favour of various parties, including purchasers and tenants. As is entirely standard, the building contract also contained express adjudication provisions.
The care home was completed in 2016, and the contract was novated to Toppan Holdings, the freehold owner, who leased it to Abbey Healthcare.
In 2018, Toppan discovered fire safety defects in the property, in particular the internal plasterboard wall linings were alleged to not provide the required 60 minutes of fire resistance. Toppan engaged a third-party contractor to rectify the problem which Abbey paid for on behalf of Toppan.
The Adjudication
In 2020, Abbey secured a collateral warranty from Simply and subsequently both Toppan and Abbey referred disputes to adjudication regarding the defects and costs of remedials totalling more than £14m. Simply challenged Abbey’s claim under the collateral warranty by arguing that a collateral warranty was not a construction contract under the Construction Act as it was not a contract “for…the carrying out of construction operations…” and therefore did not fall within the mandatory adjudication regime under the Act. The adjudicator rejected that argument and found in favour of Toppan and Abbey, though Simply did not pay.
The Court proceedings
Toppan and Abbey sought to enforce the decision in the TCC and whilst the court decided that Toppan should be paid their award, they did not come to the same conclusion in respect of Abbey’s claim. The court agreed that the collateral warranty was not a construction contract for the purposes of the Construction Act. The TCC were swayed by the fact that the warranty was executed years after the works were completed and months after the subsequent remedial works were complete. Therefore, how could it be a contract for the carrying out of works? At best, it was a contract warranting what had already been constructed.
The Court of Appeal took a very different view and decided that, in general terms, the timing of the provision of a warranty couldn’t decide if a warranty was a construction contract or not. Two of the three judges then decided, for different reasons, that in this particular case the warranty was a construction contract and the mandatory adjudication regime applied. The case was then appealed to the Supreme Court.
The Supreme Court decision
The Supreme Court clarified that a collateral warranty is not a construction contract if it merely promises to perform obligations under the building contract. It must create separate obligations for construction operations which go beyond being simply reflective or derivative of the underlying contract. The Abbey warranty did not meet this criterion and was not considered a construction contract under the Construction Act.
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