The Supreme Court in the case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 has decided that usually a collateral warranty will not be a construction contract. It follows that under most collateral warranties the statutory right to adjudicate will not arise.
What is a collateral warranty?
A collateral warranty is a contract under which a party involved in the design and/or construction of the works (such as a contractor, consultant or sub-contractor) grants certain contractual rights to a third party beneficiary with an interest in the project (such as a funder, purchaser or tenant). Normally, those contractual rights relate to the performance by the member of the design/construction team of their obligations under an associated building contract, appointment or sub-contract.
If the third party beneficiary suffers a loss which results from a breach by the contractor/consultant, the idea is that the collateral warranty enables the contractor/consultant to be pursued. Such a scenario may arise where, for example, a funder is not able to fully recover monies loaned out for a development because the project has not been properly designed or where a commercial tenant incurs repair costs where a building has not been properly constructed.
Without a collateral warranty in place, it would be difficult for the third party beneficiary to pursue a claim due to the restrictions on claims in tort for pure economic loss as a result of Murphy v Brentwood District Council [1991] 1 AC 398.
What is statutory adjudication?
Under the Housing Grants, Construction and Regeneration Act 1996, parties to a construction contract have a right to refer a dispute to adjudication at any time. Adjudication is a quick-fire form of dispute resolution which is binding on an interim basis, in other words, unless and until the matter is finally determined in court. The 1996 Act defines a “construction contract” as an agreement for the carrying out of construction operations.
What were the facts of this case?
The dispute arose in relation to a collateral warranty entered into by Augusta in favour of Abbey. Augusta was the building contractor of a care home project and Abbey was the tenant of this property.
Abbey started an adjudication against Augusta in respect of fire safety defects and the cost of remedial works. Abbey were awarded damages by the adjudicator which were subsequently not paid by Augusta and so Abbey commenced enforcement proceedings before the Technology and Construction Court by way of summary judgment. (Summary judgment is a curtailed procedure whereby the court can dispose swiftly of an issue on which a party has no real prospect of success.)
What was the decision at first instance?
The judge at first instance dismissed the summary judgment application on the basis that a collateral warranty was not a construction contract and therefore the adjudicator lacked jurisdiction. Mr Martin Bowdery QC took the view that the collateral warranty was not a construction contract because the works had been completed before the collateral warranty was executed. For him, the timing of the execution of the collateral warranty was key.
What was the decision in the Court of Appeal?
Abbey appealed Mr Martin Bowdery QC’s decision and were successful before the Court of Appeal. The Court of Appeal (by majority) found that the collateral warranty was a construction contract. For Coulson LJ, it was the wording rather than the timing that was the important factor. If the collateral warranty was worded so that it warranted the future performance of construction operations (which it did) rather than simply the past performance, then it would be a construction contract.
What was the decision in the Supreme Court?
The Supreme Court reversed the Court of Appeal’s decision and found that the collateral warranty was not a construction contract. The Supreme Court found that the key question was whether or not the purpose of the agreement was the carrying out of construction operations. As the purpose of a collateral warranty was usually not this but was “to afford a right of action in respect of defectively carried out construction work” a collateral warranty would not usually be a construction contract.
Furthermore, the Supreme Court found that a collateral warranty will not be a construction contract if it “merely promises to perform obligations owed to someone else under” the underlying contract (e.g. the building contract). It would only be where there is a “separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract” that the collateral warranty might constitute a construction contract.
Is this a sensible decision by the Supreme Court?
Given the nature of disputes which might arise under a collateral warranty which could include for example complex issues of professional negligence, it is questionable whether adjudication is the most appropriate dispute resolution mechanism to resolve such disputes.
The Supreme Court’s decision also has the benefit of creating a much clearer “dividing line which means that collateral warranties are generally outside the 1996 Act rather than everything being dependent on the wording of the particular collateral warranty in issue” as per the Court of Appeal’s approach.
What are the practical implications of this decision?
If parties wish to be able to refer a dispute under a collateral warranty to adjudication, they will need to make express provision for that in the collateral warranty. They will no longer be able to rely on a statutory right arising under the 1996 Act.