When is a collateral warranty a "construction contract"?

8 minute read
04 August 2021

Back in 2013, the Technology and Construction Court (TCC) decision in Parkwood Leisure Limited v Laing O'Rourke Wales and West Limited [2013] caused quite a lot of murmuring in the ranks when the TCC held that the parties' collateral warranty was a "construction contract" for the purposes of the Housing Grants, Construction and Regeneration Act 1996, as amended (the Construction Act).

Fast forward some eight years and we have the first reported case to cite the Parkwood decision. We review the judgment in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2021] and what it means for parties agreeing collateral warranties.



Background

  • In 2015, Simply were engaged by a third party to design and construct a care home in Mill Hill that was in due course occupied and operated by Abbey The contract was an amended form of JCT Design and Build Contract 2011 with June 2015 updates (the Building Contract).
  • Practical completion was certified in October 2016.
  • In 2017, by a novation agreement, the third party transferred all its rights and obligations under the building contract to Toppan, the owner of the care home.
  • In mid-2018, fire safety defects were discovered in the care home. In January 2019, Simply was notified of these defects, which were subsequently rectified by another company.
  • In 2020, the parties executed the collateral warranty whereby Simply warranted to Abbey that it had performed and would continue to perform its obligations under the Building Contract (the Abbey Collateral Warranty).
  • Adjudications followed, including a claim by Abbey against Simply under the Abbey Collateral Warranty for loss of trading profits, and a claim by Toppan against Simply under the Building Contract arising out of the remedial works. Abbey and Toppan succeeded in the adjudications and were awarded approximately £908,000 and £1 million respectively by the (same) adjudicator - Simply did not pay.
  • These TCC proceedings were commenced in order to enforce the two adjudication decisions against Simply.

Various matters were in issue in the proceedings. We concentrate here on the arguments between Abbey and Simply relating to the Abbey Collateral Warranty and whether or not it comprises a "construction contract" under the Construction Act. If the Abbey Collateral Warranty is not a construction contract, then the adjudicator did not have jurisdiction to decide this dispute and the award will not be enforceable.

The Construction Act

Section 104(1) of the Construction Act provides:

"In this Part a "construction contract" means an agreement with a person for any of the following -

  1. the carrying out of construction operations;
  2. arranging for the carrying out of construction operations by others, whether under sub contract to him or otherwise;
  3. providing his own labour, or the labour of others, for the carrying out of construction operations

(2) References in this Part to a construction contract include an agreement -

  1. to do architectural, design, or surveying work; or
  2. provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape,

    in relation to construction operations..."

Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013]

The Judge in Toppan considered the decision in Parkwood Leisure Limited v Laing O'Rourke Wales and West Limited [2013] in detail, with the starting point being that the Parkwood decision "turned on the particular terms of the warranty in issue" (the Parkwood Collateral Warranty). Three points of principle were derived by Mr Justice Akenhead in Parkwood, summarised as follows:

  1. a construction contract does not have to be wholly or even partly prospective - being retrospective in effect is not in itself a bar to it being a construction contract under the Construction Act;
  2. s104 of the Construction defines a construction contract as "an agreement "for... the carrying out of construction operations" - Parliament intended this as a "wide definition";
  3. where one party to a contract agrees to carry out and complete construction operations, it will usually be an agreement "for the carrying out of construction operations" under the Construction Act.

The Parkwood Collateral Warranty was held to be a construction contract under the Construction Act. Mr Justice Akenhead however clearly stated in his judgment that this did not mean that all collateral warranties on construction projects will be "construction contracts" - each warranty must be construed in the light of its wording and the relevant factual background. In Parkwood, a central factor was that the wording of the Parkwood Collateral Warranty expressly replicated the obligation in the Building Contract "for the design, carrying out and completion of the construction of a pool development". This clearly related to the carrying out of construction operations.

Mr Justice Akenhead in the Parkwood judgment stated as follows: "Clause 1(1) [of the Parkwood Collateral Warranty] is not merely warranting or guaranteeing a past state of affairs. It is providing an undertaking that [the Contractor] will actually carry out and complete the works". It was of significance that at that time the Parkwood Collateral Warranty was executed, the works were ongoing and it was some time before practical completion.

The Abbey Collateral Warranty

The key substantive terms of the Abbey Collateral Warranty provided (in summary) that Simply warranted that:

  1. it has performed and will continue to perform diligently its obligations under the Building Contract; and
  2. in carrying out and completing the works and design, Simply has exercised and will continue to exercise all reasonable skill care and diligence.

The TCC held that the Abbey Collateral Warranty was not a "construction contract" under the Construction Act as it was not an agreement for "the carrying out of construction operations".

Key considerations included that:

  1. the Abbey Collateral Warranty was not executed until four years after practical completion and 8 months after remedial works had been completed by another contractor; and
  2. the Abbey Collateral Warranty gave a warranty in favour of the beneficiary but did not refer to any "acknowledgment" or "undertaking" in its favour (in contrast to the Parkwood Collateral Warranty).

Martin Bowdery QC sitting as a Deputy Judge of the High Court stated " [o]n the facts of this case I cannot see how applying commercial common sense a collateral warranty executed four years after practical completion and months after the disputed remedial works had been remedied by another contractor can be construed as an agreement for carrying out of construction operations". He also expressed the view that the Abbey Collateral Warranty was "akin to a manufacturer's product warranty".

As the Abbey Collateral Warranty was not a construction contract under the Construction Act, there was no contractual right to adjudicate, and the adjudicator's decision could not be enforced.

Commentary

The decision in Toppan is further confirmation that those drafting collateral warranties on construction projects need to consider carefully the wording of the obligations provided for, so as to provide certainty (as far as possible) as to whether or not the warranty will comprise a construction contract under the Construction Act.

The right to adjudicate is valuable to the beneficiary of a warranty but it seems likely that the construction industry will continue to accept that collateral warranties are now drafted to ensure (as far as possible) that the Construction Act will not apply.

If you have any queries on this or any other construction issue, please contact Ashley Pigott.


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