Are Collateral Warranties Construction Contracts? Timing is Key.

Simply was engaged in 2015 under a JCT Design and Build Contract to construct a care home owned by Toppan and operated by Abbey. Under the terms of the building contract, Simply was obliged to provide a collateral warranty for the benefit of Abbey (the Abbey Collateral Warranty).

Practical completion occurred in October 2016. Simply was subsequently notified of fire safety defects in January 2019 and remedial works to correct these were completed in February 2020.

Simply provided the Abbey Collateral Warranty in October 2020, under which Simply warranted that:

It had “performed and would continue to perform diligently its obligations under the [Building] Contract”; and
In carrying out and completing the works, it had “exercised and will continue to exercise all the reasonable skill and care…”.

Abbey and Toppan started separate adjudications against Simply and were both awarded substantial sums of money. When Simply did not comply with the decisions, Toppan and Abby applied for summary judgment enforcement.

The TCC’s Decision

The judge found that the Abbey Collateral Warranty was not a construction contract for the purposes of the Act and that there was, therefore, no right to adjudicate the dispute.

In reaching this decision the judge considered the principles laid down in a 2013 case Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd[2] (which had found that the parties’ collateral warranty was in fact a construction contract), and then construed the wording of the Abbey Collateral Warranty against the relevant factual background.

Whilst noting that the Abbey Collateral Warranty referred to both a past state of affairs (“has performed” / “has exercised”) and future performance (“will continue to perform” / “will continue to exercise”), he considered that it could not be construed as a construction contract within the meaning of the Act because the agreement between Abbey and Simply was not an agreement for “the carrying out of construction operations”. Key to this decision was the timing of the execution: the Abbey Collateral Warranty was executed 4 years after practical completion and 8 months after remedial works had been completed.

As points of principle, he considered:

– 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 even latent defects have been remedied, a construction contract is unlikely to arise and there will be no right to adjudicate.

Even though Parliament intended Section 104 of the Act to be construed widely, applying ‘commercial common sense’ to the facts the judge couldn’t see how a “collateral warranty executed four years after practical completion and months after the dispute remedial works had been remedied…can be construed as an agreement for carrying out of construction operations”.

In effect, by the time the Abbey Collateral Warranty was executed it was a warranty of a state of affairs past or future, akin to a manufacturer’s product warranty. Accordingly, it was held that it was not a construction contract for the purposes of the Act and so there was no contractual right to adjudicate.
Comment

Beneficiaries of collateral warranties who want to benefit from the right to adjudicate will need to consider the timing of execution in addition to the wording of the warranty; getting the warranty executed before the works are completed will increase the chances of it being considered a construction contract.

Sharpe Pritchard has extensive experience preparing all forms of construction contracts and ancillary agreements. If you require further information or advice, please contact Justin Mendelle.

Clare Mendelle is a professional support lawyer and Anna Sidebottom a Trainee Solicitor at Sharpe Pritchard LLP

[1] Toppan Holdings Ltd and another v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC)

[2] Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC)

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