The decision will be of interest to those who commonly provide collateral warranties, as well as funders, end users, and other beneficiaries of CWs.
Under the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) a party to a construction contract has the right to refer a dispute arising under the contract for adjudication. "Construction contracts" are defined as agreements for any of the following:
- Carrying out of construction operations;
- Arranging for carrying out of construction operations by others…;
- Providing labour for carrying out construction operations.
Construction contracts which do not contain HGCRA compliant adjudication rights will be subject to the adjudication provisions in the Scheme for Construction Contracts. The Scheme sets out an adjudication procedure which is implied into construction contract.
Abbey Healthcare v Simply Construct: The Facts
In 2015, Simply Construct entered into a JCT D&B Contract for the construction of a care home in London. Under the contract, Simply Construct were required to provide collateral warranties to purchasers and tenants. They delayed doing so, such that the CW in favour of Abbey (the tenant) was not provided until September 2020.
In November 2020 Abbey commenced adjudication proceedings against Simply Construct arising out of fire safety defects and the cost of remedial works. Simply Construct argued that the Abbey CW was not a construction contract, but this was rejected by the Adjudicator, who awarded Abbey £908,495.98. Simply Construct refused to pay, so Abbey commenced enforcement proceedings.
The judge at first instance ruled that the Abbey CW was not a "construction contract", and so the Adjudicator lacked jurisdiction. He found that the Abbey CW warranted past performance, of works carried out many years previously. It was not an agreement for future or ongoing carrying out of construction operations.
The Court of Appeal Decision
The Court of Appeal gave its decision on 21 June 2022. It considered three questions:
- Can a collateral warranty ever be a construction contract within the meaning of the HGCRA?
- If so, was the Abbey CW a construction contract?
- Did the date of execution of the Abbey CW make any difference?
Collateral Warranties as Construction Contracts
Coulson LJ confirmed that CWs are capable of being construction contracts. Much will depend on the express wording and substantive rights conferred.
Coulson LJ held that the HGCRA definition of construction contracts "was intended to cast the net of the 1996 Act as widely as possible". One of the key tenets of the HGCRA was to improve the dispute resolution mechanisms available to those involved in construction. This would be undermined if a dispute between a contractor and employer could be heard swiftly and inexpensively by an Adjudicator, whilst the same dispute between the employer and warrantor had to be litigated.
Was the Abbey Collateral Warranty a Construction Contract?
The Abbey CW contained standard wording that Simply Construct "has performed and will continue to perform diligently its obligations under the contract". Coulson LJ held this was a warranty of both past and future performance of construction operations, and so plainly, it was a construction contract. Jackson LJ agreed that this was a primary obligation: in the Abbey CW Simply Construct made a direct promise to perform its obligations under the contract.
Effect of the Date of the Abbey Collateral Warranty
Coulson LJ stated that the fact that the Abbey CW was executed after the works were complete was irrelevant to its categorisation as a construction contract. The warranty had retrospective effect; it made a promise as to both the standard of past work and the future carrying out of work.
The CoA decision provides useful guidance on the scope of the HGCRA right to adjudicate.
It follows a recent trend of the Courts being prepared to widen access to Adjudication (c.f. Bresco v Lonsdale  where the Supreme Court held that insolvent companies can adjudicate, even against respondents with cross claims).
The decision raises the question of whether other ancillary agreements might attract the right to adjudicate. For example, is a parent company guarantee, guaranteeing due and punctual performance by the contractor of its obligations under a building contract, an agreement for the carrying out of construction operations – or carrying out construction operations by others? Or perhaps a joint venture agreement in which the parties agree with each other to properly perform their obligations under a construction contract?
Parties entering CWs and other ancillary agreements should carefully consider whether the terms of the agreement create primary obligations in relation to future or ongoing performance of construction operations. If they do, adjudication may be down the road.
Written by Katherine Doran