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Collateral Warranties as Construction Contracts: A Cautionary Tale 

by Leigh Herd

Published: October, 2021

Submission: October, 2021

 



Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP

In the case of Toppan Holdings Limited (“Toppan”) and Abbey Healthcare (Mill Hill) Limited (“Abbey”) v Simply Construct (UK) LLP (“Simply”) the TCC held that a collateral warranty between Abbey and Simply was not a construction contract and therefore Abbey could not enforce an adjudication between the parties. For parties who may wish to pursue an adjudication on the basis of a collateral warranty, the judgment provides both a cautionary tale and a guide on how best to protect the right to do so.


Background

Simply entered into a design and build contract with Sapphire Building Services Limited (“Sapphire”) for the construction of Aarandale Manor, a luxury care home in Mill Hill, London. Sapphire transferred its rights and obligations under the contract to Toppan, the owner of the home, and Toppan entered into a long lease with Abbey, which became the tenant and operator. 


Defects arose in the home and Toppan requested that Simply remedy them. When Simply did not, Toppan engaged a third party to carry out the works. Toppan and Abbey both then raised separate adjudication proceedings against Simply to recover their costs. Toppan’s adjudication proceeded under the building contract with Simply. Abbey’s adjudication proceeded under the Simply-Abbey collateral warranty. Both were awarded damages, but when they sought to enforce the adjudication awards, Simply argued that the Abbey-Simply collateral warranty, which was only executed after the defects had been remedied, was not a construction contract and therefore did not give rise to a right to adjudication.


When is a contract not a construction contract?

The TCC agreed with Simply that the collateral warranty was not a construction contract in terms of the Housing Grants Construction and Regeneration Act 1996 (“HGCRA 1996”) and thus did not give rise to a right to adjudicate. In deciding this, the TCC followed a number of points of principle: 


  • A construction contract need not be wholly or even partly prospective. 
  • Parliament intended a wide definition for construction contracts, so “peculiarly syntactical analysis”  of the statute should be avoided.
  • Where a party agrees to carry out and complete construction operations, it will invariably be an agreement “for the carrying out of construction operations”, which would be a construction contract under HGCRA 1996.
  • Attention must be paid to the wording and relevant factual background of individual warranties.

The TCC referred to two particular “pointers”:


  • A very strong pointer” is “whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out [construction] operations”.
  • A pointer against the existence of a construction contract “may be that all the works are completed and that the Contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard”. 

Considering these factors, the TCC held that the Abbey-Simply warranty was not a construction contract and therefore adjudication was not implied into the contract by the HGCRA 1996. When the warranty was executed, it was some four years after practical completion of the build and eight months after completion of the remedial works that were the subject of the adjudication. The warranty was entirely post-construction where no further works were being carried out, a pointer against it being considered a construction contract. Thus, though Abbey could still bring a court action against Simply, it had no right to pursue an adjudication and the adjudication award in its favour was therefore unenforceable.


Protecting the right to adjudication in a collateral warranty

It is clear from the judgment in this case that whether a collateral warranty confers a right to adjudication will turn on the specifics of the case. However, parties who wish to have a right to adjudicate under a collateral warranty should consider the following.


  • Express provision – in this case, Abbey sought to imply the right to adjudicate into the collateral warranty because it was not expressed. Had the collateral warranty contained its own adjudication clause then there would have been no debate about whether adjudication was competent. Whether such a clause is appropriate for parties will depend on the warranty in question.
  • Early execution – the case suggests that, generally speaking, the earlier a collateral warranty is executed, the greater the chance of it being considered a construction contract and vice-versa. If there are still construction operations to be completed, a warranty will be at least partly prospective and more likely to be deemed an agreement “for the carrying out of construction operations”.
  • Remedying defects – one of three points of “relevant factual background” in Toppan was that “the remedial works to the disputed defects had been completed by another contractor months before the Abbey Collateral Warranty had been executed”. Parties who may wish to argue that a collateral warranty is a construction contract should think carefully about the timing of any remedial works being carried out. Carrying out all works before any collateral warranty is entered into may remove any argument that there are outstanding construction operations, and therefore close off the path to adjudication.

For more information please contact Leigh Herd, at [email protected], or Iain Drummond, at [email protected] in our property and infrastucture disputes team, or your regular Shepherd and Wedderburn contact.


 


 

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