Posted: 01/08/2024
The Supreme Court has handed down judgment in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP [2024] UKSC 23; a long-awaited case in which it has considered whether a collateral warranty can be a ‘construction contract’ within the meaning of section 104 of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA).
It should first be remembered that a ‘construction contract’ under HGCRA is a contract that provides for the carrying out of ‘construction operations’, the definition of which is contained in section 105 of HGCRA. Section 105 covers a broad range of activities ranging from construction and repair to demolition and site clearance. If a warranty is a ‘construction contract’, there will be an implied right to adjudicate.
Sapphire Building Services Ltd was the main contractor and had engaged Augusta 2008 LLP to design and build a new 65-bedroom care home in London. Abbey Healthcare (Mill Hill) Ltd was to be the tenant and manager of the property. The contract imposed an obligation on Augusta to execute a collateral warranty in favour of Abbey if required to do so.
The works were practically completed on 10 October 2016. The final account was the subject of a settlement agreement between Sapphire and Augusta on 13 June 2017, with the building contract being novated to the landlord the following day. The settlement agreement expressly excluded latent defects from the compromise. On 12 August 2017, Abbey was granted a 21-year lease of the property to operate a care home.
In August 2018, fire safety defects were discovered in the property. Abbey offered Augusta the opportunity to fix the defects, but it did not do so. On 8 June 2020, the landlord exercised its right under the building contract and required Augusta to execute a collateral warranty in favour of Abbey. Augusta did this on 23 September 2020.
On 11 December 2020, Abbey commenced an adjudication against Augusta seeking damages for the fire safety defects. Augusta challenged the adjudicator’s jurisdiction, claiming that the collateral warranty was not a ‘construction contract’ under HGCRA. There were no express provisions concerning adjudication in the contract. The adjudicator rejected this challenge and awarded Abbey damages of approximately £870,000.
Augusta did not pay, and Abbey commenced proceedings to enforce the adjudicator’s award. The High Court agreed with Augusta that the collateral warranty was not a construction contract as it did not provide for the carrying out of construction operations. Therefore, the adjudicator had no jurisdiction to decide the dispute. This was overturned by the Court of Appeal by a 2:1 majority, holding that the collateral warranty was a construction contract.
The Supreme Court unanimously allowed the appeal, holding that the collateral warranty in question was not a construction contract, because it did not provide for the carrying out of construction operations.
Was the collateral warranty an agreement ‘for… the carrying out of construction operations’?
The Supreme Court has provided a short and straightforward answer to this question: the collateral warranty will provide for the carrying out of construction operations if ‘… the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which are separate and distinct from the contractor’s obligation to do so under the building contract’. As is usually the case, the collateral warranty in this case did not do so.
In arriving at this conclusion, the Supreme Court considered that the majority of the Court of Appeal had placed too much emphasis on the fact that the warranty given by Augusta stated it would ‘continue to perform’ its obligations under the building contract. It was explained that this promise is derived entirely from the underlying building contract, and does not promise to do anything that Augusta is not already obliged to do under the contract. The promise does not itself give rise to the completion of construction operations; nor does a warranty expressed in free standing terms that merely mirrors the obligations under the building contract.
Further, collateral warranties need to be expressed in relation to both past and future obligations, as it is possible that the contract works may have ceased, or still be ongoing, when the collateral warranty is executed.
In light of the Supreme Court’s findings, it also expressly overruled Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), in effect rewinding the law on collateral warranties to how it was understood pre-2013. The Parkwood case had found that a collateral warranty that included not just the word ‘warrant’, but also an ‘acknowledgement’ and agreement to ‘undertake’, was a ‘contraction contract’. As noted in both the Supreme Court and Court of Appeal’s judgments, the Parkwood decision was somewhat controversial when it was handed down.
Accordingly, the position is now that almost all collateral warranties will not be ‘construction contracts’.
It must be noted that the Supreme Court has not ruled that collateral warranties cannot be construction contracts, rather that the warranty must provide for a ‘separate and distinct’ obligation. Further, there is nothing preventing the parties from expressly providing for adjudication within the collateral warranty’s terms.
Finally, it is also interesting to note that the Court of Appeal’s finding, that the timing of the execution of the collateral warranty was not determinative of whether the warranty is a construction contract, was not appealed. The Supreme Court appears to indirectly support this view given its judgment that a reference to future performance of pre-existing contractual obligations is insufficient to bring the warranty within the HGCRA.
While the Supreme Court was emphatic about the necessary characteristics for a collateral warranty to be considered as providing for the carrying out of construction operations, it has arguably also created a small patch of grey. The key question is whether the warranty provides a separate and distinct obligation to the beneficiary. What about a collateral warranty that expressly gives the beneficiary a right to require the contractor to effect repairs?
If the building contract provides for a rectification period, one may argue that the repair obligation under the building contract and collateral warranty are not distinct nor separate. It may be argued the latter is derivative from the existence of the building contract, notwithstanding that both the employer and beneficiary would have the right to require repairs. This would especially be the case if the period in which the beneficiary can require repairs to be carried out matches that in the building contract.
The position may however be different where the collateral warranty provides that the contractor will undertake repairs for a period of time which is greater than its obligation under the building contract. For example, the collateral warranty provides a contractor will effect repairs for a period of 10 years, whereas, under the building contract, there is a rectification period of 12 months. As such, the Supreme Court’s judgment may not quite be the final word on the construction of collateral warranties.
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