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Collateral warranties and adjudication – time for a rethink?

Details

In light of the recent decision in Toppan Holdings Limited and Abbey Healthcare (Mill Hill Limited) -v- Simply Construction (UK) LLP [2021] EWHC 2110 (TCC), this article discusses whether it is worth changing how collateral warranties are drafted. Has the time now come for collateral warranties to include an express adjudication provision?

Background

  • Sapphire Building Services Limited (Sapphire) engaged Simply Construct (UK) Limited (Simply) to design and build a new care home (the Works)
  • The building contract was an amended JCT Design and Build Contract 2011 (Building Contract)
  • Toppan Holdings Limited (Toppan) were subsequently novated as employer under the Building Contract
  • Abbey Healthcare (Mill Hill) Limited (Abbey) was the tenant of the care home
  • Abbey had the benefit of a collateral warranty (the Warranty)

Facts

Defects arose in the Works and Abbey and Sapphire proceeded to adjudication:

  • The Toppan adjudication was commenced under the Building Contract
  • Toppan was awarded damages for remedial works and professional fees alongside interest and VAT (the Toppan Decision)
  • The Abbey adjudication was commenced under the Warranty
  • Abbey was awarded damages for loss of trading profit alongside interest and VAT (the Abbey Decision).

Several issues arose at enforcement including whether the Warranty was a ‘construction contract’ for the purposes of s.104 of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).

In the absence of an express adjudication clause, the right to refer a dispute to adjudication only arises insofar as the underlying contract is a ‘construction contract’ under s.104 of the Construction Act.

There has previously been no hard and fast rule as to whether a collateral warranty constitutes a ‘construction contract’. In this instance, the court decided that the Warranty was not a ‘construction contract’ and thereby there was no implied right to adjudicate under the Construction Act.

The court cited various previous authorities, but a passage relied heavily on by the court was paragraph 28 of the judgment in Parkwood Leisure -v- Laing O’Rourke [2013] BLR 589:

“It does not follow from the above that all collateral warranties given in connection with all construction developments will be construction contracts under the Act. One needs primarily to determine in the light of the wording and of the relevant factual background each such warranty’ to see whether, properly construed, it is such a construction contract for the carrying out of construction operations. A very strong pointer to that end will be whether the relevant Contractor is undertaking to the beneficiary’ of the warranty’ to carry out such operations. A pointer against 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.”

The court found that the Warranty in this case fell into the category of “a pointer against” insofar as the Warranty was executed:

  • Four years after practical completion; and
  • three years, four months after a settlement agreement had been entered into; and
  • eight months after remedial works had been completed by another contractor.

The court found that:

“Contrary to the submissions of Abbey, 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”.

The court enforced the Toppan Decision but not the Abbey Decision.

Takeaway

Adjudication provides an invaluable tool for the swift and cost-effective settlement of construction disputes. However, for those with the benefit of a collateral warranty the decision will undoubtedly make adjudication far less appeasing. Adjudications require significant time and cost investment and to fall at the final hurdle of enforcement is a frustrating outcome to a claimant.

The time has perhaps now come for collateral warranty drafters to expressly draft an adjudication clause into their warranties. If there is an express term, this removes the uncertainty associated with the implied right to adjudication under the scheme and the question as to whether the warranty is ‘a construction contract’.

For further information on any aspect of this article please contact Matthew Cookson.