Adjudicating under collateral warranties

United Kingdom

A recent TCC decision has concluded that a collateral warranty did not fall within the Construction Act and refused enforcement of an adjudication decision obtained in respect of it. Although the court emphasised the late execution of the warranty, many years after practical completion, the court’s decision will increase uncertainty generally as to the adjudicability of collateral warranty claims. The decision also poses questions as to the interpretation of collateral warranties and the extent to which they are to be given retrospective effect.

Parkwood Leisure v Laing O’Rourke: a recap

The Housing Grants Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) applies to “construction contracts”, defined as being (among other things) a contract for the carrying out of construction operations. Up until now, the only case which had considered whether collateral warranties fell within this definition was Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd. The collateral warranty in that case was executed part way through the works and was held to be construction contract subject to the adjudication provisions of the Construction Act.

The court in Parkwood noted that, “A very strong pointer to [a warranty being a construction contract] will be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out [construction] 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 also noted, however, that it is common for construction contracts to be executed after the commencement of the works and to have retrospective effect. This was said not to be a bar to the application of the Construction Act and that, in principle, “a construction contract does not have to be wholly or even partly prospective.”

More recently retrospectivity in relation to collateral warranties was considered by the TCC in Swansea Stadium Management Company Ltd v City & County of Swansea. The court in that case held that the warranty in question operated retrospectively so that the limitation date for claims under it aligned with the same date for claims under the principal construction contract. Supportive of this conclusion was said to be a “no greater liability” clause as well as the fact that the warranty referred to past and future performance of the principal contract without there being any time limitation on when the employer could call for execution of the collateral warranty under the principal contract.

The reasoning in the Parkwood case has also been supported by Mr Lord Justice Coulson, writing extra-judicially in Coulson on Construction Adjudication. He notes that, “From a broader perspective, if the underlying contract was a construction contract, it makes commercial common sense for any parasitic warranties to be treated in the same way.”

Toppan Holdings Ltd v Simply Construct (UK) LLP

A developer entered into a contract with Simply in 2015 to build a care home. The developer’s interest was subsequently novated to Toppan and the contract (as novated) obliged Simply, on notification by Toppan, to execute a collateral warranty in favour of any tenant.

Practical completion took place in 2016 and in August 2017 Toppan granted a long-leasehold interest to a tenant known as Abbey Healthcare. It is unclear when Simply were first requested to execute a warranty in favour of Abbey Healthcare, but it was only after Toppan commenced legal proceedings to compel the provision of a warranty that Simply executed one in favour of Abbey Healthcare in September 2020. In the meantime, defects had been identified in the works which Toppan had refused to repair and which Toppan subsequently had rectified in September 2019.

A number of adjudications subsequently ensued in relation to the defects, including by Abbey Healthcare under the warranty. Simply contended that the adjudicator did not have jurisdiction under the warranty granted to Abbey Healthcare as it was not a “construction contract” for the purposes of the Construction Act. This question (among others) came before the TCC on an enforcement hearing.

Construction Act not applicable

Although the wording of the warranty granted to Abbey Healthcare included both past and future tenses, for example that Simply “has performed and will continue to perform” its obligations under the principal construction contract, the court concluded that it did not meet the definition of a construction contract under the Construction Act. Strong emphasis was placed on the timing of the execution of the collateral warranty, with the court noting that:

“[W]here 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. [W]here the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate.”

The court sought to interpret the express words of the warranty against the factual background and timing of its execution. Practical completion had been achieved for many years, and all remedial works completed, before the warranty had been executed. There was no suggestion the parties had contemplated any further construction operations being carried out. Based on these factors, the court concluded the warranty was no more than a warranty of a past state of affairs and could not realistically be held to be a contract “for the carrying out of construction operations”.

Conclusions and implications

This is a significant decision which will increase uncertainty as to the status of collateral warranties under the Construction Act. In the wake of the Parkwood decision, and given the future tense language used in almost all collateral warranties, there was a high degree of confidence that collateral warranties would generally be subject to the Construction Act and provide the beneficiary with a right of adjudication. This was supported by the passage from Coulson on Construction Adjudication quoted above. The right to adjudicate is rarely included in third party rights regimes and this was an important factor for some parties in favouring collateral warranties over third party rights.

The court’s emphasis on the point at time at which the collateral warranty was executed raises questions as to the doctrine of retrospectivity in relation to collateral warranties. As noted above, the court in Parkwood had considered that a construction contract which operated retrospectively could fall within the Construction Act even without it being “even partly prospective”. The court in Toppan does not make clear whether the warranty before it was to be given retrospective effect, but many of the reasons given in the Swansea case would appear to be applicable. If the warranty was to operate retrospectively, it is difficult to understand on what basis the court concludes that it was not a contract for the carrying out of construction operations.

On the assumption that the court in Toppan considered the warranty not to operate retrospectively, issues of a different kind emerge. Firstly, the case would provide a counterpoint to the Swansea decision and leave scope for parties to argue for potentially much later limitation periods applying under collateral warranties than under the principal construction contract. Secondly, even where a collateral warranty is executed part way through a project (which occurs often) objections may be made that work carried out prior to the warranty is not subject to the Construction Act whereas work carried out after the warranty is. Such “hybrid” contracts are expressly envisaged by section 104(5) of the Construction Act and would appear to be the natural result of a conclusion that such a warranty was not to have retrospective effect.

While one way of avoiding these issues is to include express adjudication provisions in any collateral warranty, this is rarely done and collateral warranty wordings are often standardised. Short of an express adjudication clause, attention should be given to the key verbs used in a warranty. A combination of “warrants”, “acknowledges” and “undertakes” is commonly used, but each of these has subtly different meanings. In Parkwood, the court noted that: “a warranty often relates to a state of affairs (past or future); an acknowledgement usually seeks to confirm something; an undertaking often involves an obligation to do something.” The court in Toppan noted the absence of the verbs “acknowledgement” and “undertaking”, although it is unclear whether the presence of these words – particularly “undertaking” – would have made any difference to the result. Employers and beneficiaries would be well advised to include all three verbs where possible.

References:

Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665

Swansea Stadium Management Company Ltd v City & County of Swansea [2018] EWHC 2192 (TCC)

Coulson on Construction Adjudication (4th Edition), 2018.

Toppan Holdings Ltd & Anor v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC)