A New View of Collateral Warranties

Key Contacts: Clare Cashin – Partner 

UK Supreme Court’s Ruling in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23.

On 9 July 2024, the UK Supreme Court delivered judgment in a case which provides useful guidance as to whether a collateral warranty should be regarded as a “construction contract” for the purposes of adjudication.

The case was looking at a “construction contract” within the meaning of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the “UK Act”) but of course it is equally of interest to lawyers considering the same question under the Irish Construction Contracts Act 2013.

The UK Supreme Court ultimately determined that, in most cases, a collateral warranty will not be a construction contract for the purposes of the Act, thereby overruling the decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd (“Parkwood”), which had been a statement of the law in this area for over 10 years.

Background to the proceedings

By way of brief factual background:

Is a collateral warranty a construction contract?

Pursuant to the UK Act (and indeed the Irish legislation too, being the Construction Contracts Act 2013) one of the first tests to meet in order to pursue a statutory adjudication is that one must have a construction contract. 

The central question arising in this case was accordingly, whether the collateral warranty executed by Simply in favour of Abbey Healthcare constituted a construction contract under the UK Act, and would therefore give rise to statutory adjudication rights.

The TCC in 2021 determined that the collateral warranty was not a construction contract within the meaning of the Act. The Court of Appeal in 2022 overturned this decision, relying on the principles established in Parkwood back in 2013. Simply subsequently appealed the case to the Supreme Court and that decision has landed just now in 2024,so it has been quite a protracted saga.

In reaching a decision, the Supreme Court carried out a statutory interpretation of the UK Act and a contractual interpretation of the wording within the warranty itself.

The Supreme Court considered the meaning of an agreement “for… the carrying out of construction operations” in section 104(1) of the UK Act. In this regard, the question was whether the object of the warranty was the carrying out of construction operations.

The Supreme Court found that it is difficult to see how this could be the purpose of a collateral warranty and that “the main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work”.

In considering the legislation on a wider basis, the Supreme Court noted that the various payment provisions within the UK Act are simply inapplicable to collateral warranties (in collateral warranties the consideration provided by the beneficiary is normally nominal and in this case involving Abbey Healthcare they paid £1). The Supreme Court concluded accordingly that this indicates that such warranties were not intended to fall within the scope of the Act.

On a contractual interpretation of the warranty itself, the Court found that Simply was not promising anything that had not already been promised under the building contract. The warranty was therefore considered an entirely derivative promise, which itself does not give rise to any construction operation.

This reverses the approach as taken by Judge Akenhead in Parkwood, whereby a broad interpretation of section 104(1) was adopted. However, even Judge Akenhead in the TCC in Parkwood acknowledged that not every warranty would be a “construction contract” and, in this regard, “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 timing of the collateral warranty was considered to be of key importance in Parkwood, in circumstances where the warranty was executed while works were on-going and the warranty therefore was “not merely warranting or guaranteeing a past state of affairs”.

In contrast, in the case to hand involving Simply and Abbey Healthcare, the collateral warranty in favour of Abbey Healthcare was executed 4 years post-completion.

In overruling Parkwood, the Supreme Court said Parkwood cannot be satisfactorily distinguished from the present case and that “…there are both principled and practical grounds for overruling the decision and reverting to the position as it was generally understood to be before Parkwood. This allows parties to contract into the adjudication regime where this is seen as desirable but not to be fixed with an inability to contract out”.

Supreme Court findings

A distinction is drawn between collateral warranties which merely replicate undertakings given in the building contract and those which give rise to separate undertakings for the carrying out of separate and distinct construction operations.

The Supreme Court set out its conclusion as follows:

1. “A collateral warranty will be an agreement “for… the carrying out of construction operations” if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor’s obligation to do so under the building contract.”
2. “A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement “for” the carrying out of construction operations.”

Conclusion

This decision provides welcome clarification as it is the more obvious and logical interpretation of what a collateral warranty is; a contract collateral to the building contract ; a contract which is simply warranting (to the beneficiary) performance of the obligations owed to an employer; it is not offering to carry out construction operations separate and above the obligation in the building contract (and if on the off-chance it does take on this separate and distinct obligation, then of course it will be considered a construction contract).

This case reverses the precedent set in Parkwood; typical collateral warranties will not be considered construction contracts within the meaning of the Act.

In light of our own dearth of case law on these adjudication questions, the decisions of the UK TCC provide really helpful guidance to Irish adjudications.

This article was written with the assistance of Fiona McLoughlin, Trainee