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Increased access to adjudication under collateral warranties

Posted: 05/07/2022


The recent Court of Appeal (CoA) decision in Abbey v Simply Construct [2022] EWCA Civ 823 will increase access to adjudication under collateral warranties, particularly where the warranty is intended to have retrospective effect.

Background

Several years after the completion of the construction of Aarandale Manor Care Home, Simply (as main contractor) provided Abbey (as tenant) with a collateral warranty following court proceedings for an order requiring it to do so.

Latent defects relating to fire safety had emerged after completion and, once the warranty was provided, Abbey brought an adjudication against Simply. The adjudicator awarded Abbey damages. On enforcement, Simply argued - as it had before the adjudicator - that the adjudicator lacked jurisdiction because the collateral warranty was not a “construction contract” for the purpose of s104 of the Housing Grants Construction and Regeneration Act 1996 (“HGCRA”). As such a right to adjudicate was not implied by statute and the warranty contained no express adjudication provision.

The law

Section 104 relevantly provides that “a “construction contract’’ means an agreement…for…the carrying out of construction operations”.

In Parkwood v Laing O’Rourke [2013] B.L.R. 58, the court had considered whether a particular collateral warranty was a construction contract for this purpose.

On the question of whether collateral warranties should generally be regarded as construction contracts, the court expressed the following views:

  • It is common for construction contracts to have retrospective effect, ie because the contract is executed after the works have started. This is not a bar to the contract being a construction contract.
  • The phrase “agreement…for…the carrying out of construction operations” is intended to be a broad one.
  • However, it does not follow that all collateral warranties will be construction contracts. The wording of the warranty and the relevant factual background will be determinative. A pointer in favour will be that the warrantor is agreeing to carry out operations in the future. A pointer against will be that the warrantor is simply warranting a past state of affairs, as in a product guarantee.

On the question of whether the particular warranty in that case was a construction contract, the court noted that:

  • The warranty contained the terms “warrants, acknowledges and undertakes”. The court felt that these terms had different connotations: “warranty” relates to work carried out and to be carried out; “acknowledges” relates primarily to work carried out; and “undertakes” usually entails an obligation to do something.
  • Other terms referred to the past and future, ie “…it has carried out and shall carry out….
  • The works were ongoing at the time the warranty was executed.

The court decided that, as the warranty was a construction contract, so statutory adjudication was available. The question of retrospective effect does not seem to feature in the court’s judgment on the interpretation of the particular warranty.

The potentially retrospective effect of a collateral warranty was explored in a different context in Swansea Stadium Management Limited v City and County of Swansea [2018] BLR 652. In that case, a similarly worded warranty was construed as having retrospective effect for the purpose of determining when the limitation period for claims began to run.

The Abbey collateral warranty

Abbey’s collateral warranty was in different terms to those in Parkwood and Swansea. It did not contain the terms “warrants, acknowledges and undertakes”. The warranty did, however, refer to future works. For example, Simply warranted that it: “has performed and will continue to perform diligently its obligations under the Contract”. It also contained a statement that:

“Insofar as the Contractor has performed a part of its obligations under the Contract before the date of the Contract the obligations and liabilities of the Contactor under this agreement shall take effect in all respects as if the Contract had been dated prior to the performance of that part of its obligations by the Contractor.”

Notwithstanding the above, the court decided that the warranty was not a construction contract, principally because the works - including the defect rectification - had all been completed prior to execution of the warranty. So there were, in fact, no future works when the warranty was executed.

However, the Court of Appeal has overruled this decision and decided that the warranty was a construction contract. The CoA agreed with the previous cases that a distinction should be drawn between, on the one hand, warranting a past state of affairs and, on the other, warranting the ongoing carrying out of construction operations. The latter could be an “agreement…for…the carrying out of construction operations”. The CoA said the word “for” indicates the purpose of the contract and it is not limited to contracts under which the works are done.

The CoA placed particular weight on the obligations expressed in future terms “…will continue to perform…”, which it held was sufficient even without the use of the word “undertakes”, on which weight was placed in Parkwood. In this respect, the CoA went further than the court in Parkwood had done.

 As to the fact that the works were completed before the warranty was given, the CoA said it was “of little relevance” because the warranty was retrospective in effect. Although the CoA dealt with this point shortly, it is another important respect in which the CoA went further than Parkwood. The CoA clearly felt it was right to develop the law in this way. It remarked that any other decision would create avoidable uncertainty and would encourage contractors to delay the execution of warranties until after the completion of the works.

A note of caution

In a dissenting judgment, Lord Justice Stuart-Smith, who favoured a narrower interpretation of “agreement…for…the carrying out of construction operations”, explored the intricacies of determining whether and from when a contract has retrospective effect. This could be a determining factor, so could give rise to issues in future cases if the express terms of the warranty do not make the parties’ intention clear.

Comment

For those who have a say in the drafting of collateral warranties, it has always been possible to include a contractual adjudication provision. However, tenants and subsequent purchasers may have no say. They may be dependent on the warranty being regarded as a construction contract with statutory adjudication implied. This judgment makes it more likely that this will be the case.

It does not follow that the beneficiaries of warranties will always wish to adjudicate. There may be significant disadvantages, particularly for those with no information about the construction process. Adjudication may provide little or no opportunity to compel the other party to provide such information.

Adjudication also usually does not provide an ability to recover legal costs. However, adjudication can be a fast and cost-effective process for claims under warranties. As here, it is being widely used in the context of claims relating to fire safety. In appropriate cases and/or in respect of discrete issues, its use may now increase.

Finally, there was some discussion in the original court’s judgment and before the CoA as to whether a parent company guarantee should also now be considered a construction contract. The original court said it would not. It is not addressed in the CoA’s judgment.

It does not follow from the CoA’s reasoning that a parent company guarantee, in conventional terms, is likely to be regarded as a construction contract. Such a guarantee is legally different to a warranty. It is a secondary obligation guaranteeing the performance of another, not a primary obligation to do something or to do it in a particular way. This would be a further extension of the law and a matter for a future court.


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