Abbey Healthcare – Collateral Warranties

Abbey Healthcare – Collateral Warranties

Written by Matthew Cordwent and Neil Mason.

The question of whether a collateral warranty qualifies as a construction contract has come back to the fore as the decision of the Technology and Construction Court  (“TCC“) in Toppan Holdings Ltd v Simply Construct LLP [2021] EWHC 2110 (TCC) has been appealed. 

The TCC decision, concerning the enforcement of an adjudicator’s decision arising from a dispute about the construction of a care home, was reported on by my colleague Michael Bonning. His article, including a helpful summary of the facts, can be accessed here. As a brief summary, the Martin Bowdery QC, sitting in as a Deputy Judge of the High Court, provided that this collateral warranty (“the Warranty“) could not amount to a ‘construction contract’ as four years had passed between practical completion of the construction and the Warranty being entered into.

The High Court Judge had referred to the decision of Parkwood Leisure Ltd v Laing O’Rouke Wales and West Ltd [2013] EWHC 2665 (TCC) in his decision and commented:

I do not consider that [the Warranty] can be construed as a “construction contract” within the meaning of Section 104 of the Act. I reach that conclusion because whilst construing the section widely I do not consider the agreement between Abbey and Simply as an agreement for “the carrying out of construction operations”.’

This decision was due to the specific facts of this case, and it should be noted that in Parkwood Akenhead J concluded that the collateral warranty there did amount to a construction contract.

However, as Michael says in his article, here the TCC’s verdict on the status of this collateral warranty meant that Toppan Holdings, the freehold owner of the care home, and Abbey Healthcare (Mill Hill) Limited (“Abbey“), the operator of the care home under a lease, could not enforce the adjudication decision they had obtained, for the cost of remedial works and loss of profit respectively, against the contractor Simply Construct LLP (“Simply“).

The Court of Appeal

Abbey appealed against the High Court Judge’s ruling in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2022] EWCA Civ 823. In response, Simply contended that the Warranty was not capable of being a construction contract under s104(1) of the Housing Grants (Construction & Regeneration) Act 1996 (“the Act”).

Coulson LJ considered three distinct questions in his ruling. Firstly, is it ever possible for a collateral warranty to be a construction contract; if it can, did the terms of the warranty in this particular case (irrespective of timing) create a construction contract; and finally, if yes, should the timing of execution of the Warranty lead to a different outcome?

In reaching his decision, Coulson LJ quoted parts of Akenhead J’s comments in Parkwood as below:

(a) The fact that the construction contract (if it is one) is retrospective in effect is not a bar to it being a construction contract. It is common for contracts to be finalised after the works have started and to be retrospective in effect back to the date of or even before commencement. If that is what the effect of the parties’ agreement is, then that cannot prevent it from being a construction contract for the carrying out of construction operations. Put another way, a construction contract does not have to be wholly or even partly prospective.

(b) One must be careful about adopting a peculiarly syntactical analysis of what words mean in this statute when it is clear that Parliament intended a wide definition. An agreement “for … the carrying out of construction operations” is a broad expression and one should be able, almost invariably at least, to determine from the contract in question whether it fits within those words, without what could be a straight-jacketed judicial interpretation.

(c) Usually and possibly invariably, where one party to a contract agrees to carry out and complete construction operations, it will be an agreement “for the carrying out of construction operations.”‘

On the application of these comments, it becomes clear why Coulson LJ came to the conclusion that “this particular collateral warranty was and is to be treated as a construction contract ‘for … the carrying out of construction operations'”. While the Warranty had been entered into four years after practical completion took place, this did not preclude it from being within the definition of a ‘construction contract’ if it was still an agreement “for the carrying out of construction operations.”

Turning to the three issues on appeal, Coulson LJ commented as follows:

  1. Can a collateral warranty ever be a construction contract as defined by s104(1)?

Yes, depending on the wording of the warranty itself. One example provided was concerning a warranty in the form of a fixed promise or guarantee of past state of affairs. Such a warranty would unlikely amount to a contract for the carrying out of construction operations and so would not be considered a construction contract. Alternatively, warranties to carry out construction operations, to a specified standard, would likely amount to a construction contract.

  1. Did the terms of the Warranty make it a construction contract as defined by s104(1)?

Simply had warranted that it “has performed and will continue to perform diligently its obligations under the [building] contract” and “has exercised and will continue to exercise” reasonable skill, care and diligence both in relation to carrying out the designs and the construction itself.

It should be noted that the Warranty did not include the terms ‘acknowledges’ or ‘undertakes’, both of which had been present in the Parkwood warranty. Mr Bowdery QC in his judgment commented that such an omission should not affect whether a warranty could amount to a construction contract and Coulson LJ echoed those views on the appeal.

  1. Did the date on which the Warranty was executed make any difference?

Coulson LJ highlighted that the drafting of the Warranty was such as to have retrospective effect, and as such the fact it was executed following completion of the works was “of little relevance to its categorisation under s104”. In doing so, Coulson LJ applied the judgement of O’Farrell J in Swansea Stadium Management Limited v City & County of Swansea and Another [2018] EWHC 2192 (TCC).

Furthermore, the approach applied in the first instance would result in commercial uncertainty and encourage contractors to delay executing a collateral warranty until the building works had completed, so as to avoid the implied terms allowing adjudication that come with a construction contract.

Jackson LJ concurred with Coulson LJ, but Stuart-Smith LJ provided a dissenting judgement. In particular providing that the word ‘for’ within s104(1) should, he said, be construed more narrowly than as suggested by above, instead being interpreted as “being a word indicating and followed by the purpose of the agreement.” This was argued to mean that the word for is to act as a precursor for one party’s direct and primary contractual obligations to the other.

This case has provided an interesting addition to the discussion of collateral warranties and assists with developing key questions to consider (and those to which carry less weight) when determining whether a collateral warranty amounts to a construction contract.

On the 21 December 2022 the Supreme Court granted permission to appeal the Court of Appeal’s judgment. We look forward to hearing a final decision concerning how section 104 should be interpreted with regards to the wording typically found in collateral warranties.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relation to your particular circumstances, you should seek independent legal advice.

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