Collateral Warranties still attract right to adjudicate

Yesterday (21/06/2022) the Court of Appeal handed down an important judgment which will be of interest to the construction industry generally and to those giving and receiving collateral warranties.

The Case

In Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2022] EWCA Civ 823 The Court of Appeal, by a majority of 2 to 1, found that a collateral warranty was a construction contract for the purposes of s.104(1) of the Housing Grants, Construction and Regeneration Act 1996 (“HCGRA”). This meant that the right to adjudicate any dispute was implied into the collateral warranty by s.108 HGCRA.

Abbey is the tenant of a care home constructed by Simply Construct. Abbey was not a party to the original contract to build the care home but had received the benefit of a collateral warranty. That warranty was executed 4 years after the works were completed. The works were defective and Abbey referred a dispute to adjudication, resulting in a decision in its favour to the tune of £900,000.

Abbey sought to enforce the decision through the usual process in the Technology and Construction Court. Simply Construct resisted enforcement on the basis that the adjudicator had no jurisdiction, because the collateral warranty was not a construction contract and the right to adjudicate was not implied in.

The First Instance Judgment

Before the High Court, Simply Construct had successfully argued that because there were no ongoing obligations to carry out construction works at the time of execution (as they were complete), the collateral warranty was little more than a retrospective guarantee of the works.

This enabled Simply Construct to successfully defend proceedings for the enforcement of the adjudicator’s decision.

The Appeal

Overturning the first instance judge, Coulson LJ (with whom Jackson LJ agreed) held that the collateral warranty was a construction contract despite the fact it had been executed some 4 years after the works were completed. The judgment of the Court of Appeal is available here.

Coulson LJ has long been a strong proponent of adjudication as an efficient and cost effective means of resolving construction disputes. He had little difficulty in finding that a collateral warranty can be a construction contract, providing it fits within the broad definition in s.104 HCGRA. He went on to find that this collateral warranty, which was in fairly standard terms, did fit that definition. The Court therefore enforced the adjudicator’s decision in Abbey’s favour.

The Consequences

This decision puts to bed the uncertainty which the first instance decision created. It is likely to be reassuring to tenants, landlords, lenders and other recipients of collateral warranties. They will be reassured that they are likely still to enjoy access to adjudication as a means to recover money with the same speed and efficacy as other players in the industry.

The Court made clear that the exact wording of warranties will be key to deciding whether rights would be implied in. Advice as early in the process as possible will give you more chance to ensure that the wording suits your objectives. So, whether you are entering into collateral warranties and you are unsure what they do, or if you have the benefit of warranties and an issue with a property, our Construction Team can help. If you require this advice, please get in touch by emailing info@leathesprior.co.uk or calling 01603 610911.