Collateral Warranties And The Right To Adjudicate
If parties seek to rely on the statutory right to refer a dispute to adjudication, there must be a “construction contract” for the purpose of “carrying out of construction operations” as defined in s104(1) of the Housing Grants, Construction and Regeneration Act 1996.
Uncertainty as to whether a collateral warranty constitutes a “construction contract” has prevailed since the decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC); [2013] BLR 589. In that case, the Judge held that certain collateral warranties were construction contracts within the meaning of the 1996 Act, depending on the wording of the warranty in question. The Judge held that if the contractor was “undertaking to the beneficiary of the warranty, to carry out construction operations”, the agreement would be a construction contract and the statutory right to adjudication would apply.
This week, the Supreme Court overruled Parkwood, in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024 UKSC 23], providing welcome clarification to the position.
Background
The case arose from tenant and operator of a care home (being the beneficiary of a collateral warranty from the contractor) bringing an adjudication against the contractor regarding the costs of remedial works for remedying fire safety defects. The remedial works had been carried out by a third party contractor, as the contractor had refused to carry out the works. The contractor resisted enforcement of the adjudicator’s decision on the grounds that the collateral warranty was not a “construction contract” under the 1996 Act.
In the first instance, the Technology & Construction Court Judge dismissed the enforcement proceedings on the basis that the collateral warranty was not a construction contract under the 1996 Act. The adjudicator therefore lacked jurisdiction, so the decision was unenforceable.
The Court of Appeal (CA) allowed the appeal by a majority (Peter Jackson and Coulson LJ: Stuart-Smith LJ dissenting). The majority held that the collateral warranty was a construction contract within the meaning of s104(1). Accordingly, the adjudicator had jurisdiction, and the decision should be enforced.
The Supreme Court’s decision
The contractor was granted permission to appeal to the Supreme Court, who determined there were two key issues that needed to be determined:
- Statutory interpretation: what was the meaning of an agreement “for… the carrying out of construction operations” in section 104(1) of the 1996 Act?
- Contractual interpretation: how should the collateral warranty in this case be construed, and when so construed, was it an agreement “for… the carrying out of construction operations”?
The Supreme Court reversed the Court of Appeal’s decision, and held that a collateral warranty will only be an agreement under s104(1) if the contractor undertakes a contractual obligation to the beneficiary with the object or purpose of carrying out of construction operations.
Therefore, the obligation must be a separate and distinct one from the contractor’s obligation to carry out construction operations pursuant to the underlying building contract.
Where the contractor is merely performing its obligations owed to the employer in accordance with the underlying building contract, it will not be an agreement “for” the carrying out of construction operations.
What does this mean going forward?
The Supreme Court decision provides welcome certainty that most collateral warranties will not be construction contracts within the meaning of s104(1) of the 1996 Act, and so the statutory right to adjudicate disputes will not apply.
As well as removing the uncertainty over whether a particular warranty met the old test set out in Parkwood, this removes a potential concern that certain ancillary contracts (such as parent company guarantees or fundings agreements) could arguably have been deemed to be construction contracts within the meaning of the1996 Act.
If parties wish to have the right to adjudication under collateral warranties, they will therefore usually need to include an express contractual provision to give a contractual right to adjudicate, and so “contract in” to the adjudication regime. Whether or not that opt in is agreed in the course of negotiations, the parties will know where they stand.
