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The UK Supreme Court recently released Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 determining that a collateral warranty used in the construction context was not a construction contract under the Housing Grants, Construction and Regeneration Act 1996 (the Act) for the purposes of a right to adjudication. A collateral warranty is an agreement with a third party to provide that party rights in respect of defective works.
Augusta 2008 LLP (Formerly Simply Construct (UK) LLP) (Simply) was engaged as a contractor by Sapphire Building Services Ltd (Sapphire), with the contract later novated to Toppan Holdings (Toppan) for the construction of a care home in Mill Hill, London (Property). The tenant of the Property was Abbey Healthcare (Mill Hill) Ltd (Abbey).
In 2018, alleged construction defects were discovered which Simply refused to remediate, resulting in Abbey bearing the costs of the remedial work. Fast forward to 2020, Toppan requested a collateral warranty to be provided to Abbey. Following proceedings for specific performance, Simply entered into the collateral warranty with Abbey (Abbey Collateral Warranty). The dispute arose in late 2020 following adjudication proceedings commenced by Toppan and Abbey against Simply for the defective work and cost of remedial works.
Judicial History
From commencement, the case has experienced significant judicial analysis as to whether a collateral warranty is a construction contract. Initially, the Adjudicator rejected Simply’s challenge that the Abbey Collateral Warranty was not a construction contract for the purposes of section 104(1) of the Act. The Technology and Construction Courts (TCC) judge took an opposing view. The summary judgment application by Abbey was dismissed on the grounds that the Abbey Collateral Warranty was not a construction contract. On appeal to the Court of Appeal, the majority adopted a contrary view that a collateral warranty may be a construction contract, and timing of the entering of the warranty was not relevant. The Abbey Collateral Warranty was considered retrospective and prospective. Notably, Coulson LJ found that “it is a warranty as to future performance” therefore could still amount to a construction contract.
Supreme Court Judgment
On appeal, the Supreme Court had two issues to determine:
- A statutory interpretation question on section 104(1) of the Act to ascertain the meaning of an agreement “for… the carrying out of construction operations”; and
- A contractual interpretation exercise of how to construe the Abbey Collateral Warranty and, so construed, whether it fell within the scope of s 104(1).
On the first issue, the Court made an important distinction that s 104 requires an agreement for which the purpose or object of the agreement is the carrying out of construction operations. The distinction arises as the warranty which merely promises the work will be performed does not give rise to a “distinct or separate obligation” to carry out the work beyond the original construction contract. The nature of a derivative promise and lack of direct contractual obligation precludes the ability of a collateral warranty to be enforced as a construction contract.
On the second issue, the Court considered the majority’s interpretation of the collateral warranty did in part provide for future performance and it does amount to a promise to carry out the works. Yet the Court noted the majority’s undue weight on the wording which merely amounts to a derivative promise. The contractor is not promising anything beyond their obligations to the employer. Rather, the collateral warranty needs to be expressed in such terms to cover both past and future obligations. Where the contractor is warranting performance of existing obligations under the contract, the warranty will not be an agreement for the carrying out of construction.
The Court’s judgment favoured the approach that the dividing line for collateral warranties be those that replicate the undertakings provided in the head contract and those that give rise to a separate and distinct obligation to carry out construction. On this approach, most collateral warranties will not be construction contracts for the purposes of the Act. This reinforces the certainty that collateral warranties generally fall outside of the Act.
New Zealand’s Approach
The Supreme Court’s approach to collateral warranties provides some guidance on their potential treatment in New Zealand. The Construction Contacts Act 2002 creates a statutory right to adjudication for parties to a construction contract. A construction contract is defined as a “contract for carrying out construction work” (s 5).
NZS3910:2023 schedule 13 provides for the inclusion of a standard form warranty. While the express words of the warranty will always prevail, unamended, this standard form warranty is unlikely to be a construction contract.
If you have any questions about this article, please get in touch with our Construction Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
