The Supreme Court on whether collateral warranties are construction contracts

In Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 the Supreme Court decided unanimously that the collateral warranty in issue was not a construction contract for the purposes of the 1996 Act and that most collateral warranties will also be regarded as the same. This overrules the decision of the Technology and Construction Court (TCC) in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC). The Supreme Court’s judgment provides much-needed clarity for the industry.

The dispute concerned alleged cladding and fire safety defects at a care home, which were discovered after practical completion in 2018. Abbey, the tenant and operator of the care home, was the beneficiary of a collateral warranty from the building contractor, Simply. The collateral warranty warranted (amongst others) that Simply “has performed and will continue to perform diligently its obligations under the Building Contract”.

In December 2020, Abbey commenced successful adjudication proceedings against Simply for the cost of remediation works. Simply refused to pay the sums awarded in the adjudication and Abbey sought to enforce the decision in the TCC.

The TCC found in favour of Simply in that the collateral warranty was not a construction contract within the meaning of s.104(1) of the Act. This meant the adjudicator lacked jurisdiction to be able to determine the dispute. Abbey sought to appeal the TCC decision, and in June 2022, the Court of Appeal reversed the decision of the TCC, relying on positions as established in the earlier Parkwood decision. Simply sought permission to appeal to the Supreme Court.

In a unanimous judgment, the Supreme Court has provided much-needed clarity confirming that:

“(1) A collateral warranty will be an agreement “for … the carrying out of construction operations” if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor’s obligation to do so under the building contract.

(2) A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement “for” the carrying out of construction operations.”

In reaching this position, the court considered the purpose of the collateral warranty being derivative to the underlying construction contract enabling a beneficiary to bring a direct claim against the entity providing the warranty. The court stated the carrying out of ‘construction operations’ has to be the main object or purpose of the agreement and it must be necessary for the agreement to give rise to the carrying out of such operations. As such, a “collateral warranty that merely promises to the beneficiary that construction operations under the building contract will be performed does not do so”. The main object of a warranty is to provide a right of action and not the carrying out of work. The wording in the collateral warranty of “has performed and will continue to perform…” did not in itself give rise to any construction operations – it is merely promising the obligations under the building contract.

The court also considered the genesis of the Act and in particular the payment regime. Collateral warranties do not typically include requirements for payment (other than the nominal £1 consideration) and therefore the payment mechanism under the Act is not applicable. The original intent for the Act was twofold, with a primary focus being to improve cashflow within construction contracts and this doesn’t extend to collateral warranties.

Practical points:

• This decision is likely to mean that most collateral warranties will not be considered construction contracts.
• There is a dividing line, collateral warranties are generally not construction contracts unless there is a distinct or separate undertaking for the carrying out of construction operations compared to those undertakings under the building contract.
• Specific contractual adjudication provisions will need to be added to a collateral warranty; otherwise, beneficiaries will need to pursue any construction disputes through the courts. How successful negotiating such terms will be, remains to be seen.

Rachel Murray-Smith is a Partner and Helen Arthur is a Senior Professional Support Lawyer at Sharpe Pritchard LLP.

This video is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk