Can collateral warranties be adjudicated?

This affair asks whether a collateral warranty is capable of being adjudicated like any other construction contract. Pause for a moment. A collateral warranty creates a direct second link between, say, an employer and a subcontractor – second in the sense that an employer can then obtain remedial works either from the main contractor or the subcontractor which actually did the work. It’s another string to the employer’s bow. A contractual link is needed in order to claim economic loss. The collateral warranty is frequently used to link a main contractor with a new owner of the premises built or to link a tenant with the main contractor.

In Abbey Healthcare (Mill Hill) Ltd vs Simply Construct (UK) LLP, Abbey took a 25-year lease on a new building for a care home in Mill Hill, London, called Aarendale Manor. Abbey waved the collateral contract at the main contractor, Simply Construct, alleging the partitioning was not 60-minute fire-rated. The claim neared £2m. The Abbey lease required the leaseholder to claim defective work via the collateral warranty from the main contractor, but when it baulked Abbey began an adjudication. Irrespective of whether Abbey had a good claim, Simply Construct deployed a debate we have been having for 20 years: is a collateral warranty a construction contract? If yes, the adjudicator has jurisdiction; if no, it’s goodbye to the adjudicator.

Is a collateral warranty a construction contract? If yes, the adjudicator has jurisdiction; if no, it’s goodbye to the adjudicator

The adjudicator dismissed the notion he had no jurisdiction. He decided Simply Construct owed a lot of money to Abbey. But the High Court enforcement failed. The judge ruled adjudication did not apply because the remedial works had already been completed by another contractor and no more work was to be completed when the actual collateral warranty was executed.

>>Also read: Is a collateral warranty a construction contract?

>>Also read: Collateral warranties: beware time bars

So it came to the three-person Court of Appeal. Simply Construct was determined not to obey the adjudicator’s decision. Its hat was firmly fixed on the idea that the wording in the collateral contract did not provide for adjudication. Lord Justice Coulson and Lord Justice Parker decided the adjudicator was correct to decide the dispute. Lord Justice Stuart-Smith said the opposite.

Let’s look at the wording of the document:

“4.1 The contractor (Simply) warrants that:

(a) The contractor (Simply Construct) has performed and will continue to perform diligently, its obligations under the contract;

(b) In carrying out and completing the works the contractor (Simply Construct) has exercised and will continue to exercise all … reasonable skill, care and diligence.”

As to other provisions:

• The contract is defined in clause 1 as “the contract in the form of a JCT Design and Build Contract dated 29 June 2015 entered into by Sapphire Building Services Ltd and the contractor under which the contractor is to carry out the works”.
• The works are defined in the same clause as “the construction of the development at the site”.
• Clause 4.2 provides that if the contractor had performed part of its obligations under the contract, the agreement should take effect as if it were dated prior to that performance.
• Clause 4.3 provides that the duties owed by the contractor to the beneficiary under the terms of the ACW shall be no greater than those owed to the beneficiary had the beneficiary been named as the employer under the contract.

Focus intensely on the precise terms that the contractor warranted to be true, said Lord Justice Stuart-Smith. The contractor warranted that it “has performed and will continue to perform diligently its obligations under the contract”. That is a promise in relation to Simply Construct’s obligations that are owed to someone else and not to Abbey. That is made clear by the last words of the sentence: what Simply Construct warranted was that it had performed and would perform its obligations “under the contract” (meaning the obligations it owed to the employer under the JCT building contract).

Lord Justice Stuart-Smith added: “There is […] nothing in the terms of the sentence that either says or implies that Simply Construct is undertaking direct obligations to Abbey: it is merely warranting its performance of obligations owed to someone else.” His point is that Simply is not assuming an obligation of skill, care or direct obligation to carry out the works for Abbey. If anything, the warranty gave Abbey a right of action for breach of warranty, not a breach of any direct obligation to carry out the works. If that is correct then the warranty falls outside the Construction Act, whose scope is the carrying-out of construction operations or arranging to do so.

Lord Justice Coulson and Lord Justice Parker saw the warranty as a promise by the contractor to continue performing its obligations under the contract for someone else. These are the primary promises under the JCT contract to the employer, but that does not stop the promise also being made by the contractor to others such as leaseholders or new owners. The dissenting judge may have been content if the wording in the warranty actually said Simply Construct would carry out construction operations.

In the event, the Court of Appeal entered summary judgment for Abbey and ordered Simply Construct to pay the amount awarded by the adjudicator.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple