Over the past 11 years, the question of whether a collateral warranty is, or can be, a construction contract for the purposes of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) has been considered twice by the TCC, and once by the Court of Appeal.  However, that question was finally settled on Tuesday (9 July) when a five-judge panel (three Lords, two Ladies) of the Supreme Court handed down its judgment in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23.

In short, the Supreme Court held that:

  • A collateral warranty will be a construction contract if it is an agreement by which the warrantor undertakes a contractual obligation to the beneficiary to carry out construction operations which obligation is separate or distinct from the warrantor’s obligation to do so pursuant to the underlying construction contract.
  • A collateral warranty will not be a construction contract where (as is often the case) the warrantor is merely warranting the performance of the obligations it owes to the employer under the construction contract.

Reasoning

The first issue for the Court to decide was the meaning of the following words in section 104(1) of the Act: “an agreement with a person for…the carrying out of construction operations”, which required consideration of the meaning of the word “for” (eliciting a collective groan from non-lawyers!).  The Supreme Court rejected the Court of Appeal’s suggestion that “for” meant “in respect of” and held that for an agreement to fall within section 104(1), it is necessary for that agreement itself (i.e. the collateral warranty) “to give rise to the carrying out of” construction operations: there must be an obligation in the agreement to carry out construction operations that is “separate or distinct” from the obligation to do so in the underlying construction contract.  If the obligation in the agreement is “merely derivative and reflective of obligations owed under the building contract”, the agreement will not fall within section 104(1). 

The second issue was for the Court to interpret the relevant wording of the collateral warranty provided to Abbey, which wording is typical of the collateral warranties with which we are all familiar:

4.1 The Contractor warrants that:

(a)  the Contractor has performed and will continue to perform diligently its obligations under the Contract;

(b)  in carrying out and completing the Works the Contractor has exercised and will continue to exercise all the reasonable skill care and diligence…

The Court agreed that 4.1(a) was a promise to carry out future works, but reasoned that the collateral warranty had to be drafted in these terms in order to cover the warrantor’s past and future obligations. Critically, the Court held that the warrantor was not, by this clause, “promising anything that is not already promised to the employer under the Building Contract. It does not in itself give rise to any construction operation”. 

As such, Abbey’s collateral warranty contained no separate or distinct obligation and was not a construction contract for the purposes of the Act, and so neither will be the many warranties that contain this typical wording. 

Reaction

The judgment may be seen as disadvantageous to beneficiaries of collateral warranties who will now be deprived of the potential benefit of having their dispute decided in adjudication (at lower cost over the course of weeks), rather than in litigation (at a higher cost over the course of months or even years). Nevertheless, that is the consequence of the criteria that parliament set for statutory adjudication to apply, and perhaps warrantors – contractors, subcontractors, and consultants – will breathe a sigh of relief that the group of parties who might bring potentially onerous statutory adjudications against them has been reduced. 

In any event, it remains open to the parties to agree express drafting in their collateral warranties giving them a right to bring contractual adjudication proceedings should they so wish (indeed, it will be intriguing to see whether the market reacts to the Supreme Court’s ruling by doing so).   Moreover, as the Court itself noted, the decision brings certainty to the question of a collateral warranty’s status under the Act, the answer to which will no longer be dependent on whether the works were complete at the time the collateral warranty was executed, or whether there is a right of step-in, or on the “niceties of the language” and “fine distinctions” in drafting, and that is surely a good thing.