The Supreme Court decision of Abbey Healthcare (Mill Hill) Limited vs Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 provides much needed clarity that the beneficiary of a collateral warranty does not have a statutory right to refer a claim to adjudication.
The matter concerns alleged defects at a care home discovered following practical completion in 2018. Abbey, the tenant of a care home and the beneficiary of a collateral warranty given by the building contractor, Simply, referred its claim against Simply to adjudication. The adjudicator found in favour of Abbey. Simply resisted enforcement proceedings on the grounds that the collateral warranty was not a "construction contract" within the meaning of section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 ("the HGCRA") and therefore the adjudicator did not have jurisdiction. In a 2021 judgment, the Technology and Construction Court ("TCC") decided in favour of Simply. In June 2022, the Court of Appeal reversed that TCC judgment (by a 2:1 majority). Earlier today, the Supreme Court has allowed Simply's appeal and provided much needed clarity on the legal position. In doing so, the Supreme Court also overruled the important judgment of Parkwood from 2013 that had shaped the construction industry's general approach to collateral warranties.
How is adjudication used in construction?
The HGCRA introduced a statutory right for parties to a construction contract to refer their disputes to adjudication. Contractors and sub-contractors came to use adjudication to aid cash-flow during a construction project, allowing them to swiftly (and relatively cheaply) enforce outstanding payments and continue the project. Employers too recognised the benefits in using adjudication, specifically to advance defects claims against contractors.
How is a collateral warranty used in construction?
In the Simply case, it wasn’t a contractor or an employer who attempted to use adjudication. It was a third party, specifically a tenant who was a beneficiary under a collateral warranty. This was controversial because the HGCRA only applies to construction contracts; and, unlike the contractor and the employer, the tenant had never been a party to the original construction contract.
As the name suggests, a collateral warranty is 'collateral' to an underlying construction contract. In the case of a collateral warranty given by a contractor to a third party, the primary rights and obligations of the building contract remain between the employer and the contractor. The collateral warranty simply enables the third party beneficiary to bring a claim against the contractor if a defect interferes with their interest in the property after work is completed. Such a claim would normally be brought in court, but the third party in this case, Abbey, opted to use adjudication.
What did the TCC decide in 2013?
In 2013, in the case of Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), Mr Justice Akenhead considered a similar scenario - whether a tenant, who was the beneficiary of a collateral warranty given by a contractor, could bring a defects claim against the contractor via statutory adjudication. The judge ruled that the parties' collateral warranty was a "contract for the carrying out of construction operations" and therefore a construction contract in accordance with section 104(1) of the HGCRA and consequently that the beneficiary therefore had a right to refer a dispute to adjudication. He notably placed emphasis on the wording of the collateral warranty where the contractor had 'undertaken' and 'warranted' that it had carried out the works in accordance with the building contract.
The Parkwood decision came as a surprise to construction practitioners and received criticism. Nevertheless, it was not appealed to the Court of Appeal, let alone to the Supreme Court, so it remained binding legal authority (until today, that is).
What did the TCC decide in 2021?
In its ruling in July 2021, the TCC sided with Simply and declined to enforce the adjudicator's decision. Mr Martin Bowdery QC (sitting as a Deputy TCC Judge) held that the collateral warranty was not a construction contract and that there was no right to adjudicate under the HGCRA. The judge notably made no attempt to challenge the validity of the Parkwood decision but noted that the collateral warranty given by Simply to Abbey included different language to that in Parkwood . He decided that it was not a construction contract within the meaning of section 104(1).
What did the Court of Appeal decide in June 2022?
The TCC decision was appealed to the Court of Appeal, where the legal issues were scrutinised by Lord Justices Peter Jackson, Coulson and Stuart-Smith. In the June 2022 judgment, the Court of Appeal found in favour of Abbey by a 2:1 majority (with Lord Justice Stuart-Smith dissenting). It is worth noting again that none of the three Court of Appeal judges challenged the validity of the Parkwood decision.
What did the Supreme Court decide in July 2024?
DACB's Nick Hillyard and Kai von Pahlen acted for Simply in the Supreme Court, instructing Anneliese Day KC (Fountain Chambers) as Leading Counsel and Michele De Gregorio (Crown Office Chambers) as Junior Counsel.
The judgment was given by Lord Hamblen, with whom Lord Briggs, Lady Rose, Lord Richards and Lady Simler agreed.
Lord Hamblen's judgment is as clear and straightforward as it is decisive, in that he had no qualms with overruling the Parkwood decision to achieve a "principled and workable approach… which can be easily understood and applied" (as noted at paragraph 76 of his judgment).
Lord Hamblen identified that the then-current interpretation of the law, as established by Mr Justice Akenhead in 2013 (and endorsed by the Court of Appeal in 2022), had produced uncertainty, which was illustrated by the differing decisions made by the four eminent judges who had been involved. He specifically noted (at paragraph 79) that two judges (Lord Justices Peter Jackson and Coulson) had concluded that the collateral warranty was a construction contract, whilst two other judges (Mr Martin Bowdery QC and Lord Justice Stuart- Smith) had concluded that it was not; and that differing reasons had been provided by all four of them. That was clearly an unsatisfactory state of affairs.
Importantly, Lord Hamblen provided the following analysis:
- The approach of the majority [of the Court of Appeal] means that whether or not a collateral warranty [is a construction contract] will always depend on the niceties of the language used and in particular on whether or not it contains language materially similar to clause 4.1(a) [of the HGCRA]. This is likely to lead to fine distinctions being drawn and to disputes in relation both to the drafting of collateral warranties and to their proper interpretation…
- … There are, however, good reasons for concluding that, in general, such warranties were not intended to fall within the scope of the [HGCRA]. In particular, … it is notable how the various payment related provisions of the [HGCRA] (sections 109 to 113) are simply inapplicable to collateral warranties since the consideration provided by the beneficiary is typically nominal, such as the £1 in this case. Further, it follows that one of the twin purposes of the [HGCRA], improvement of cashflow, is not furthered by its application to collateral warranties. Unless step-in rights are exercised the beneficiary has no construction related payment obligations.
Lord Hamblen also noted (at paragraph 83) that prior to Lord Justice Akenhead's decision in Parkwood , the general understanding in the construction industry was that the HGCRA did not apply to collateral warranties; and that there are "both principled and practical grounds" for overruling the Parkwood decision and thus reverting to the position as it was generally understood to be before Parkwood .
Lord Hamblen therefore allowed the appeal and concluded (at paragraph 84) that:
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.
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 practice that means most collateral warranties will no longer be considered construction contracts within the meaning of section 104(1) of the HGCRA, so adjudication will only be available as a remedy if adjudication provisions are specifically drafted into the collateral warranty in question (which was not the case on the facts of the Simply case).
Kai von Pahlen (who also acted for the contractor in both the Court of Appeal and TCC) said: “We are of course very pleased with the outcome of this appeal for our client, but we also think that the Supreme Court judgment is beneficial for the wider construction industry. Lord Hamblen (and the other Justices who agreed with him) have restored certainty to an important area of construction law. As solicitors, we feel privileged that we were able to play a small part in such an important case."
The full judgment can be read at https://www.supremecourt.uk/cases/docs/uksc-2022-0124-judgment.pdf
