On 21 December 2022, the Supreme Court granted permission to appeal the judgment in Abbey vs Simply (July 2022), in which the Court of Appeal had decided (by 2:1 majority) that a collateral warranty was a construction contract. When the Court of Appeal delivered its judgment, it reversed the first instance decision by the TCC that the collateral warranty was not a construction contract. 

What is a collateral warranty?
As the name suggests, a collateral warranty is “collateral” to an underlying construction contract. The primary rights and obligations remain with the parties to that contract (ie the employer and the contractor), but the collateral warranty enables a beneficiary (usually a tenant or funder) to bring a claim against the contractor if the works are defective.

Why does it matter whether a collateral warranty is a construction contract?
The answer lies in the wording of the Construction Act of 1996. When the Act introduced statutory adjudication, it became an extremely popular dispute resolution method in the construction industry. However, statutory adjudication only applies to a construction contract. So, if a collateral warranty is not a construction contract, then the beneficiary cannot use statutory adjudication to advance a claim against the contractor. The beneficiary would have to go to court instead.

When the Court of Appeal held that the collateral warranty was a construction contract, it significantly widened the scope of recourse under collateral warranties generally, to include a right to refer a dispute to adjudication (which the parties cannot contract out of). Because the collateral warranty contained standard wording typically used in the construction industry, most standard collateral warranties have been caught by the judgment of the Court of Appeal.

Since February 2023, Nick Hillyard and Kai von Pahlen have been acting on behalf of the contractor in the appeal before the Supreme Court. Kai von Pahlen (who also acted for the contractor in both the Court of Appeal and TCC) said: “The appeal before the Supreme Court is very important for the construction industry, because it represents an opportunity for the Supreme Court to provide guidance on the proper interpretation of wording typically found in collateral warranties on construction projects.”

Links

Court of Appeal judgment in Abbey vs Simply (July 2022): https://www.bailii.org/ew/cases/EWCA/Civ/2022/823.html

TCC judgment in Toppan and Abbey vs Simply (July 2021): https://www.bailii.org/ew/cases/EWHC/TCC/2021/2110.html