John Dugdale: Is a collateral warranty a ‘construction contract’?
John Dugdale, partner at Belfast firm Carson McDowell, examines a recent English court ruling with significance for construction law.
A recent judgment of the Court of Appeal in England and Wales has provided guidance on whether a collateral warranty can be a “construction contract” for the purposes of the Housing Grants, Construction and Regeneration Act 1996 — the legislation that governs adjudication in construction contracts in Great Britain.
The case arose out of the construction of the Arandale Manor care home in London. Simply Construct was engaged under a JCT Design & Build Contract to carry out the construction.
Abbey was the tenant of the care home, and had a collateral warranty from Simply Construct. The collateral warranty was entered into in October 2020, over four years after practical completion.
Abbey made claims against Simply Construct arising out of fire-safety defects and the cost of necessary remedial work.
Abbey referred a dispute relating to that remedial work to adjudication. Simply Construct took the jurisdictional objection that Abbey’s collateral warranty was not a “construction contract” and it therefore did not have a right to refer any dispute to adjudication.
The issues for the Court of Appeal to determine included:
- Whether a collateral warranty could ever be a construction contract; and
- If it could, did the terms of Abbey’s collateral warranty make it a construction contract?
The Law — Adjudication
The Construction Contracts (Northern Ireland) Order 1997 is the legislation that governs adjudication and payment in “construction contracts” in Northern Ireland.
Under the 1997 Order, a party to a “construction contract” has a statutory right to refer a dispute to adjudication at any time. An adjudicator’s decision is binding on an interim basis, that is, until the dispute is finally determined by arbitration, litigation or agreement.
“Construction contract” is a defined term in the 1997 Order, being (amongst other things) an agreement with a person for the carrying out of construction operations. The 1997 Order also provides for a defined list of “construction operations”.
The regime in England and Wales is similar, albeit different legislation applies.
The Law — The Scheme
Abbey’s collateral warranty did not contain any adjudication provisions.
However, if a construction contract does not contain adjudication provisions, then the relevant provisions of the Scheme for Construction Contracts in Northern Ireland will take effect as an implied term.
Amongst the submissions made by Simply Construct, which argued that the collateral warranty was not a “construction contract” were:-
In respect of one set of construction operations, there could only be one construction contract—in this case the JCT Design & Build Contract and not Abbey’s collateral warranty or any other related warranty.
As there were no future works to be carried out by Simply Construct at the time Abbey’s collateral warranty was signed (i.e. four years after practical completion), the collateral warranty was merely a warranty of a state of affairs akin to a manufacturer’s product warranty. It was not a construction contract.
Abbey was successful, with the Court deciding that Abbey’s collateral warranty was a “construction contract”.
The Court of Appeal construed the term “construction contract” broadly, concluding it not only covers “primary” building contracts—those that look and sound like a building contract—but is also capable of including related agreements, including collateral warranties.
In the words of Coulson LJ, the statutory definition of “construction contract” “was intended to cast the net … as widely as possible”. In other words, the purpose of the legislation was to provide a right to refer a dispute to adjudication to a broad spectrum of parties.
To be a “construction contract”, a collateral warranty ought to relate to the past as well as to the future. That was the case with Abbey’s collateral warranty—which included a warranty that it “has performed and will continue to perform”.
As Abbey’s collateral warranty was both retrospective and looked to the future, it did not matter that it was executed only after completion of the works.
Carson McDowell view
In short, this judgment clarifies that a beneficiary of a collateral warranty can, subject to its wording, avail of adjudication for resolution of disputes. For many, adjudication may provide a speedy and cost-effective alternative to court proceedings.
Whether adjudication is the appropriate forum for resolution of disputes under a collateral warranty, which may be complex disputes relating to defects as was the case with Abbey, ought to be considered on a case-by-case basis.
That a collateral warranty can be a “construction contract” is not new. The High Court in England and Wales decided as much in 2013. Whether this latest decision will have any wider impact on the willingness of parties to give collateral warranties remains to be seen.