Supreme Court upholds appeal in Abbey Healthcare collateral warranties case

12th July 2024

3PB's construction law barrister Tony BinghamAnthony BinghamCall: 1992 comments on the Supreme Court ruling today in the landmark collateral warranties case of Abbey Healthcare (Mill Hill) Ltd (Respondent) v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (Appellant) [2024] UKSC. The appeal gave the opportunity for the Supreme Court to clarify the meaning of section 104 and provide guidance on the proper interpretation of wording typically found in collateral warranties on construction projects.

The appeal considered whether the collateral warranty given by Simply to Abbey is a ‘construction contract’ within the meaning of Section 104(1) (a) Housing Grants (Construction & Regeneration) Act 1996, so as to give rise to a right to statutory adjudication. Collateral warranties give third parties contractual rights against contractors should defects arise in respect of the works carried out by them. It is common practice in the construction industry for collateral warranties to be provided to third parties.

Simply is a contractor under a JCT Design and Build Contract 2011 and was engaged by its employer Sapphire Building Services Ltd to design and build a 65-bedroom care home at Holder Hill Road, Mill Hill, London. On 10 October 2016 Simply completed works on the property. On 14 June 2017, the Building Contract was novated from Sapphire to Toppan Holdings Ltd. On 12 August 2017, Toppan granted a 21 year lease on the property to Abbey Healthcare. In August 2018, Toppan discovered alleged fire safety defects at the property. Simply was notified of the defects and requested to rectify them, which Simply did not do. Toppan subsequently engaged a third party contractor to conduct remedial works, paid for by Abbey. On 23 September 2020, Simply provided a collateral warranty to Abbey and Toppan. Toppan and Abbey made claims against Simply arising out of the fire safety defects and costs of remedial works. On 11 December, Toppan and Abbey each referred to adjudication a dispute regarding the alleged defects, seeking sums in excess of £8.8m and £5.5m respectively.

The adjudicator Peter Vinden found, on 30 April 2021, for Toppan and Abbey on liability. Simply did not pay the sums due. On 12 May 2021, Toppan and Abbey issued proceedings in the Technology and Construction Court(TCC) to enforce the decisions by way of summary judgment. Judge Martin Bowdery KC granted summary judgment in respect of Toppan and dismissed the summary judgment application on the grounds that the warranty given to Abbey was not a construction contract and therefore the adjudicator lacked jurisdiction. Abbey appealed to the Court of Appeal who said that a collateral warranty could be a construction contract and a majority held that the Abbey Collateral Warranty was such a contract with Stuart-Smith LJ dissenting on the latter issue. On 21 December 2022, the Supreme Court granted Simply permission to appeal to the Supreme Court on the question of whether or not the Abbey Collateral Warranty is a construction contract within the meaning of the 1996 Act.

The Supreme Court has unanimously allowed the appeal, which means that the decision of Akenhead J in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), upon which the majority of the Court of Appeal placed considerable reliance and rightly held to be indistinguishable, was wrongly decided and must be overruled.

According to Tony BinghamAnthony BinghamCall: 1992, who specialises in building and civil engineering litigation and arbitration/adjudication/mediation of these disputes: "the key take aways from this important decision of the Supreme Court are that it draws a clear dividing line between the status of collateral warranties which either copy existing obligations of a contractor under a building contract, or those which include separate and distinct obligations owed to the beneficiary under the warranty. Accordingly, most collateral warranties will not be considered construction contracts. The position is likely to be the same with respect to other ancillary documents such as parent company guarantees.

Those drafting collateral warranties should ensure that the obligations owed by a contractor under a collateral warranty do not go further in scope than those provided under any building contract, if they want to avoid the implication of the statutory right to adjudicate. Should a beneficiary under a collateral warranty wish to benefit from the statutory adjudication provisions of the Act, it should now consider including an express contractual right to refer a dispute under the warranty to adjudication."

If you wish to instruct Tony, or see about his availability, please email either of his clerks Joe Townsend on [email protected] or Steve Evers on [email protected] or by calling them on 020 7583 8055.