When is a collateral warranty not a building contract? The decision in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23

Background

In this case Simply Construct (UK) LLP (Simply) was a contractor under a JCT Design and Build Contract 2011 to Sapphire Building Services Ltd to design and build a care home (the Property and the Building Contract). The Property was ultimately leased to Abbey Healthcare (Mill Hill) Ltd (Abbey). Simply gave a collateral warranty to Abbey which is the focus of this appeal. Upon an adjudication claim being brought by Abbey and ultimately decided against Simply, the question became whether Abbey’s adjudication decision in its favour could be enforced. This turned on whether, as Simply had disputed in the adjudication, the collateral warranty was a ‘construction contract’ for s.104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the Act). 

So far as is relevant, s.104(1) of the Act provides as follows: 

(1) In this Part a ‘construction contract’ means an agreement with a person for any of the following – 
(a) the carrying out of construction operations; 
(b) arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise; 
(c) providing his own labour, or the labour of others, for the carrying out of construction operations. 

It is common practice in the construction industry for collateral warranties to be provided to third parties. The collateral warranty in this case included at clause 4.1(a) the following: ‘[t]he Contractor warrants that: the Contractor has performed and will continue to perform diligently its obligations under the [Building] Contract’. 

Abbey brought proceedings to enforce the adjudication decision in its favour by way of summary judgment. At first instance the High Court (Martin Bowdery QC, sitting as a Deputy High Court Judge) held that a collateral warranty was not a building contract and refused summary judgment. By a majority (Peter Jackson and Coulson LJJ; Stuart-Smith LJ dissenting) the Court of Appeal allowed the appeal and held the collateral warranty was a building contract. The matter was appealed to the Supreme Court. 

Supreme Court 

The Supreme Court unanimously allowed the appeal and refused summary judgment. Lord Hamblen gave the judgment for the Court. 

Lord Hamblen began by noting that ‘for’ was a function word to indicate purpose, or to indicate the object of an activity. The question, then, was whether the object or purpose of the agreement is the carrying out of construction operations. Typically, this is identified as the primary obligation being undertaken under the agreement. 

Lord Hamblen considered it difficult to see how the object or purpose of a collateral warranty is the carrying out of construction operations. The main purpose, instead, is to afford a right of action in respect of defectively carried out construction work. It is not the carrying out of that work. It could not be said a collateral warranty gives rise to the operations; they instead arise as a result of a building contract. Any obligation undertaken to a beneficiary of a warranty derives from and mirrors the obligations already undertaken under the building contract. Thus, everything is referable to the building contract and there is no distinct or separate obligation undertaken to the beneficiary. 

Indeed, this disconnect is illustrated by the fact that the beneficiary under a collateral warranty has no control over how operations are performed. The beneficiary cannot instruct how work be carried out, order variations, or suspend or terminate works. They must follow the fortunes of the employer but are not the employer. 

As to the facts of this case, Lord Hamblen rejected the contention that clause 4.1(a) resulted in a direct obligation to conduct construction operations. Here ‘warrants’ simply meant promise. Whether or not there was included within clause 4.1(a) obligations to perform under the Building Contract, these were entirely derivative. The width of the words in clause 4.1(a) was, rather, simply to capture all of the contractor’s obligations under the Building Contract. 

Lord Hamblen concluded that, were the Court of Appeal right, whether a collateral warranty was a building contract would turn on the language of that contract. He considered this undesirable, and thought it preferable to have a clear dividing line between the two types of contract. This is a distinction which can be easily understood and applied. Considering the past case law, the Supreme Court finally resolved to overrule the decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC). 

Comment 

It is helpful that there is now clarity in identifying what is a construction contract for the purposes of the Act. In circumstances where adjudication is intended to make the decision-making process expeditious, arguments over jurisdiction spilling into the High Court was not a desirable outcome. The decision of the Supreme Court produces a more intelligible position which minimises delays and satellite litigation. 

39 Essex Chambers barristers Vivek Kapoor, Patrick Hennessey and David Hopkins discussed the judgment as well as the implications of Abbey Healthcare in a recent 39EC webinar which can be found here.