When is a collateral warranty a construction contract? Court protects Beneficiaries' rights to adjudication in construction contract disputes
An Appeal Court ruling on rights to adjudication in construction contract disputes under collateral warranties will protect employers and potential beneficiaries, according to national law firm Clarke Willmott LLP.
Chenukshi Ratwatte, a solicitor specialising in construction law at Clarke Willmott, says the judgement in Abbey Healthcare (Mill Hill) Limited v Simply Construction (UK) LLP, which concerned the rectification of fire-safety defects in a care home, will hopefully provide clarification to employers, developers and beneficiaries - and have significant implications for the construction and real estate industries.
The case revolved around a collateral warranty between the two organisations – an arrangement often used in building projects to create a contractual link between two parties which do not have a formal contractual agreement in place.
Abbey Healthcare was the beneficiary tenant under a collateral warranty provided by Simply Construction as contractor. The warranty was issued after practical completion of a care home construction project. When the warranty in favour of Abbey Healthcare was granted, Simply Construction warranted that it had “performed and will continue to perform diligently its obligations under the original building contract” (which was a JCT Design and Build).
Abbey Healthcare brought adjudication claims against Simply Construction seeking remediation of fire safety defects. Simply Construction refused to pay awards due to Abbey Healthcare arguing that a collateral warranty is not a construction contract and so there was no right to adjudication (and to claim any awards granted by said adjudications).
The case reached the Court of Appeal where it was found the market standard wording of the warranty made it a construction contract under Section 104 of the Housing Grants (Construction and Regeneration Act) Act 1996 because the wording contained the promise to “perform and will perform”. This was considered future facing and therefore could be considered to fall under the “carrying out” of construction activities under the Act.
The Court also reiterated its approach that a broader interpretation of Section 104 of the Act will be taken and that a party’s rights to adjudication under the Act will be protected.
“It is likely this decision will have wide application and practical use as it confirms the benefits of adjudication and will have a significant impact in framing how construction contract disputes under collateral warranties can be resolved,” says Chenukshi Ratwatte.
“From now on, what is promised under the warranty should be considered as to whether it relates to fixed or past state of affairs only, or if future performance be covered as well.”
Chenukshi says the decision safeguards a parties’ access to the Construction Act 1996’s adjudication procedure.
“It means in future construction contracts will not only cover primary building contracts but can also cover subsidiary agreements including collateral warranties.
“However, it is still a question of fact and interpretation based on the wording of the warranty or relevant contract and so not all collateral warranties will be found to be construction contracts. This means more focus will now need to be placed on the implications of the wording to be used when drafting and interpreting said warranties.”
Chenukshi says the decision also safeguards a party’s access to the Act’s adjudication and highlights the importance of the adjudication process as whole.
Clarke Willmott LLP is a national law firm with offices in Birmingham, Bristol, Cardiff, London, Manchester, Southampton, and Taunton.
For further information visit: https: www.clarkewillmott.com
