Adjudicating claims under a Collateral Warranty

Abbey Healthcare v Simply Construct: BLR [2022] p. 433, Court of Appeal

The Facts

Simply was a builder, which constructed the Arundale Care Home, achieving practical completion in October 2016.  In August 2017 Abbey took a long lease of the property in order to operate it as a care home.  Extensive fire safety defects were discovered and rectified at considerable expense in 2018.  In October 2020 Simply gave a collateral warranty to Abbey and subsequently took Abbey to adjudication for repair costs.  The adjudicator found he had jurisdiction, and ordered Abbey to pay £908,000!

The TCC refused to enforce the award on grounds that warranty was not a contract for construction operations.

The Court of Appeal (2:1) Held

• Abbey’s appeal was granted, since
• The builder’s collateral warranty to the Tenant was, on its wording, a “contract for construction operations” (see section 104(1) Housing Grants Construction Regeneration Act 1996).

Comment

1. The CA consciously adopted a wide interpretation of s. 104(1) “a construction contract means an agreement with a person .....for the carrying out of construction operations”.
2. Simply had a contractual duty to give the warranty to the Tenant, even though it knew that a claim would follow.  This case shows the importance of ensuring that a Warranty gives the Beneficiary no greater nor longer rights than the original Employer.
3. Unfortunately, this decision also creates at least 2 serious problems:
4. all 3 judgements of the court placed great stress on the interpretation of the specific wording.  This means that much time will be spent in future arguing whether not particular warranties are or are not contracts for  construction operations, and before that, in negotiating the wording so as to impose or avoid this status;
5. collateral warranties given by design professionals will drag their underwriters into high-speed 28 day dispute resolution, with limited opportunity to involve defence expert evidence, and the threat having to make a major payout and then pursue recovery through the courts.