Olivia Jenkins and Helen Stuart consider the practical implications of a recent landmark decision by the Supreme Court, which confirms the majority of the Court of Appeal were wrong to conclude that a collateral warranty was a construction contract.
In construction dispute resolution, adjudication is often preferred for its speed and cost efficiency when compared with court or arbitration proceedings. If construction contracts do not confer upon contracting parties the contractual right to refer disputes to adjudication, the Construction Act (formally the Housing Grants, Construction and Regeneration Act 1996) implies a statutory right to adjudicate, which cannot be contracted out of.
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When the collateral warranty was executed:
- Augusta’s building work was complete; and
- fire-safety defects in Augusta's work had been identified and rectified by a third party.
Generally, collateral warranties give third parties, including freeholders, consultants, funders, or leaseholders (like Abbey), contractual rights of action against contractors if their work under a building contract – to which the beneficiary of the collateral warranty is not a party – is defectively carried out. Without Augusta’s collateral warranty, Abbey had no contractual right of action against Augusta in connection with its defective work.
Here, the parties’ collateral warranty did not include a contractual right to adjudicate disputes, so the only way that a dispute between them could be referred to adjudication was if their collateral warranty met the Construction Act’s definition of ‘construction contract’, as that would provide an implied statutory right to adjudicate.
To meet the Construction Act’s definition of a construction contract (contained in section 104(1)), the collateral warranty must amount to an agreement “for… the carrying out of construction operations”.
Abbey argued that Augusta’s collateral warranty met this definition and pursued adjudication proceedings against Augusta in relation to its defective work. Augusta disagreed and so contended that the adjudicator lacked jurisdiction to determine the parties’ dispute. The adjudicator decided in Abbey’s favour and sums were awarded to Abbey (concerning its loss of profit while the defects were being rectified), which Augusta refused to pay.
Abbey commenced court proceedings against Augusta and applied to enforce the adjudicator’s decision (by way of a summary judgment application). In dismissing Abbey’s application, the High Court refused to enforce the adjudicator’s decision on the basis that:
- the collateral warranty did not meet the Construction Act’s definition of a construction contract; and
- the adjudicator consequently lacked jurisdiction to decide the dispute.
While the Court of Appeal disagreed, the Supreme Court has now reversed the Court of Appeal’s decision and confirmed that:
- Augusta’s collateral warranty is not a construction contract as Augusta merely warranted to perform obligations owed to another party under a separate contract, which does not constitute an agreement ‘for’ the carrying out of construction operations; and
- a collateral warranty will only be an agreement ‘for’ the carrying out of construction operations if the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations that is separate and distinct from the contractor’s obligation under the building contract.
A ‘significant’ ruling
It is worth remembering that parties to collateral warranties are not prevented from adjudicating disputes entirely, as they retain their entitlement to ‘contract in’ to adjudication. However, they will not now have a statutory right to adjudicate (that they cannot ‘contract out’ of) unless the collateral warranty confers separate obligations upon the contractor to carry out construction operations.
Although the Supreme Court’s decision aligns with common industry interpretations of the definition of a construction contract, it is significant as it overturns both the Court of Appeal ruling in this case and the longstanding decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), in which it was first decided that a collateral warranty could be a construction contract.
While contractors are unlikely to be inclined to take on additional obligations to carry out construction operations under warranties, and many defect disputes are determined by way of court or arbitration proceedings, parties to collateral warranties are now far more likely to contractually ‘opt in’ to adjudication so that the entitlement to adjudicate is not lost altogether, particularly given its commercial attraction over other forms of dispute resolution.
Helen Stuart is a partner and Olivia Jenkins is a senior associate at Trowers & Hamlins.
