REUTERS | Bogdan Cristel

When is a collateral warranty a “construction contract”?

Or should that be, when is a collateral warranty not a construction contract?

July was a busy month for TCC judgments, which makes the job of writing these blogs considerably easier. In addition to the fascinating judicial review cases being brought by the Good Law Project, one case that caught my eye was Timberbrook Ltd v Grant Leisure Group Ltd because it concerned the construction of a new orangutan enclosure at Blackpool Zoo. However, it is quite a detailed, merits-based judgment and, in the end, I plumped for the only TCC judgment (at least of those on BAILII) that concerned adjudication, Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP.

It is an interesting judgment by Martin Bowdery QC, sitting as a deputy High Court judge, not least because two decisions (from the same adjudicator) were dealt with in the same enforcement proceedings.

Toppan Holdings Ltd and Abbey Healthcare Ltd v Simply Construct (UK) LLP

The facts in Toppan Holdings Ltd v Simply Construct (UK) LLP are relatively straightforward but there are quite a few players to introduce and a number of steps in the chronology worth highlighting:

  • In June 2015, Sapphire Building Services Ltd entered into a JCT Design and Build Contract, 2011 Edition, with Simply Construct (UK) Ltd, whereby Simply was to design and build a care home in Mill Hill, London (the building contract). Those works reached practical completion in October 2016.
  • There was a dispute over defects and sums due and, in June 2017, the parties entered into a settlement agreement. That agreement did not settle claims for latent defects.
  • Thereafter, Sapphire novated all its rights and obligations under the building contract to Toppan Holdings Ltd, the freehold owner of the care home.
  • In August 2017, Toppan granted a lease to Abbey Healthcare (Mill Hill) Ltd so it could operate the care home. (Toppan and Abbey have the same owners.)
  • During 2018, defects were discovered, which were notified to Simply in early 2019. Simply did not rectify the defects and Toppan engaged another contractor, who completed the remedial works in September 2019.
  • In August 2020, Toppan issued Part 8 proceedings to require Simply to execute a collateral warranty in favour of Abbey. The warranty was subsequently executed by the parties.
  • In December 2020, two adjudications were started with Simply as the responding party and the same adjudicator was appointed. The costs of the remedial works were addressed in the Toppan adjudication and a claim for loss of trading profit in the Abbey adjudication.
  • The adjudicator issued his decisions in April 2021, awarding Toppan some £1.07 million and Abbey £908,000.

Enforcement proceedings

Simply did not comply with the adjudicator’s decisions and resisted enforcement, arguing that the adjudicator in the Abbey adjudication lacked jurisdiction because the collateral warranty was not a construction contract. It also raised issues regarding interest and VAT, and sought a stay of execution of both decisions. Crucially, Simply had raised the collateral warranty-jurisdiction point in the Abbey adjudication and the adjudicator had given a non-binding decision. However, no jurisdictional reservation had been made in the Toppan adjudication or on the other points raised in the enforcement proceedings.

Can a collateral warranty be a construction contract?

The majority of the judgment deals with whether a collateral warranty can be a construction contract. It starts by looking at the judgment in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd, where Akenhead J said yes, a collateral warranty can be a construction contract.

In Toppan v Simply, the judge:

  • Compares the words used in the Abbey collateral warranty with the language used in the Parkwood collateral warranty:

“Mr Justice Akenhead reviewed the precise wording of the collateral warranty and looked at each of the verbs, ‘warrants, acknowledges and undertakes’ as having a different meaning … The Abbey Collateral Warranty does not include the verbs ‘acknowledges’ or ‘undertakes’ … Simply warranted that … It ‘has performed and will continue to perform diligently its obligations under the Contract’…”

“Any breach of contract created by the collateral warranty would be regarded as actionable from the original date on which the breach occurred even though the relevant facts occurred prior to the effective date of the collateral warranty.”

“Although … the judge noted that it did not follow from his conclusion that all collateral warran­ties given in connection with all construction developments would be construction contracts under the 1996 Act, it is safe to assume that, on this analysis, because the provision noted above is commonly found in such warranties, they will be so regarded.”

Ultimately, the judge decided that the Abbey collateral warranty was not a construction contract and so there was no right to adjudicate. As such, the application to enforce the adjudicator’s decision failed. However, there was nothing wrong with the decision in the Toppan adjudication and so it was enforced. There was no stay of execution because there was “no evidence of a probable inability to repay the monies”.

My thoughts

In answering the question posed in the title of this blog, one has to look at when the parties executed the collateral warranty and whether the works being warranted were ongoing at the time.

In Parkwood, Akenhead J expressly stated that a pointer against a collateral warranty being a construction contract was where the works were complete and the contractor was therefore warranting a past state of affairs. This has now been elaborated on by the judge in Toppan v Simply:

“- where a contractor agrees to carry out uncompleted works in the future that will be a very strong pointer that the collateral warranty is a construction contract and the parties will have a right to adjudicate.

– where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate.”

As we can see, the timing of the execution of the collateral warranties is now of primary importance in deciding whether they constitute a construction contract. Interestingly, this is not something that Coulson LJ focused on in his commentary on Parkwood in his book. Indeed, he concluded his commentary by stating:

“From a broader perspective, if the underlying contract was a construction contract, it makes commercial common sense for any parasitic warranties to be treated in the same way.”

In Toppan v Simply, the judge referred to the fact that the Abbey collateral warranty did not include the verbs “acknowledges” or “undertakes”, but even if it had this may not have altered his overall conclusion given his findings concerning the timing of the warranties. This suggests that the express wording of the obligations might be of lesser importance than the timing of the execution, which will be a question of fact.

Implications of the Toppan v Simply judgment

So, what are the possible implications of the timing issue for construction projects?

An obvious one could arise where a project is nearing completion and the warranties have still not been executed. In those circumstances, it may suit one party for the warranties not to be “construction contracts” and therefore not be subject to a right of adjudication, and so that party might go out of its way to avoid executing the warranties before practical completion of the relevant works.

One way of avoiding the issues that arose in Toppan v Simply is for the parties to include express provision for adjudication in the warranties themselves and, in my view, this is long overdue. Overall I think most parties involved in construction would agree that the positives of adjudication outweigh the negatives and so I do not consider that including an express right to adjudicate in a collateral warranty should be controversial.

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: