In a previous article, we analysed the judgment in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), where the central issue was whether a collateral warranty could be a construction contract for the purpose of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “HGCRA”). Why is this relevant? If the answer is “yes”, the parties have a statutory right to refer any disputes under the collateral warranty to adjudication. Adjudication is a swift and often cost-effective way to resolve construction disputes.

In Parkwood, the court held that a collateral warranty could be a construction contract for the purpose of the HGCRA. This was because the collateral warranty 1) referred to carrying out the construction works and 2) recognised that the construction works were still ongoing. However, the judge in Parkwood said that the works being completed at the time the collateral warranty is executed would be a “strong pointer” towards it not being a construction contract.

In (1) Toppan Holdings Ltd and (2) Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC), the court considered the same issue albeit against a different factual background.

Background

Toppan Holdings Ltd (“Toppan”) is the freehold owner of a care home in Mill Hill, London (the “Care Home”). Abbey Healthcare (Mill Hill) Limited (“Abbey”) is the tenant and operator of the Care Home. Simply Construct (UK) LLP (“Simply”) is a Scottish building contractor.

In June 2016, Sapphire Building Services Limited (“Sapphire”) engaged Simply to construct the Care Home using an amended JCT Design and Build form of contract (the “Contract”). The Contract sum was £4.7m. The Contract obliged Simply to execute a collateral warranty for the benefit of a tenant in favour of Toppan (the “Collateral Warranty”).

In October 2016, Toppan achieved practical completion on the Care Home. In June 2017, Sapphire novated its right and obligations under the Contract to Toppan.

In January 2019, Toppan notified Simply of some defects in the Care Home and requested that they be remedied. Having received no response, Toppan engaged another contractor (“Luciano”) to carry out the works. Luciano had completed those works by February 2020.

It was not until October 2020 that Toppan, Abbey – as the tenant of the Care Home - and Simply had executed the Collateral Warranty. The Collateral Warranty included provisions that:

  • Simply “has performed and will continue to perform […] its obligations under the Contract”; and
  • Simply “has exercised and will continue to exercise” reasonable skill and care in carrying out its design and construction obligations under the Contract.

In December 2020, Toppan and Abbey referred two separate disputes with Simply to adjudication. One of these was known as the “Abbey Adjudication”. (The other adjudication is not relevant for the purpose of this article.) In the Abbey Adjudication, Simply raised the jurisdictional point that the Collateral Warranty was not a construction contract for the purpose of the HGCRA. The adjudicator made a non-binding decision in favour of Abbey. In his decision (the “Abbey Decision”), the adjudicator decided that Simply should pay Abbey some £908,000. Simply did not comply, and Abbey sought to enforce the Abbey Decision. At enforcement stage, Simply again raised its jurisdictional argument.

Decision

The issue for the court to decide (relevant to this article) was whether the Collateral Warranty was a construction contract for the purpose of the HGCRA.

The judge, Martin Bowdery QC, firstly referred to the decision in Parkwood. In Parkwood, the court had interpreted section 104 of the HGCRA (that a construction contract is a contract for “the carrying out of construction operations”) widely. However, Mr Bowdery QC noted that the judge in Parkwood “seemed much exercised” about the timing of any collateral warranty.

Drawing these principles together, Mr Bowdery QC said (at paragraph 26 of the judgment) that:

[W]here 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.

 

[However,] where the works have already been completed […] a construction contract is unlikely to arise and there will be no right to adjudicate.

The judge subsequently held that the Collateral Warranty was not a construction contract for the purpose of the HGCRA. He did not consider, even despite a wide reading of section 104 of the HGCRA, that the Collateral Warranty was for the “carrying out of construction operations”. This was because the Collateral Warranty was executed some four years after practical completion of the Care Home and eight months after the defects were rectified by Luciano. Further, at the time the Collateral Warranty was executed the parties did not envisage any further construction operations – for example the rectifying of defects – taking place.

Therefore, Abbey had no right to refer a dispute under the Collateral Warranty to adjudication and the Abbey Decision could not be enforced.

Commentary

The decision in Toppan v Simply shifts the key issue as to whether a collateral warranty should be considered a construction contract to one of timing.

Most claims made after practical completion will be by the beneficiary for defects in the works. It is therefore important for employers (or contractors in a sub-contract scenario) to ensure that all necessary warranties are executed during the currency of the project if they wish the potential beneficiary to have the option to refer to adjudication later.

Conversely, contractors may look to delay signing collateral warranties to avoid later adjudication and force the beneficiary into lengthy litigation proceedings. In this instance, employers can use adjudication and/or litigation to ensure that the warranties are executed in a timely way. The judge in Toppan v Simply did not indicate whether commencing such proceedings would “stop the clock” for the purpose of executing the collateral warranty. Therefore, the timescales of these processes should be factored in to ensure that the collateral warranty is executed on time after an adjudicator’s decision or court order is made.

Alternatively, if the parties wanted the ability to refer disputes under the collateral warranty to adjudication, they could include an express adjudication clause. This also gives the opportunity to shape the adjudication process, by for example choosing a nominating body and a set of procedural rules. Adjudication is generally accepted as a swift and cost-effective method of resolving disputes when compared to litigation, and so this option may be desirable.

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Liam Hendry
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Peter Blake
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