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Court of Appeal to review Statutory Right to Adjudicate under Collateral Warranties

  • United Kingdom
  • Construction and engineering
  • Construction and engineering - Articles


Whether or not a collateral warranty is a “construction contract” is important to establish, as this will determine whether the parties have a statutory right to adjudicate under the Housing Grants, Construction and Regeneration Act 1996 (the Act)17. The right to adjudicate is preferable for the beneficiary of a collateral warranty, as it is quicker and often more cost effective than pursuing a claim for defects through the courts. With the Court of Appeal set to consider this issue again in 2022 it is an ongoing point of interest and debate.

The position was first reviewed in Parkland Leisure ltd v Laing O’Rourke Wales and West Ltd18 by Mr Justice Akenhead. He considered the definition of a “construction contract” under the Act, which includes “an agreement for the carrying out of construction operations”19. Based on the facts of the case, he decided that the collateral warranty was indeed a construction contract for the purposes of the Act. This was because the collateral warranty included the words “warrants, acknowledges and undertakes”. The words were examined as follows: “warrants” refers to either a past or future state of affairs; “acknowledges” is a confirmation about something and “undertakes” means a commitment or obligation to do something in the future. It was therefore decided that the collateral warranty had both a retrospective and prospective effect. As the collateral warranty contained a future obligation and was granted before the works had completed, it was decided that it was an agreement for “the carrying out of construction operations”. The collateral warranty was therefore deemed to be a construction contract with a statutory right to adjudicate under the Act. However Akenhead was careful in reaching his conclusion stating, “It does not follow from the above that all collateral warranties given in connection with all construction developments will be construction contracts under the Act. One needs primarily to determine in the light of the wording and of the relevant factual background each such warranty to see whether, properly construed, it is such a construction contract for the carrying out of construction operations. A very strong point to that end will be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed and that the Contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard.”20

This decision was considered in the more recent TCC case of Toppan Holdings Limited and Another v Simply Construct (UK) LLP21. This concerned a collateral warranty that was entered into in favour of a tenant four years after practical completion of the original works and 8 months after remedial works to fire safety defects had been carried out by another contractor. The wording of the collateral warranty contained a warranty from the Contractor that it “has performed and will continue to perform diligently its obligations” under the underlying building contract. The collateral warranty was therefore in relation to works carried out and to be carried out, and the judge was satisfied that the warranty was in respect of both future and past performance. However the judge concluded that it could not be an agreement “for the carrying out of construction operations” as required under the Act because all of the works, including the rectification of latent defects, were complete. In making this decision the judge noted that, “Whilst contractors and beneficiaries should negotiate the contents of their collateral warranties with some caution if they want them not to fall within the Act, the timing as to when they are executed is also important. On the facts of this case I cannot see how applying commercial common sense a collateral warranty executed four years after practical completion and months after the disputed remedial works had been remedied by another contractor can be construed as an agreement for the carrying out of construction operations.”22 Therefore despite the wording of the collateral warranty having both a retrospective and prospective effect the conclusion was that “by the time the Abbey Collateral Warranty was executed it was a state of affairs past or future akin to a manufacturer’s product warranty.”23

Whilst the Toppan judgment seems a logical outcome when applying the principles of the Parkwood case, it does however poses a number of significant practical problems. If the timing of the collateral warranty is crucial to determine its effect, then this could take precedence over the contractual terms and intentions of the parties. There would also be in existence two classes or tiers of collateral warranties: those that offer a statutory right to adjudicate and those that don’t. There could be a very fine line between those collateral warranties that are in one tier and those that are in another. The execution of collateral warranties is often a time-consuming administrative process, and their exact delivery cannot always be guaranteed, particularly in light of the pandemic where parties are not generally available. Also there has been no guidance from the courts on when the crucial cut off date is for determining whether or not the collateral warranty has adjudication rights or not. If it is necessary for the works to still be continuing, to what extent does this apply to remedial works that are ongoing during the defect liability period after practical completion? If the end of the defect liability period is the determining date then this can be variable in practice depending on when sign off is made by the Employer’s Agent. This could have unfair and unintended consequences for the parties. As most parties want certainty when they enter into contracts the current legal position makes this problematic. Although it is possible to add in a contractual right to adjudicate, it is not possible to opt out of the mandatory statutory right to adjudicate if the collateral warranty is deemed to be a construction contract under the Act. If it all depends on timing, then beneficiaries will want the collateral warranty signed up to earlier whilst the warrantor will wish to delay, creating a conflict in when the collateral warranty is procured.

The decision also poses problems for those classes of beneficiary who often get collateral warranties long after practical completion of the works. For example the building contract usually permits subsequent purchasers, tenants and funders to receive a collateral warranty anytime during the building contract’s or consultant appointment’s limitation period (which is 6 year if signed by way of simple contract, or 12 years if executed by deed). The TCC’s decision in the Toppan case means that these classes of beneficiary will not have a statutory right to adjudicate, whereas previous beneficiaries who got their warranty earlier might do. It seems that a collateral warranty given whilst the works are continuing is a “construction contract” under the Act for the whole duration of the collateral warranty’s limitation period. This could result in an increase in demand for either the building contract or the original collateral warranty (such as that given to the first tenant or first purchaser) to be assigned, rather than fresh warranties being granted, so that the right to adjudicate is also assigned. This however is not always possible. Professional indemnity insurers often request a limit on the number of assignments. Also a request for a new collateral warranty may be needed to grant rights of action to purchasers or tenants of part (such as those buying or letting units on a large development).

It is clear that the TCC’s decision in Toppan is unsatisfactory commercially for a number of reasons and it is welcomed news that the Court of Appeal’s decision will be available later this year. It is hoped that the Court of Appeal will consider the legal analysis alongside the wider practical context. It would be better if the parties entering into a collateral warranty have a clear understanding of what rights they are offered and also that there are not inadvertently two classes of collateral warranty (with only some having a statutory right to adjudication) for beneficiaries who have the same legal interest in the works. Currently there is conflict between beneficiaries and warrantors on the timing of the warranties (with warrantors not wishing to offer collateral warranties early) and an unfair disadvantage to those who receive collateral warranties later on, purely based on the whim of the warrantor or upon circumstance. We await what the Court of Appeal has to say with interest.

17. Housing Grants,Construction and Regeneration Act 1996 (as amended)

18. 2013 EWHC 2665

19. s.104 Housing Grants, Construction and Regeneration Act 1996

20. Paragraph 28

21. 2021 EWHC 2110 (TCC)

22. Paragraph 27.

23. Paragraph 30