When Is a Collateral Warranty a “Construction Contract”?
The Court of Appeal in this case considered when a collateral warranty will be regarded as a “construction contract” under the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”).
The key take away points are as follows:
1. In deciding whether a collateral warranty is deemed to be a “construction contract”, one has to look at the obligations being warranted. If a collateral warranty seeks to guarantee obligations in relation to “past and static state of affairs” only, it is more akin to a product guarantee and will not be construed as a “construction contract”.
To provide guidance on this, the Court provided an example of such “product guarantee” wording:
“We completed these works two years ago and we warrant that they were completed in all respects in accordance with the Building Regulations…”
2. To qualify as a “construction contract”, the collateral warranty will have to warrant both past and future performances.
In this instance, the collateral warranty in the Abbey Healthcare case relates to both future-looking and retrospective obligations (i.e. wording of “has performed and will continue to perform” is included); hence the collateral warranty could be construed as a “construction contract”.
In deciding this, the Court also commented that the lack of certain words (for example, “acknowledge” or “undertake”) in the relevant warranty, had little relevance in swaying the Court in finding whether the collateral warranty was a “construction contract”, or not.
3. In regards to the “payment requirement” under the Construction Act, the Court made it clear that a collateral warranty is likely to satisfy the payment requirements under the Construction Act where the collateral warranty includes a nominal payment arrangement.
A typical example of a nominal payment arrangement in a collateral warranty will be the inclusion of the wording ““in consideration of the payment of one pound, receipt of which is hereby acknowledged by [the party]…the deed is agreed as follows:”
4. Assuming that the collateral warranty fulfils the above requirements, it is immaterial as to when it has been executed. The collateral warranty can even post-date the completion of the works.
5. The Court of Appeal also emphasised that the definition of “construction contract” under the Construction Act should be given the widest interpretation whenever possible and it is the intention of the legislature to extend access to the adjudication regime to all, whenever possible. The adjudication regime is very effective in resolving construction disputes (in particular payment disputes) and the 28 days timeframe has proven to be beneficial to the parties on many occasions.
The Court of Appeal has refused permission to appeal the judgment in Abbey Healthcare to the Supreme Court.
It seems, therefore, that a collateral warranty can be a “construction contract” for the purposes of the Construction Act. This will, however, always depend on the wording of the collateral warranty in question.
This case arguably opens up the possibility of adjudication claims in respect of collateral warranties. For beneficiaries of collateral warranties (such as tenants, funders, purchasers and developers) this represents positive news but the effect of the judgment in terms of those providing collateral warranties to such beneficiaries may be that third party rights are offered instead of collateral warranties (on the basis that adjudication may not be available under such third party rights).