The final verdict in the case of Abbey v Simply: Is a collateral warranty a construction contract?

The Supreme Court has this week handed down an important decision in the case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23. Notably, the Supreme Court has reinstated the pre-Parkwood position that the Housing Grants, Construction & Regeneration Act 1996 (HGCRA 1996) does not generally apply to collateral warranties. 

The Supreme Court's decision – the key points

Given the common practice of using collateral warranties in the UK construction industry, the Supreme Court's decision has been keenly anticipated, particularly by contractors, consultants and other parties typically required to provide collateral warranties in favour of various categories of beneficiaries. 

The Supreme Court has now confirmed the following (emphasis added):

1. A collateral warranty will be an agreement "for ... the carrying out of construction operations" for the purpose of s.104(1) HGCRA 1996 if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations. However, this obligation needs to be separate and distinct from the contractor's obligations under the building contract and not one which is merely derivative and reflective of the same. 
2. A collateral warranty where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, will not be an agreement "for" the carrying out of construction operations.

Applying these principles, the Supreme Court found that the collateral warranty in Abbey (Abbey Collateral Warranty) did not qualify as a construction contract. Notably, the Supreme Court's decision appears to have turned less on the precise wording of the Abbey Collateral Warranty, and more on the statutory purpose of the relevant provisions of the HGCRA 1996. In this regard, the Supreme Court went so far as to say that it was "in the interests of certainty that there is a dividing line which means that collateral warranties are generally outside the 1996 Act rather than everything being dependent on the wording of the particular collateral warranty in issue". 

The following paragraphs set out the factual and procedural background to the case and further analysis of the Supreme Court's decision. 

Background to the case

Simply Construct (UK) LLP (Simply) was engaged to build a care home under an amended JCT Design and Build 2011 contract which set out, among other things, detailed provisions in respect of warranties including rights in favour of purchasers and tenants. Pursuant to the contract, Simply executed a collateral warranty in favour of the tenant of the care home, Abbey Healthcare (Mill Hill) Ltd (Abbey). A key term of the collateral warranty, which became central to this case, provided that Simply "has performed and will continue to perform diligently its obligations under the contract" and that it "has exercised and will continue to exercise" reasonable skill, care and diligence in carrying out and completing the works. Several years after completion, fire-safety defects were discovered in the care home. Following Simply's failure to remedy the defects, Abbey and the freeholder brought adjudication proceedings against Simply.

Procedural history 

Adjudication proceedings: Abbey succeeded in its adjudication against Simply and was awarded remedial costs for the fire safety defects. The freeholder also obtained a decision in its favour following a separate adjudication, which it then went on to enforce successfully. Abbey also applied for summary judgment to enforce the adjudicator’s decision, which Simply contested on jurisdictional grounds. 

TCC enforcement proceedings: The judge dismissed Abbey's summary judgment application on the basis that the Abbey Collateral Warranty was not a “construction contract” within the meaning of s.104(1) HGCRA 1996. The judge found that, since the collateral warranty was executed years after practical completion and a settlement agreement being entered into (as well as remedial works being completed), it could not be interpreted as "an agreement for the carrying out of construction operations" as defined by s.104(1)(a). As a result, the adjudicator lacked jurisdiction and his decision was therefore unenforceable. Abbey applied for permission to appeal to the Court of Appeal which was granted.

Court of Appeal: Coulson LJ, who gave the majority judgment, held that a collateral warranty could be a "construction contract" as defined by HGCRA 1996, and based on its precise wording, the Abbey Collateral Warranty qualified as such. It was also held that the date of execution of the Abbey Collateral Warranty was irrelevant to deciding whether it was a construction contract since it contained future-facing obligations and was retrospective in effect. On the other hand, Stuart-Smith LJ, who gave a dissenting judgment, concluded that the Abbey Collateral Warranty did not amount to a construction contract since the relevant provisions warranted Simply's performance of obligations to the employer, and were not clauses in which Simply undertook a direct obligation to Abbey to carry out construction operations. Simply subsequently applied for permission to appeal to the Supreme Court which was granted. 

Further analysis of the Supreme Court's decision 

Until now, there has been a degree of ambiguity as to the extent to which statutory adjudication may be implied into contracts other than those under which works and/or services are procured (i.e. building contracts and professional appointments). As mentioned in the Supreme Court's decision, this ambiguity was introduced by the controversial decision in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), which went against the traditional view that collateral warranties generally fell outside the scope of the HGCRA 1996. 

The Supreme Court decision in Abbey resolves this ambiguity by clearly reinstating the traditional view. Further, in doing so, the Supreme Court has provided useful guidance regarding the interpretation of the relevant statutory provisions under HGCRA 1996 and on the interpretation of collateral warranties more generally.

Statutory interpretation

The first question considered by the Supreme Court was the meaning of an agreement "for... the carrying out of construction operations" in s.104(1) HGCRA 1996. In this regard:

• The Supreme Court disagreed with the Court of Appeal’s broad interpretation of s. 104(1), pointing out that "whilst it may be correct that section 104(1) is expressed in broad terms there is no reason why its interpretation should be approached in a particular way, whether broadly or narrowly". Instead, the process of statutory construction should be approached in the normal way – i.e. what does the statute say and what is it seeking to achieve by what it says?
• Applying these principles, the natural and ordinary meaning of "for…" under s. 104(1) indicated the object or purpose of the agreement. Therefore, the question to be asked was whether the object or purpose of an agreement was the carrying out of construction operations. 
• The Supreme Court found that "[a]s a generality, it is difficult to see how the object or purpose of a collateral warranty is the carrying out of construction operations. The main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work".  
• The Supreme Court's reasoning was further supported by the following points:
  • Whether or not the carrying out of construction operations must be the main object or purpose of the agreement, it must be necessary for the agreement to give rise to the carrying out of such operations, which a collateral warranty does not. 
  • Any obligation undertaken to the beneficiary to carry out construction operations derives from and mirrors the obligations already undertaken under the building contract. There is no distinct or separate obligation undertaken to the beneficiary. 
  • The beneficiary of a collateral warranty has no control over how construction operations are performed. Nor does the beneficiary have any right to "regulate" the construction operations. 

Contractual interpretation

The second question for the Supreme Court was how the Abbey Collateral Warranty should be construed and whether it was an agreement "for... the carrying out of construction operations". 

Of the grounds on which the Supreme Court found that the Abbey Collateral Warranty did not constitute a construction contract, the following are of particular note: 

• Whilst the Abbey Collateral Warranty could potentially be seen as a "warranty as to future performance" and it constituted a "promise to carry out the works" made to Abbey, this promise was entirely derivative. Simply was not promising anything beyond what was already promised under the building contract. Further, a collateral warranty must include forward-looking terms because it needs to cover all the contractor's obligations under the building contract, including past and future performance.
• Importantly, whether a collateral warranty falls within s. 104(1) should not depend on the niceties of the language used; rather, the dividing line should be between (i) collateral warranties which merely replicate undertakings given in the building contract and (ii) those which give rise to separate or distinct undertakings for the carrying out of construction operations. 

Key takeaways

As noted in the decision, the Supreme Court's approach is likely to mean that most collateral warranties will not be construction contracts and will therefore fall outside the scope of HGCRA 1996. This may affect the enforceability of adjudicator's decisions issued pursuant to collateral warranties prior to the Supreme Court's judgment.

The Supreme Court has not ruled out the possibility that some collateral warranties may constitute construction contracts for the purpose of the HGCRA 1996, and questions remain as to the interpretation of collateral warranties that include step-in rights that arguably allow the beneficiary to "regulate" construction operations under a building contract. For the time being, however, the Supreme Court's decision provides the clarity and consistency of approach that the construction industry has been seeking, and will no doubt come as a relief to those who commonly assume obligations under collateral warranties.