Right to Adjudicate under a Collateral Warranty – Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP
August 2021In Toppan Holdings Limited (‘Toppan’) and Abbey Healthcare (Mill Hill) Limited (‘Abbey’) v Simply Construct (UK) LLP (‘Simply’) [2021] EWHC 2110 (TCC), the TCC declined to enforce an adjudicator’s decision due to finding that the collateral warranty in issue was not a construction contract, and so the Adjudicator had no jurisdiction to decide the dispute.
Background
This case concerns the design and construction of Aarandale Manor, a luxury care home located in Mill Hill, London (the ‘Care Home’).
The Defendant, Simply, was engaged by Sapphire Building Services Limited (‘Sapphire’) under a building contract as design and build contractor in June 2015. These works were deemed complete in October 2016.
Following completion, Sapphire novated all its rights and obligations under the building contract to Toppan, the freehold owner of the Care Home. The Care Home was let to Abbey, as tenant operator, under a long lease dated 12 August 2017.
A number of defects were then identified at the Care Home and were notified to Simply in January 2019. Another company was engaged to undertake the remedial works and these were completed in February 2020.
Under the building contract, Simply was obliged, on notification by Toppan, to execute a collateral warranty for the benefit of a tenant. Following the completion of the remedial works, Toppan exercised its right under the building contract and issued a Part 8 claim requiring Simply to execute a collateral warranty for the benefit of Abbey. A collateral warranty was subsequently executed on 23 October 2020 (the ‘Abbey Collateral Warranty’), being 4 years after practical completion of the original construction works, and 8 months after completion of the remedial works.
To recover their respective losses in relation to the disputed defects, Abbey and Toppan both brought separate adjudication proceedings, which ran in parallel. Abbey and Toppan were awarded separate sums in the adjudication proceedings: £1.047m to Toppan and £894k to Abbey (exclusive of the Adjudicator’s fees).
The case before the TCC related to an application for summary judgment made jointly by Abbey and Toppan to enforce the two adjudication awards.
Enforcement of the Abbey decision was resisted by Simply on the ground that the Adjudicator did not have jurisdiction to decide the dispute, as there was no implied contractual right to adjudicate under the Abbey Collateral Warranty.
Separately, for both claims Simply sought a stay of execution on the basis that Toppan and Abbey would most likely be unable to repay the sums awarded if required to do so in later proceedings.
Entitlement to Adjudication
Adjudication is a widely used method for resolving disputes in the construction industry, as it can provide a quick and cost-efficient resolution, without the parties having to resort to lengthy and expensive court proceedings. It can be particularly effective for resolving payment disputes.
Absent any contractual right to adjudicate, a party needs to determine whether it has a statutory right to adjudicate. Under the Housing Grants, Construction and Regeneration Act 1996 (the ‘Construction Act’), parties to a ‘construction contract’ have the implied right to refer a dispute to adjudication at any time, even in absence of an express adjudication clause.
A ‘construction contract’ is widely defined in Section 104 of the Construction Act as being an agreement with a person for any of the following:
- the carrying out of construction operations;
- arranging for the carrying out of construction operations by others; and
- providing his own labour, or the labour of others, for the carrying out of construction operations.
However, there has been some uncertainty as to whether a collateral warranty constitutes a construction contract for the purposes of Section 104, and the TCC’s judgment in this case provides important judicial guidance on this issue.
Judgment
When considering whether the Abbey Collateral Warranty constituted a construction contract under Section 104, the Judge placed particular weight on the Judgment in Parkwood v Laing O’Rourke [2013], and Mr Justice Akenhead’s commentary that:
“A very strong pointer.. 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 warrantying a past state of affairs as reaching a certain level, quality or standard”.
In Parkwood, the decision turned on the wording of the terms in the collateral warranty, and the fact that the terms were not merely warranting or guaranteeing a past state of affairs. Rather, the terms were also providing an undertaking that the party would carry out and complete the construction works, and so the warranty constituted a construction contract for the purposes of the Construction Act.
However, in this case, the Judge analysed the wording of the Abbey Collateral Warranty and stressed that it should be construed against the relevant factual background and the timing of the warranty’s execution. Here, the collateral warranty was executed after the construction works had been completed and the latent defects had been remedied by another contractor.
The Judge concluded that although the wording of the Abbey Collateral Warranty refers to both a past state of affairs and future performance, by the time the warranty was executed it was a warranty of only a state of affairs and could not be construed as an agreement for the carrying out of construction operations.
The Judge concluded that the Abbey Collateral Warranty was not a construction contract for the purposes of the Construction Act. There was therefore no contractual right for Abbey to adjudicate under the Construction Act and so the decision in the Abbey adjudication was not enforced.
Simply failed to show that the financial position of Toppan was sufficient for a stay of execution and so that decision was enforced.
Key Takeaways
The Judgment shows that when determining whether a collateral warranty is a construction contract, for the purposes of the Construction Act, the Court will give particular focus not only to the terms of the collateral warranty, but also to the timing of its execution and whether there are future construction operations to be completed.
This highlights the importance of the parties, and their advisers, establishing at the outset whether they wish to have the right to adjudicate under a collateral warranty.
During negotiations, contractors and consultants may find employers pushing for express adjudication clauses to be included in the terms of a collateral warranty following this decision. However, contractors and consultants should be cautious of agreeing to this. The types of disputes commonly arising under collateral warranties involve negligence and/or breach of contract claims, when adjudication may not be the most appropriate dispute resolution mechanism if the issues are numerous and/or complex given the time periods involved.
This Judgment therefore underlines that when negotiating collateral warranties, forward facing obligations should be avoided to try and reduce the likelihood of adjudication applying (although, this will not be the only factor that is taken into account).
Please do not hesitate to contact James Vernon or your usual Beale & Co contact for more information or with any queries regarding adjudication and/or collateral warranties
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