COLLATERAL WARRANTIES AND SOPA - FOOD FOR THOUGHT
The recent United Kingdom Supreme Court decision of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 (“Judgment”) is an interesting case on whether collateral warranties given to third parties are subject to statutory adjudication.
Brief facts. The Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”), like the Building and Construction Industry Security of Payment Act 2004 (“SOPA”), provides for a statutory right to refer disputes to adjudication for “construction contracts”.
The appellant, Augusta 2008 LLP (formerly Simply Construct (UK) LLP) (“Simply”), was engaged by Sapphire Building Services Ltd (“Sapphire”) under a JCT Design and Build Contract 2011 with bespoke amendments (the “Building Contract”) to design and build a 65-bedroom care home at Holders Hill Road, Mill Hill, London (the “Property”). Abbey Healthcare (Mill Hill) Ltd (“Abbey”) was the tenant (Judgment [4]).
Under the Building Contract, Sapphire was entitled to novate the Building Contract to the Property’s owner, Toppan Holdings Ltd (“Toppan”), and Simply was obliged, on notification by Toppan, to execute a collateral warranty for the benefit of a tenant or management corporation and in favour of Toppan (Judgment [5]).
On 15 October 2015, Simply executed a collateral warranty in favour of Toppan (Judgment [9]). Works were subsequently certified as practically complete on 10 October 2016 (Judgment [11]), and on 14 June 2017, the Building Contract was novated from Sapphire to Toppan (Judgment [13]). Toppan granted a 21-year lease of the Property to Abbey on 12 August 2017 (Judgment [14]).
Subsequently, a collateral warranty (the “Abbey Collateral Warranty”) was entered into, which was executed by Simply on 23 September 2020 and Toppan and Abbey on 23 October 2020 (Judgment [16]).
Adjudication. On 11 December 2020, Abbey and Toppan referred to adjudication disputes arising out of alleged fire safety defects and the cost of remedial works (Judgment [19]).
Simply challenged the jurisdiction of the adjudicator appointed to the adjudication commenced by Abbey on the basis that the Abbey Collateral Warranty was not a “construction contract” within the meaning of s. 104(1) of the 1996 Act (Judgment [19] – [20]).
This challenge was rejected by the Adjudicator (Judgment [19]), and the Adjudicator rendered his decision finding in favour of Abbey (Judgment [21]).
Court proceedings. Abbey sought to enforce the adjudication decision by summary judgment (Judgment [22]).
Before the High Court, summary judgment was refused on the basis that the Abbey Collateral Warranty was not a “construction contract” (Judgment [24]).
Abbey appealed to the Court of Appeal, where a split decision was rendered with the majority finding that the Abbey Collateral Warranty was a “construction contract” (Judgment [25] – [26]).
Simply then appealed to the Supreme Court (Judgment [27]).
s. 104 of the 1996 Act. Before going further, we set out the salient portion of s. 104 of the 1996 Act below as found in Judgment [30]:
"104 Construction contracts.
(1) In this Part a 'construction contract' means an agreement with a person for any of the following—
(a) the carrying out of construction operations;
(b) arranging for the carrying out of construction operations by others, whether under sub-contract to him or otherwise;
(c) providing his own labour, or the labour of others, for the carrying out of construction operations.
(2) References in this Part to a construction contract include an agreement—
(a) to do architectural, design, or surveying work, or
(b) to provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape,
in relation to construction operations.
(3) References in this Part to a construction contract do not include a contract of employment (within the meaning of the Employment Rights Act 1996) ...
(5) Where an agreement relates to construction operations and other matters, this Part applies to it only so far as it relates to construction operations.
An agreement relates to construction operations so far as it makes provision of any kind within subsection (1) or (2) ... "
What the UKSC held. And in short, what the United Kingdom Supreme Court (“UKSC”) held was that in general, collateral warranties would not be “construction contract” for the purposes of s. 104(1) of the 1996 Act.
As set out in Judgment [65], “[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 collateral warranty generally does not give rise to the carrying out of construction operations and “… [a]ny obligation undertaken to the beneficiary to carry out construction operations derives from and mirrors the obligations already undertaken under the building contract. Everything is referable to the building contract and replicates duties owed thereunder. There is no distinct or separate obligation undertaken to the beneficiary” (Judgment [66]).
The beneficiary has no control over how the building operations are performed (Judgment [67]).
Hence, a collateral warranty would only be a “construction contract” if there is a “separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract” (Judgment [70]).
On the facts of the case, the UKSC held that the Abbey Collateral Warranty was not a “construction contract”.
While Clause 4.1(a) of the Abbey Collateral Warranty provided that Simply warranted that “(a) the Contractor [Simply] has performed and will continue to perform diligently its obligations under the Contract” (Judgment [17]), it was “an entirely derivative promise. The contractor is not thereby promising anything that is not already promised to the employer under the Building Contract. It does not in itself give rise to any construction operation.” (Judgment [72]).
The UKSC also held that if an easily understood and applicable dividing line was to be applied, it would be between “collateral warranties which merely replicate undertakings given in the building contract and those which give rise to separate or distinct undertakings for the carrying out of construction operations” (Judgment [76]), and commented that applying this approach, most collateral warranties would not be construction contracts (Judgment [77]).
In doing so, the UKSC referred the general policy as set out below (Judgment [77]):
“77. … In particular, aside from reasons already given above, it is notable how the various payment related provisions of the 1996 Act (sections 109 to 113) are simply inapplicable to collateral warranties since the consideration provided by the beneficiary is typically nominal, such as the £1 in this case. Further, it follows that one of the twin purposes of the 1996 Act, improvement of cashflow, is not furthered by its application to collateral warranties. Unless step-in rights are exercised the beneficiary has no construction related payment obligations.”
Food for thought. The UKSC then summarised the position at Judgment [84] as excerpted below:
“(1) A collateral warranty will be an agreement "for ... the carrying out of construction operations" if it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the contractor's obligation to do so under the building contract.
(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.”
While there are differences between the 1996 Act and SOPA, the Judgment sheds light how the Singapore court (or adjudicators) may approach this issue if a similar situation arises. This is even though the exact fact pattern is unlikely to arise under the SOPA, bearing in mind that the statutory regime under SOPA only permits the “downstream“ party to present claims against the “upstream“ party.
Nonetheless, the position taken by the UKSC is attractive. It seems strange to say that a collateral warranty given by a contractor to the beneficiary, which in and of itself does not require the contractor to carry out any construction works separate from the contractor’s contract with the employer, should be regarded as a “construction contract”.
But having said that, what constitutes a “separate and distinct” obligation? What if the contractor still has defects rectification obligations? Would this then turn on, e.g., whether the period of the defects rectification obligation mirror those in the contractor’s original contract with the employer, versus a situation where the period was extended by agreement between the beneficiary and the contractor? We leave our readers with this food for thought.
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