Collateral Warranties and Adjudication: Supreme Court Clarifies Construction Contract Status

In our recent article The Power of Adjudication – Gilson Gray, we explored the power of adjudication. Adjudication is most often deployed in construction disputes.  It provides a quick and relatively inexpensive, albeit temporary, resolution for parties.

As explained in our earlier article, the right to refer disputes to adjudication is automatically conferred upon parties to a construction contract, which is defined in the Housing Grants Construction and Regeneration Act 1996 as “agreements for the carrying out of construction operations”.

The question that often arises in practice: is this particular contractual relationship a construction contract?

Collateral Warranties

 Construction projects usually involve a wide range of parties with an interest in the development or the execution of works. Despite their close involvement there is usually no contractual relationship among most of the parties.

Collateral warranties bridge those gaps and create contractual relationships which would not arise otherwise.  They are usually granted by contractors to third parties who have an interest in the works: e.g funders, purchasers, tenants.

In the usual scenario the contractor warrants to the third party that it has complied with its obligations contained in the underlying construction contract. If the contractor has not complied, the collateral warranty creates a contractual basis for the third party to claim against them.

Is a Collateral Warranty a Construction Contract?

As will be obvious from the introduction, whether a collateral warranty is a construction contract is an important question.  Only a party to a construction contract has the statutory right to adjudicate disputes arising from it.

The Supreme Court recently handed down its judgment in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] U.K.S.C.23.  The court found unanimously that the collateral warranty in that case was not a construction contract; and on a proper construction the majority of collateral warranties are not construction contracts.

In assessing whether there is a construction contract, the court requires to determine whether the object or purpose of the agreement is the carrying out of construction operations. The agreement itself must give rise to the operations.  In the usual scenario, the construction operations arise from the construction contract; not the collateral warranty which is a promise of performance.

The court did note that if the collateral warranty provides a “separate or distinct obligation to carry out construction operations”, which is not reflective of the obligations in the construction contract, then it could constitute a construction contract.

The clarity in this area is welcome.  In Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] BLR 589 (TCC) it had been held that the collateral warranty was a construction contract.  The Supreme Court has overruled that decision and reinstated the traditional view of collateral warranties.

That the statutory adjudication will not apply to most collateral warranties does not exclude the forum entirely.  The right to adjudicate can be drafted into the warranty as it is in other contracts.

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