Construction Contracts and Collateral Warranties

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5 August 2021

I am taking a look at collateral warranties this week and the Technology and Construction Court decision in the case of Toppan Holdings Limited and 1 other v Simply Construct (UK) LLP.

Background

The claimants made an application to court for summary judgment to enforce adjudication decisions against the defendant, Simply. Simply had undertaken construction works, pursuant to a JCT Design and Build Contract, to a care home which was owned by the first claimant, Toppan, but operated by the second claimant, Abbey.

Practical completion was in October 2016.  In 2018, Toppan notified Simply of fire safety defects and asked Toppan to rectify them.  Toppan then engaged a third party to carry out remedial works.  Then, in October 2020, Toppan, Abbey and Simply entered into a collateral warranty where Simply warranted that it had performed, and would continue to perform, its obligations under the JCT Design and Build Contract. Simply also warranted that it had, and would continue to, exercise reasonable skill and care when completing the works and design. 

Abbey brought a claim against Simply under the collateral warranty for loss of trading profits and Toppan brought a claim against Simply under the JCT.  Both claims were successful at adjudication.  However, during the adjudication Simply challenged the adjudicator’s jurisdiction to deal with the collateral warranty on the basis that it was not a construction contract.  The adjudicator made a finding on jurisdiction in Abbey’s favour. However, that finding was not binding on the court when dealing with enforcement of the adjudicator’s decision.

The Court’s Decision

The court found that the collateral warranty was not a “construction contract” for the purposes of section 104 of the Housing Grants, Constructions and Regeneration Action 1996 (“the Act”).

Whether or not a collateral warranty is a construction contract will be a question of fact and will depend on what is being warranted. In Parkwood Leisure Limited v Laing O’Rourke Wales & West Limited, the collateral warranty included the words “the contractor warrants, acknowledges and undertakes” in respect of works that had been carried out and were to be carried was clearly in relation to the carrying out of construction works. So, the inclusion of that phrase would tend to support that the collateral warranty is a construction contract if the underlying contract was a construction contract.  The collateral warranty made between Toppan, Abbey and Simply did not include the words “acknowledges” or “undertakes”.

The court also stated that though it is possible for a collateral warranty to be entered into after the works have completed and to have retrospective effect.  However, the collateral warranty in this case was entered into 4 years after the work had been completed.  Further relevant facts were that the defects had been attended to by another contractor months before the collateral warranty had been entered into, and that there was no evidence that Abbey or Simply contemplated the possibility of further construction works being carried out.

The clear intention of the parties must be that the collateral warranty should have retrospective effect.

The court concluded that the collateral warranty was akin to a manufacturer’s product warranty and not a construction contract for the purposes of the Act.  As such, the adjudicator did not have jurisdiction to deal with the dispute and the adjudicator’s decision could not be enforced.

Comment

As anyone used to dealing with disputes about the interpretation of a contract will know, getting the wording right in the contract itself will help to minimise the risk of a dispute later on. In this case, timing and other factors meant that the collateral warranty would not be construed as a construction contract. To further avoid the potential for dispute, entering into the warranty before practical completion may assist.

The Dispute Adviser

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