The Courts Strengthen the Benefit of Construction Collateral Warranties in Two Recent Cases

Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd [2022] EWHC 1490 (TCC) (“Orchard Plaza”)

Facts

In this case, the manager of a block of apartments, Orchard Plaza Management Company Ltd (“Orchard”), had been assigned the benefit of a collateral warranty which the developer of an apartment block, Balfour Beatty Regional Construction Ltd (“Balfour Beatty”), had originally granted to the funder of the development. The original works were carried out under an amended JCT Design & Build contract.

Orchard claimed damages under the collateral warranty from Balfour Beatty due to a number of defective cladding and fire safety issues. Balfour Beatty argued the losses claimed were too remote from the terms of the collateral warranty, specifically arguing that diminution in the value of the funder’s stake in the apartment block rather than cost of repairs was intended to be covered by the collateral warranty before it was assigned.

Orchard sought summary judgment to strike out Balfour Beatty’s defence of remoteness as having no reasonable chance of success.

Judgement

The TCC ordered summary judgement for Orchard and dismissed Balfour Beatty’s defence of remoteness, citing the following reasons:

• when issuing the collateral warranty, it would be within Balfour Beatty’s reasonable contemplation that if the works were defective, the beneficiary of the collateral warranty (either the original funder or Orchard) would incur repair costs and not just diminution of value. As such, the losses claimed were a foreseeable consequence of a breach of the collateral warranty.
• the collateral warranty contained express “no loss” wording, which did not leave open the possibility of a defence of remoteness after assignment. Specifically, clause 12.3 stated the following:

“12.3 The Contractor agrees with the Beneficiary not to contend or argue that any person to whom the benefit of this Deed is assigned shall be precluded or prevented from recovering under this Deed any loss or damage resulting from any breach of this Deed by the Contractor by reason of the fact that such person is an assignee only or otherwise is not the original beneficiary or because the loss or damage suffered has been suffered by such person only and not by the original beneficiary, or because such loss is different to that which would have been suffered by the original beneficiary.” (emphasis added)

Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2022] EWCA Civ 823 (“Abbey Healthcare”)

Facts

For more information on the first instance case, please see our summary here.

In this case, Simply Construct (UK) LLP (“Simply”), who had been engaged under a JCT Design and Build Contract by Toppan Holdings Limited (“Toppan”) to construct a care home, provided a collateral warranty to Abbey Healthcare (Mill Hill) Ltd (“Abbey”) who would be operating the care home.

The collateral warranty was provided by Simply in October 2020, after both partial completion in October 2016 and completion of remedial works in February 2020.

Amongst others, the collateral warranty included the provisions that:

• Simply “performed and would continue to perform diligently its obligations under the [Building] Contract”; and
• When carrying out the works, Simply had “exercised and will continue to exercise all the reasonable skill and care…”

Abbey argued that the collateral warranty amounted to a construction contract as defined in the section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (a “Section 104(1) Construction Contract”). This is a contract which requires particular wording and provisions, and as a result includes the contractual right for parties to refer disputes to adjudication rather than litigation.

A dispute under the collateral warranty had been adjudicated on the basis that the collateral warranty was a Section 104(1) Construction Contract. Thereafter, Abbey applied for summary judgment for the enforcement of the adjudication.

At first instance, the TCC held that the collateral warranty was not a Section 104(1) Construction Contract. The judge reasoned that as the collateral warranty referred to both past and future performance, it was not an agreement for “the carrying out of construction operations” as was required for a Section 104(1) Construction Contract. Instead, it was a warranty of a state of affairs both past and future (similar to a manufacturer’s warranty) and did not give rise to a right to adjudicate. As such, the claim for summary judgement for enforcement was dismissed.

Abbey appealed against the TCC’s decision to the Court of Appeal.

Judgement

The Court of Appeal by majority allowed Abbey’s appeal, finding that the collateral warranty did amount to a Section 104(1) Construction Contract.

Giving the leading judgement, Coluson LJ provided the following reasoning:

• The definition of a Section 104(1) Construction Contract included the phrase “an agreement for the carrying out of construction operations.” This could be interpreted broadly and includes agreements related to construction operations.
• One of the statutory purposes of the Housing Grants, Construction and Regeneration Act 1996 was to improve dispute resolution through adjudication, which supported a broad interpretation.
• The inclusion of requirements for Simply to “continue to perform diligently its obligations under the contract” amounted to an ongoing promise for the future and therefore could fall into the category of “an agreement for the carrying out of construction operations”.
• The date of execution was irrelevant, considering the future facing obligations and retrospective effects of the collateral warranty. To say that it was relevant would encourage contractors to not sign collateral warranties until after works had been completed in order to avoid their responsibilities under them.

Stuart-Smith LJ, dissenting, argued that the definition of Section 104(1) Construction Contracts should be construed narrowly, and it should not be assumed that all collateral warranties amount to Section 104(1) Construction Contracts.

Simply have not yet stated whether they plan to appeal the Court’s judgment, but it would be interesting to see if the Supreme Court agrees with the majority’s assessment.

Discussion

Both Orchard Plaza and Abbey Healthcare provide greater certainty on how the courts will interpret collateral warranties relating to construction projects and will be welcome judgments for construction clients. However, it must be noted that the courts’ interpretation of a particular collateral warranties will turn on the exact drafting.

Orchard

Orchard Plaza clarified that, provided a collateral warranty includes a clearly drafted “no loss” provision, contractors will not be able to substantiate a remoteness argument in relation to losses incurred by a party to whom a collateral warranty has been assigned.

Further, this judgment demonstrates that a relatively high bar must be met before losses will be deemed unforeseeable absent specific drafting to the contrary.

Abbey Healthcare

The fact that a collateral warranty can constitute a Section 104(1) Construction Contract is not ground-breaking; this point was confirmed in Parkwood v Laing O’Rourke [2013] EWHC 2665 (TCC) (“Parkwood”). The true significance of the Court of Appeal’s judgement in Abbey Healthcare comes from Coulson LJ’s expansion on the reasoning of Akenhead J in Parkwood, arguing that the use of the phrase “warrants” rather than “warrants, acknowledges and undertakes” does not make any material difference as to whether a collateral warranty can be considered a construction contract.

Accordingly, a broader category of collateral warranties may in future be considered to constitute Section 104(1) Construction Contracts, with parties to such agreements thereby benefiting from statutory right to adjudication and associated remedies.

The Abbey Healthcare case is also a pertinent general reminder that the definition of a ‘construction contract’ for the purpose of the Housing Grants, Construction and Regeneration Act 1996 will be construed broadly by the courts.

Sharpe Pritchard has extensive experience preparing all forms of construction contracts and ancillary agreements and are hand to assist parties through their construction projects.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email