On 9 July 2024, the Supreme Court handed down judgment in the case of Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2024] UKSC 23, providing clarity on the question of whether a collateral warranty is a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (the “Act”).

The underlying dispute concerned alleged fire safety defects at a care home in North London. The Appellant (“Simply”) was the contractor and the Respondent (“Abbey”) was the tenant and operator of the care home. Simply provided Abbey with a collateral warranty (the “Abbey Collateral Warranty”) warranting, amongst other things, that Simply “has performed and will continue to perform diligently its obligations under the [Building] Contract”.

Lord Hamblen (with whom Lord Briggs, Lady Rose, Lord Richards and Lady Simler agreed) gave the judgment of the Court, allowing Simply’s appeal. As to the definition of a “construction contract” in section 104(1) of the Act, the Court held that:

(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.

It followed that the Abbey Collateral Warranty was not a construction contract. Simply’s promise that it “has performed and will continue to perform” its obligations under the building contract was an entirely derivative promise. It did not in itself give rise to any construction operations. Simply did not promise anything that was not already promised to the employer under the building contract.

This is a significant decision as the only other previously reported case on this issue is Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] BLR 589 (TCC), a decision of Akenhead J.  The Supreme Court found that there were both principled and practical grounds for overruling that judgment and reverting to the position as it was generally understood to be before Parkwood.   

As Lord Hamblen noted:

  • Most collateral warranties are not construction contracts.
  • Collateral warranties were not intended to fall within the scope of the Act, as evidenced by the fact that the payment provisions contained within it do not apply and one of the main purposes of the Act – improvement of cash flow – was not furthered by its application to collateral warranties.
  • It was in the interests of certainty that the applicability of mandatory adjudication to collateral warranties was not dependent on the niceties of the language used in individual cases (for instance the use of the word “warrants” or “undertakes”).  This would lead to fine distinctions being drawn and to disputes on drafting and interpretation.
  • Instead the dividing line is 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.  Only the latter will fall within the Act.
  • If the parties wish to have a right to adjudication, that can always be provided for. However, adjudication on collateral warranties will be voluntary rather than mandatory.

The judgment can be found here.

Anneliese Day KC of Fountain Court Chambers and Michele De Gregorio of Crown Office Chambers were instructed by Nick Hillyard and Kai von Pahlen of DAC Beachcroft on behalf of the successful Appellant.