Introduction

This month saw the UK Supreme Court give the long-awaited judgment in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23, which considered whether a collateral warranty was a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996). Thereunder, a construction contract is defined as carrying out construction operations.

If a collateral warranty is a construction contract for the purposes of the HGCRA 1996, disputes arising thereunder can be adjudicated upon. However, if a collateral warranty is not a construction contract, disputes arising thereunder cannot be adjudicated upon. Ultimately, the Supreme Court concluded that the collateral warranty in question was not a construction contract. We have previously posted about the Court of Appeal’s judgment, which can be found here.

Background

By way of background, in 2013, Akenhead J delivered judgment in Parkwood Leisure Ltd v Laing O’Rourke [2013] EWHC 2665 finding that the collateral warranty in question was a construction contract. At the time, it was considered surprising that a collateral warranty was a construction contract. However, in 2021, Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC) concluded that the collateral warranty in question was not a construction contract considering that the timing at which the warranty was executed was central. This was reversed in the Court of Appeal, with Coulson J concluding that the collateral warranty was a construction contract. Coulson J held that the timing of execution of the collateral warranty was of little relevance to its categorisation as a construction contract.

I was particularly interested in the Supreme Court’s judgment because at a time before the Court of Appeal’s decision in Abbey Healthcare (Mill Hill) Ltd, I was involved in two adjudications regarding collateral warranties. In one adjudication the Adjudicator resigned for want of jurisdiction and in the other the Adjudicator continued and issued a decision.

The UK Supreme Court’s decision in Abbey Health Care (Mill Hill) Limited

The Supreme Court noted that 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.

Whether or not the carrying out of construction operations has to be the main object or purpose of the agreement, it must surely be necessary for the agreement to give rise to the carrying out of such operations.  A collateral warranty that merely promises to the beneficiary that the construction operations undertaken under the building contract will be performed does not do so. In such a case, it is the building contract that gives rise to the carrying out of the construction operations; not the ‘collateral’ warranty. Any 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. There is no promise to carry out any construction operation for the beneficiary; merely a promise to the beneficiary that the construction operations to be carried out for someone else under the building contract will be performed.

The disconnect between a collateral warranty which promises that the building contract will be performed and the carrying out of construction operations is highlighted by the fact that the beneficiary has no control over how those operations are performed. The beneficiary is not entitled, for example, to instruct how the works are carried out, to order variations or to suspend or terminate the works. The beneficiary ‘follows the fortunes’ of the employer under the building contract but has no employment role or rights. If the building contract is terminated by the employer the beneficiary has no right to require the contractor to continue the works unless step-in rights are exercised. At paragraph 84, the Supreme Court concluded 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.

Implications of Abbey Health Care (Mill Hill) Limited for the Irish construction sector

To date the Irish Courts have not given a decision on collateral warranties in the context of the Construction Contracts Act 2013. Given the different findings in Abbey Health Care (Mill Hill) by the UK Supreme Court (finding that the collateral warranty in question was not a construction contract) and the Court of Appeal (finding that the collateral warranty was a construction contract), should a similar matter come before the Irish Court, it will be interesting to see which stance it takes.