The recent decision made by the Court of Appeal in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) Llp  EWCA Civ 823 (21 June 2022) has overturned the earlier Technology and Construction Court (TCC) decision; now confirming that the significant benefit of adjudication can be available to a wider range of parties involved in a construction project. From the perspective of our education clients, the decision in this case is likely to have an effect on the procurement process and those who are to benefit from collateral warranties and other construction documents.
What is Adjudication?
Adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996 (the “act”). It offers a relatively quick dispute resolution procedure by an appointed adjudicator, usually in just 28 days. The adjudicator’s decision is temporarily binding until the dispute is finally determined by court proceedings, arbitration, or settlement; albeit that the decisions are largely followed without the need for such additional enforcement measures to be taken.
Under Section 104(1) of the act, the statutory benefits of adjudication only extend to certain types of agreements – those defined as “construction contracts” for the carrying out of “construction operations”. This case was therefore of great interest to the construction industry as it shed light on what the courts would interpret as a construction contract which fell within S104.
Abbey Healthcare (“Abbey”) was the tenant operating a care home. Defects in the works were notified to Simply Construct (“Simply”), but were carried out by another contractor. Following completion of the works, Simply was required to execute a collateral warranty in favour of Abbey. This collateral warranty was executed four years after practical completion of the original works, and some eight months after the completion of remedial works. Claims were brought by adjudication to recover losses relating to the defects. An adjudicator’s award was made in favour of Abbey, but enforcement was resisted by Simply on the basis that there was no implied right to adjudicate under Abbey’s collateral warranty.
The TCC had found in favour of Simply. The warranty was to be construed against the factual background and the timing of its execution. The warranty was executed after the works had been completed and defects remedied by another contractor. It was therefore a warranty only of a state of affairs and could not be construed as an agreement for the carrying out of construction operations. The TCC therefore concluded that Abbey’s collateral warranty was not a construction contract for the purposes of the Construction Act. There was no contractual right for Abbey to adjudicate under the Construction Act and so the decision in the Abbey adjudication was not enforced.
Court of Appeal decision
The Court of Appeal, by majority decision, has overturned the decision of the TCC. It has been held that Abbey’s collateral warranty was a construction contract for the purposes of the act and there was a statutory right to adjudicate. This was the case, notwithstanding that the warranty was signed years after the works were complete. The timing of its execution was not held to be determinative. Instead, the wording of the warranty was key.
Taking here some of the key parts from Lord Justice Coulson’s decision, he reasoned that:
There is no reason to limit the words of s.104(1) to refer only to the primary building contract. A collateral warranty may, therefore, be capable of being a construction contract for the purposes of s.104(1). What may be critical is whether the warranty is in respect of the ongoing carrying out of construction operations, on the one hand, or is in respect of a past and static state of affairs, on the other.
Simply had warranted to Abbey that it "has performed and will continue to perform diligently its obligations under the contract." Therefore the warranty plainly set out the standard to which the construction operations would be carried out. That was by reference to the detailed terms of the building contract. To that extent, the building contract is the marker or standard denoting the level of quality that Simply Construct was required to achieve
Simply Construct was warranting that, not only had they carried out the construction operations in accordance with the building contract, but they will continue so to carry out the construction operations in the future. That is an ongoing promise for the future. As a matter of common sense, this is "an agreement for the carrying out of construction operations". It is not a warranty limited to the standard to be achieved; neither is it a warranty limited to a past or fixed situation. It is a warranty as to future performance. It is that which differentiates Abbey’s collateral warranty from a product guarantee.
Although the Abbey collateral warranty was executed after the works had been completed, it was retrospective. It made a promise both as to the standard of past work and to the future carrying out of work to the same standard. It was therefore an agreement for the carrying out of construction operations which had retrospective effect. Once that is accepted, the delay between the completion of the works and the execution of the warranty does not matter. Otherwise arbitrary lines would start to be drawn. For example, in this case, it was inferred by the judge that four years was too long. But what about two years? A year?
As Abbey’s collateral warranty contained future-facing obligations and was retrospective in effect, the date of execution was ultimately irrelevant. The warranty is a construction contract.
To find otherwise, would in Lord Justice Coulson’s judgment, be “wholly unsatisfactory”. It would also encourage contractors not to sign collateral warranties until after they had finished as many of the construction operations as they could. On the basis that, in such circumstances, whatever the wording of the collateral warranty, they could avoid the implication of the act and therefore avoid being the subject of a claim in adjudication.”
The decision has brought welcome clarity to the interpretation of the act and will have far reaching, positive implications for the various stakeholders in any construction project and also confirms the availability of an alternative route to recovery of costs avoiding costly litigation.
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Chloe Fellowes is a proactive Paralegal with a demonstrated history of working in the legal services industry.