Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP [2024] UKSC 23

A contractor provided a collateral warranty to a lessee regarding construction of a care home. When fire safety defects arose, the lessee sought statutory adjudication. The Supreme Court held that collateral warranties which merely replicate obligations from the underlying building contract are not 'construction contracts' under the Housing Grants (Construction & Regeneration) Act 1996.

Facts

Simply Construct (UK) LLP (‘Simply’) was engaged under a JCT Design and Build Contract to construct a care home. Construction was completed in October 2016. In September 2020, Simply provided a collateral warranty to Abbey Healthcare (Mill Hill) Ltd (‘Abbey’), the lessee of the property. Fire safety defects were discovered, and Abbey sought to recover the costs of remedial works through statutory adjudication under the Housing Grants (Construction & Regeneration) Act 1996 (‘the 1996 Act’).

Procedural History

The adjudicator found in Abbey’s favour. Simply refused to pay, and Abbey sought summary judgment to enforce the decision. The Technology and Construction Court dismissed Abbey’s application, holding that the collateral warranty was not a ‘construction contract’ under section 104(1) of the 1996 Act. The Court of Appeal reversed this decision by majority. Simply appealed to the Supreme Court.

Issues

1. What is the meaning of an agreement ‘for… the carrying out of construction operations’ in section 104(1) of the 1996 Act?

2. Is the Abbey Collateral Warranty a ‘construction contract’ within the meaning of the 1996 Act?

Judgment

The Supreme Court unanimously allowed the appeal. Lord Hamblen delivered the judgment.

Statutory Interpretation

The Court held that section 104(1) requires an assessment of whether the object or purpose of the agreement is the carrying out of construction operations. The purpose of a collateral warranty is typically to afford a right of action in respect of defectively carried out works, not to bring about the carrying out of such operations.

A collateral warranty will not be an agreement ‘for’ the carrying out of construction operations if it merely promises to perform obligations owed to someone else under the building contract. There needs to be a separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract.

Contractual Interpretation

The Court held that clause 4.1(a) of the Abbey Collateral Warranty, promising that Simply ‘has performed and will continue to perform’ its obligations under the Building Contract, was an entirely derivative promise. Simply was not promising anything beyond what was already promised under the Building Contract.

A more principled and workable approach is to draw the dividing line between collateral warranties which merely replicate undertakings in the building contract and those which give rise to separate or distinct undertakings for the carrying out of construction operations.

The Court also noted that the payment-related provisions of the 1996 Act are inapplicable to collateral warranties and that the main purpose of the Act—improvement of cashflow—is not furthered by its application to such warranties.

Overruling of Previous Authority

The Court overruled the decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC), upon which the Court of Appeal majority had relied.

Implications

This judgment clarifies that most standard collateral warranties in the construction industry will not qualify as ‘construction contracts’ under the 1996 Act and therefore will not give rise to rights of statutory adjudication. Parties seeking adjudication rights must ensure that any collateral warranty contains separate or distinct obligations to carry out construction operations, rather than merely replicating obligations from the underlying building contract. This provides greater certainty for the construction industry regarding the scope of statutory adjudication.

Verdict: Appeal allowed. The Abbey Collateral Warranty is not a construction contract within the meaning of section 104(1) of the Housing Grants (Construction & Regeneration) Act 1996. The decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd was overruled.

Source: Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP [2024] UKSC 23