We looked at the background when we reported on High Court and Court of Appeal judgments in briefings here and here. Essentially, the collateral warranty in question was provided four years after practical completion and eight months after completion of remedial works paid for by Abbey, the tenant of the building. Abbey sought to recover its expenses by referring a dispute arising from the collateral warranty (its only contract with Simply) to adjudication. The adjudicator issued a decision awarding Abbey a substantial sum.  However, Abbey could not enforce that decision because the High Court did not consider the collateral warranty to be a “construction contract” for the purpose of section 104(1)(a) of the Housing Grants (Construction & Regeneration) Act 1996 (the “UK Act”). The Court of Appeal disagreed, and in a majority ruling found that the collateral warranty was a construction contract and that the issue of whether a collateral warranty was a construction contract would depend on the drafting in each case.

In a pragmatic and concise judgment, the Supreme Court has now ruled unanimously that the collateral warranty in this case is not a construction contract for the purposes of the UK Act ([2024] UKSC 23). Further, it finds that most collateral warranties, as commonly drafted, will not be considered to be construction contracts. There were two key issues.

Issue (1) – Statutory interpretation: what is the meaning of an agreement “for… the carrying out of construction operations” in section 104(1) of the UK Act?

Given the natural and ordinary meaning of “for”, the question was whether the object or purpose of the warranty was the carrying out of construction operations. The Supreme Court found that it is difficult to see how the object or purpose of a collateral warranty is the carrying out of construction operations; rather, it is to afford a right of action in respect of defectively carried out construction work. The building contract gives rise to the carrying out of the construction operations; whereas the collateral warranty promises to the beneficiary that the construction operations undertaken under the building contract will be performed. 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. To fall into the category of “construction contract”, there needs to be a separate or distinct obligation to carry out construction operations, not one which is merely derivative and reflective of obligations owed under the building contract.

Issue (2) – Contractual interpretation: how should the collateral warranty be construed and, so construed, is it an agreement “for… the carrying out of construction operations”? Critical to the Court of Appeal’s finding was its interpretation of clause 4.1(a) of the warranty, under which Simply promised Abbey that it “has performed and will continue to perform” its obligations under the building contract. The Supreme Court’s said that, while this was a promise to carry out works, it was an entirely derivative promise. The contractor was not promising anything that had not already been promised under the building contract. A collateral warranty typically has to be expressed in these terms because it needs to cover all the contractor’s obligations under the building contract. It may be given while the works are still being carried out, so needs to cover past and future performance. Rather than relying on the niceties of the language in the warranty to determine if it is a construction contract, the Supreme Court preferred a more principled approach, which would place a dividing line between warranties which merely replicate undertakings in the building contract, and warranties which give rise to separate or distinct undertakings for carrying out construction operations. This approach means that most collateral warranties will not be construction contracts.

Adjudication in Northern Ireland

The Court’s decision is binding in Northern Ireland. It gives welcome clarity to the scope of contractual documents to which the statutory adjudication regime applies.

Adjudication in Ireland

The decision is of interest to practitioners in Ireland, where it will be persuasive authority. In Ireland, the definition of “construction contract” in the Construction Contracts Act 2013 is substantially the same as the definition in the UK Act (though there are also differences in the two regimes). There is now judicial guidance from the highest level in the UK to indicate that collateral warranties typically will not be construction contracts for the purpose of adjudication. Parties are free to include contractual dispute resolution mechanisms in warranties if they consider that appropriate, though recent trends in adjudication do not suggest that this will become a common feature of collateral warranties in the near term.  

The authors wish to thank Níosa Minogue for his contribution to this article.