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VWV Obtained Permission for Contractor to Appeal Abbey vs Simply Judgment Concerning Collateral Warranties, to the Supreme Court

on Tuesday, 31 January 2023.

The case of Abbey vs Simply follows the 2021 judgment of the Technology and Construction Court (TCC), when VWV successfully defended the contractor (Simply) in adjudication enforcement proceedings brought by a tenant under a collateral warranty.

The Court of Appeal reversed that TCC judgment in June 2022, but the Supreme Court has now granted the contractor permission to appeal.

How Is Adjudication Used in Construction?

The Construction Act of 1996 introduced a statutory right for parties to a construction contract to refer their disputes to adjudication. 

Contractors soon started to use adjudication to aid cash-flow during a construction project, allowing them to swiftly (and relatively cheaply) enforce an outstanding payment and continue the project. Employers too recognised the benefits in using adjudication, specifically to advance defects claims against contractors, often years after completion of the projects.

In the Abbey vs Simply cases, it wasn’t a contractor or an employer who wanted to use adjudication. It was a third party, specifically a tenant who was a beneficiary under a collateral warranty. This was controversial because the Construction Act only applies to construction contracts; and, unlike the contractor and the employer, the tenant had never been a party to the original construction contract.

Can Adjudication Be Commenced Under a Collateral Warranty?

As the name suggests, a collateral warranty is 'collateral' to an underlying construction contract.

Under a collateral warranty, the primary rights and obligations remain with the employer and the contractor, so the beneficiary does not normally gain any control over the construction works (eg giving instructions as to how work is carried out). The collateral warranty would merely enable the beneficiary to bring a claim against the contractor if a defect interferes with their interest in the property after work is completed. Such a claim would normally be brought in court, but the tenant here wanted to use adjudication.

In 2013, Mr Justice Akenhead (who was in charge of the TCC at the time) considered whether the Construction Act applied to a beneficiary (a tenant) under a collateral warranty, who wanted to bring a defects claim against the contractor. He gave his judgment in Parkwood v Laing in 2013, ruling that the parties' collateral warranty was a construction contract under the Construction Act and that the beneficiary therefore had a right to refer a dispute to adjudication. He notably placed emphasis on the contractor having 'undertaken' and 'warranted' that it shall carry out the works. He went on to rule that the collateral warranty was therefore a construction contract - an "agreement for the carrying out of construction operations" - as defined in the Construction Act.

What Did the TCC Decide in 2021?

In 2016, a construction project was completed in London. The tenant in the new building obtained a collateral warranty from the contractor, but not until 2020. The tenant then used its recently acquired collateral warranty to refer a defects claim to adjudication. The contractor (represented by VWV) challenged the adjudicator's decision in the TCC.

In its ruling in July 2021, the TCC sided with the contractor and declined to enforce the adjudicator's decision. Mr Martin Bowdery QC (sitting as a Deputy TCC Judge in Toppan & Abbey vs Simply 2021) held that the collateral warranty was not a construction contract and that there was no right to adjudicate under the Construction Act. He noted that the wording of the collateral warranty was different to that in Parkwood (it omitted the verb 'undertake').

What Did the Court of Appeal Decide in June 2022?

The TCC decision was appealed to the Court of Appeal, where the legal issues were scrutinised by Lord Justices Peter Jackson, Coulson and Stuart- Smith (the latter two are former specialist TCC judges).

When the judgment arrived in June 2022, it was divided 2:1. Lord Justice Coulson delivered his leading judgment in favour of the tenant, whereas Lord Justice Stuart-Smith delivered a dissenting judgment in favour of the contractor.

Lord Justice Coulson ruled that a collateral warranty can be a construction contract, even if the contractor does not 'undertake' to carry out the construction works. This was an important point because many standard-form collateral warranties are drafted similarly to the one that was before the Court of Appeal, using the word 'warrant' without including the word 'undertake'.

Lord Justice Stuart-Smith disagreed (in his dissenting judgment), saying that 'an undertaking often involves an obligation to do something', whereas 'the normal meaning of the verb 'to warrant' is to provide a promise about a fact, circumstance or outcome" (paragraph 107). He concluded that "the contractor in Parkwood undertook and assumed direct obligations to the beneficiary. The contractor in Abbey vs Simply did not" (para.139).

What Will Happen in the Supreme Court?

On 21 December 2022, the Supreme Court granted permission to appeal the decision of the Court of Appeal.

The appeal is an opportunity for the Supreme Court to provide guidance on the proper interpretation of wording typically found in collateral warranties on construction projects.

In particular, the Supreme Court will have to consider whether a collateral warranty must include 'an undertaking to do something' (as envisaged by Lord Justice Stuart-Smith), for it to be properly considered to be a construction contract (ie an 'agreement for the carrying out of construction operations'). That will then determine to what extent adjudication can still be used as a dispute resolution method under a collateral warranty.

Whatever the outcome, it is plain that practitioners must consider the precise wording of a collateral warranty very carefully.

For further advice on adjudication, please contact Jason Prosser in our Construction team on 0117 314 5237, or complete the form below.

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