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VWV Acted for a Building Contractor in Possibly the Most Important Construction Case of 2022

on Tuesday, 30 August 2022.

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

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, would 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.

The scope of the Construction Act has since widened. Nowadays, employers too can use adjudication, specifically to advance defects claims against contractors, often years after completion of the projects.

The Court of Appeal however had to deal with whether a third party, specifically a tenant (a beneficiary under a collateral warranty), should be able to use adjudication to bring a defects claim against the contractor too.

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 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 if the collateral warranty is a construction contract, the beneficiary can then use adjudication too.

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') and that it was executed long after completion of the works.

What Did the Court of Appeal Decide in 2022?

The TCC decision was appealed to 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 this year, 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 Jackson sided with Lord Justice Coulson.

The three main points to note from the judgement are that:

  • Mr Justice Akenhead's judgment in Parkwood was endorsed by all of the Lord Justices, so the Court of Appeal reaffirmed that collateral warranties can be construction contracts (depending on their wording, that is).
  • The timing of the execution of a collateral warranty is irrelevant (or at least less important than had been suggested in the TCC ruling). That is because collateral warranties have retroactive effect, ie they can be executed before or after completion of the works and still be considered a "contract for the carrying out of construction operations".
  • A collateral warranty can be a construction contract, even if the contractor does not 'undertake' to carry out the construction works. It is sufficient for the contractor to 'warrant' to carry out the construction works.

Th third point is most significant as it will affect many (if not all) of the collateral warranties that have been entered into since Lord Justice Akenhead gave his judgment in Parkwood in 2013.

No Requirement to 'Undertake' the Construction Works

According to the Construction Act, a construction contract is a contract for the carrying out of construction operations. Whilst there can be no doubt that a collateral warranty is 'related to' the carrying out of construction operations, the question whether it is 'for' the carrying out of construction operations requires deeper analysis. It is worth repeating that the beneficiary does not control (or pay for) the construction works. The employer does. The contractor merely warrants (or 'undertakes') something to the beneficiary in respect of the works.

In his dissenting judgment, Lord Justice Stuart-Smith opined that the wording of the collateral warranty before him was different to that in Parkwood. The devil is in the detail, specifically in the verb 'undertake' In order for the contract to be 'for' the carrying out of construction operations, the contractor must 'undertake' to carry them out.

 By contrast, he noted that "the normal meaning of the verb 'to warrant' is to provide a promise about a fact, circumstance or outcome" (paragraph 107).

Lord Justice Coulson said that the absence of the word 'undertake' in the collateral warranty did not make any material difference. Lord Justice Stuart-Smith, on the other hand, thought that it did. Specifically, he said that 'an undertaking often involves an obligation to do something.' He also said that the "distinction that Akenhead J drew between 'warranting' and 'undertaking' was correct: "the contractor in Parkwood undertook and assumed direct obligations to the beneficiary. The contractor in Abbey vs Simply did not" (para.139).

This is 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'. So if a contractor thought (as did Lord Justice Stuart-Smith) that their collateral warranty was materially different to the one in Parkwood (and therefore not a construction contract), then they would probably be mistaken (as per the majority of the Court of Appeal).

What Next?

The tenant has succeeded, at least for now.

In the absence of a unanimous decision from the Court of Appeal, it remains to be seen whether the Supreme Court will want to have the final word on the matter.

As things stand though, the Court of Appeal has endorsed the Parkwood decision. Whilst not every collateral warranty is a construction contract (it all depends on the wording), it is likely that many (if not all) of the collateral warranties that have been given by contractors over the years, are construction contracts and therefore subject to adjudication.

If a contractor does not wish for the beneficiary to have a right to refer a dispute to adjudication, it is likely that its collateral warranty will have to be substantially amended to move it out of the ambit of the majority judgment of the Court of Appeal.

For more information on collateral warranty in relation to adjudication, please contact a member of our Construction Law team or complete the form below.

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