No statutory right to adjudicate under collateral warranties as “common sense prevails” in landmark construction ruling

In Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct) [2024] UKSCA 23 (Abbey Healthcare v Augusta 2008) the Supreme Court confirmed that there is no statutory right to adjudicate collateral warranty disputes.

Here, construction law specialists Adam Jason and Chloe Harrison explore what this means for contractors and beneficiaries in the construction industry that rely on collateral warranties.

Separate contractual obligations are required to satisfy the Act

The Supreme Court has confirmed that a collateral warranty where a contractor is merely warranting its performance of obligations owed to the employer under the building contract will not be an agreement for the “carrying out of construction operations” for the purposes of s.104(1)(a) of the Housing Grants, Construction and Regeneration Act 1996 (the Act). 

In Abbey Healthcare v Augusta 2008, the court held that a collateral warranty will only satisfy the requirements of s104(1)(a) of the Act, if it’s an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations. 

This obligation needs to be separate and distinct from the contractor’s obligations under the building contract and so can’t merely be derivate and reflective of the same. However, it’s rare for a collateral warranty to provide such separate obligations.

What this means in practice

Collateral warranties are regularly provided to funders, purchasers and prospective tenants of building projects, providing such parties a contractual right of recovery against contractors should defects arise in respect of the works carried out by them. 

Prior to this judgment, beneficiaries to collateral warranties would be entitled to make use of the statutory right under the Act to refer any disputes which arise under a “construction contract”. Adjudication is a popular alternative to litigation and arbitration, being the quickest and more cost-effective resolution process. While adjudication is only temporarily binding and an adjudicator’s decision can be overturned by the courts or an arbitral tribunal, many disputes are resolved by the parties at adjudication stage to avoid further costs and business interruption. 

The finding in Abbey Healthcare v Augusta 2008 means that those third parties relying on collateral warranties in the future of a development don’t have the previously-assumed statutory right to adjudication and have to seek determination by the courts or arbitral tribunal. 

How will defect claims be handled going forward?

The majority, if not all, adjudications brought pursuant to rights conferred by collateral warranties concern defects claims. 

While clients and practitioners alike have long queried the appropriateness of the time-limited adjudication process and the rough justice it’s designed to serve for dealing with complex defects disputes, arguably adjudication was still a useful dispute resolution forum for more straightforward defects claims or where the dispute relates to quantum or remedial works only. Equally — although this shouldn’t be a consideration of the Supreme Court judges — this judgment is juxtaposed with general policy considerations of keeping disputes out of the courts as much as possible. 

That being said, our Head of Construction, Barry Goodall, believes that common sense has prevailed as the purpose of the Act has always been to improve cash flow in the construction industry — which the operation of collateral warranties doesn’t affect in any event. 

Going forward, beneficiaries may seek to incorporate contractual adjudication provisions into collateral warranties. Though how this would be viewed by warrantors and their insurers will be interesting to see. 

For those who may have already received an adjudicator’s decision based on collateral warranties, the enforceability of those decisions may now be in question. 

Talk to us

Our construction law team has significant experience in construction contracts and warranties, as well as handling contentious issues including defects claims.

If you’d like support on how this judgment impacts your building projects, please contact our team.