Collateral warranty or mere product guarantee?

The recent decision in the Technology and Construction Court (“TCC”) in Toppan Holdings Limited and Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP arguably does no more than follow precedent.

But the outcome is significant for anyone taking a collateral warranty. The lesson is: get a warranty signed promptly, if you do not want to lose the right to adjudicate.

Suppose an owner, purchaser or tenant (“beneficiary”) discovers latent defects in work carried out by a subcontractor. The beneficiary will usually claim against its main contractor. However, there may be reasons why this is not possible. For example, the main contractor may be insolvent. So the beneficiary will claim against the subcontractor, relying on its collateral warranty (if it has one).

How will the claim be made? The obvious answer is: via adjudication. It is quick, cheap, and usually much more cost-effective than the alternative (litigation or arbitration).

But does a collateral warranty qualify as a “construction contract” for the purposes of the Housing Grants, Construction and Regeneration Act 1996? That, in turn, requires there to be an agreement for “the carrying out of construction operations” within section 104 of the Act.

Is a collateral warranty such an agreement? That question arose In Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2014] TCC., Akenhead J said that that the answer would depend on the wording of the particular warranty. He said:

“A very strong pointer to that end [ie to the contract being a “construction contract”] will be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed and that the Contractor is simply warranting a past state of affairs and reaching a certain level, quality or standard.” [underlining supplied]

In Parkwood Leisure, the warranty was held to be a construction contract, and therefore adjudicable.

In Toppan, the judge, Martin Bowdery QC, sitting as a Deputy Judge of the High Court, applied the same test. On the facts here however, he decided that the warranty was not a construction contract. What was the difference?

The key point was that it had taken some time for the warranty to be signed. In fact, the works had been completed some four years before signature. The case thus fell comfortably within Akenhead J’s “pointer against”, underlined above. As the judge said:

“On the facts of this case I cannot see how applying commercial common sense a collateral warranty executed four years after practical completion and months after the disputed remedial works had been remedied by another contractor can be construed as an agreement for carrying out of construction operations.”

The warranty was therefore, said the judge, simply “a warranty of a state of affairs past or future akin to a manufacturer’s product warranty”. The beneficiary of the warranty – Abbey Healthcare, a long leaseholder – could still sue for the allegedly defective work of course. But it could not use the speedy route of adjudication.

Comment

The warranty contained a mixture of promises about past performance (“The Contractor has performed…” “The Contractor has exercised…”) and about future performance (“The Contractor ….. will continue to perform…..”).

This second type of promise could well have turned the warranty into an adjudicable construction contract, had the warranty been signed while there were still unperformed works to which the promises could apply. But they were meaningless once the works had been complete. That left the warranty as being merely akin to a product warranty.

It may seem odd that a document can be a “construction contract” if it is signed at one point in time, but be something else if signed at another. But the Act was about providing remedies, including a right to adjudication, in ongoing projects. It was not designed to regulate post-completion product warranties. The Toppan decision can certainly therefore be supported on principle. It is also completely in line with Parkwood Leisure.

What is the position where the works are nearly, but not quite, complete, at the time the warranty is signed? It is suggested that a court would in principle treat this as a contract for the carrying out of construction operations and therefore adjudicable, unless the outstanding works could be regarded as de minimis.

Finally, what can a beneficiary do to make a subcontractor or consultant sign early? In practice, building contracts are often amended so that sums are held back from the main contractor until all warranties have been signed and returned. Subject to that, the only remedy is the rather cumbersome route of an application for specific performance of the promise to sign.