The judgment in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23 was delivered by the Supreme Court on 9 July 2024 (full judgment here for reference). In this insight, we discuss the ramifications of the judgment, and the subsequent considerations for beneficiaries of collateral warranties.

Background

In summary, Abbey Healthcare was the prospective tenant of a care home. Sapphire Building Services was the main contractor, and Augusta (formerly Simply Construct LLP) the sub-contractor of the works. Sapphire & Augusta entered into a Joint Contracts Tribunal (JCT) Design and Build Contracts 2011 (D&B 2011) with amendments, under which Augusta were obliged to provide collateral warranties to funders & purchasers in a form annexed to the JCT.

Defects in the home rendering it unsaleable were subsequently discovered, and Abbey Healthcare (alongside a novated party, named Toppan) brought adjudication proceedings against Augusta for the defects. Augusta challenged the jurisdiction of the adjudicator on the basis that the collateral warranty executed in favour of Abbey Healthcare was not a construction contract and therefore there was no right to adjudication pursuant to the Housing Grants, Construction and Regeneration Act 1996 (the Act).

Supreme Court’s decision

The key issues for the Supreme Court were:

• Was the collateral warranty in favour of Abbey Healthcare a construction contract under s.104(1) of the Act?
• Was the collateral warranty in favour of Abbey Healthcare to be construed as a ‘contract for the carrying out of construction operations’ under the Act?

The Supreme Court ultimately decided the collateral warranty was not a construction contract under the Act. They stated it would be if “it is an agreement by which the contractor undertakes a contractual obligation to the beneficiary to carry out construction operations which are separate and distinct from the contractor’s obligations to do so under the building contract” and went slightly further in saying that “where the contractor is merely warranting its performance of obligations owed to the employer under the building contract, it will not be an agreement “for” the carrying out of construction operations”.

Key takeaways

The result of the judgement may have larger ramifications than just adjudication rights; the Act covers payment provisions too and one of its ‘mischief’ interpretations (i.e. things the Act is designed to prevent from happening) is to prevent payment abuse by contractors, by implying periodic payment provisions where the contract itself is insufficient or absent of such provisions.

Albeit, collateral warranties tend to provide nominal payment provisions, of £1 being exchanged between the beneficiary and sub-contractor/consultant and beneficiary in order to make the warranty enforceable as a contract. There is therefore an argument that the Act itself was never designed to cover collateral warranties.

The significance of Abbey Healthcare, is that it supports this idea by overturning the previous decision of Parkwood v Laing O’Rourke (2013), in which the Technology and Construction Court set down a precedent that a warranty could very much be considered a construction contract. It seems we now have a judgment which supports the Act.

But where does this leave us now?

Whilst most beneficiaries are not concerned about payment provisions for the reasons set out above, they may be interested in ensuring that they can enforce their warranty via adjudication rather than needing to rely on court proceedings. Because it’s now unlikely they will be able to rely on the Act for this, bespoke drafting will be needed to provide a beneficiary with the right to adjudication. For simplicity it may be worth mirroring the adjudication provisions under the main building contract (if there are any) in the form of warranty provided. 

It is, however, also worth bearing in mind for the purposes of drafting a warranty that the court in Abbey Healthcare placed a lot of emphasis on alignment of the collateral warranty with the underlying build contract in deciding that it wasn’t a construction contract for the purposes of the Act. Therefore, where a collateral warranty goes further than the build contract, i.e. by placing more onerous/additional obligations on the contractor, there is still a possibility that it will be construed as a construction contract.

How Capsticks can help

We are construction and building safety experts. We have extensive construction expertise and provide support to our clients from the development of their business case through to completion of the project. We work with our clients to support the development of their construction strategy and to appoint their professional team and build contractor.

We have experience of all of the industry standard form contracts such as NEC and JCT, as well as bespoke arrangements, sub-contracts, consultant appointments and collateral warranties.

To discuss how the decision in this could affect your projects, please get in touch with Spencer Vella Sultana or Wilton Thomas.

Additionally, our specialist local government advice is cost-effective and strategic, complemented by practical knowledge of your daily challenges. We are experts on all aspects of compliance with these new legal requirements and can advise on the broader changing landscape of the construction sector.

To discuss how the decision in this could affect your local government, please get in touch with Tiffany Cloynes or Lee Clarke.