Landmark adjudication case has big implications for collateral warranties

Conventional thinking on the rights of beneficiaries seeking redress under collateral warranties has shifted dramatically following a landmark Court of Appeal judgement handed down in the case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP on Tuesday 21 June 2022.

The long-awaited outcome has caused something of a stir in the UK construction and insurance industries due to the significant impact this case will have in framing how disputes under collateral warranties can be resolved.

Background to the case

The case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP concerned the rectification of fire safety defects in a care home. In 2020 an adjudication took place with Abbey Healthcare seeking the recovery of financial compensation for trading, and other losses, which it claimed from Simply as a result of defects and required remedial works to a building it occupied as a tenant. The claim was brought under a collateral warranty Abbey Health Care had entered into with Simply.

In the ensuing adjudication, the appointed adjudicator received a threshold challenge to his jurisdiction. Simply argued that the collateral warranty entered into by the parties was not actually a construction contract. The adjudicator, however, decided on a non-binding basis that the collateral warranty entered into by the parties – an agreement associated with another primary contract – was a construction contract.

As a result, a dispute under that warranty could be adjudicated under the statutory scheme and in his decision the adjudicator ordered Simply to make a payment of £869,500 plus interest to Abbey Healthcare. Simply refused to pay the amount decided and Abbey Healthcare issued court proceedings to enforce the adjudicator’s decision.

In the first instance, the High Court judge concluded that the Abbey Healthcare’s collateral warranty was not a construction contract and refused to apply the adjudicator’s decision. However, the Court of Appeal judgement has now reversed the High Court’s judgement from 2021 and enforced the adjudicator’s original decision.

A significant outcome for the construction industry

Although there have been many court cases about adjudication, very few have addressed the issue of defining what a ‘construction contract’ is and how section 104(1) of the Housing Grants Construction and Regeneration Act 1996 should be interpreted and applied. 

The main findings raised from the Court of Appeal reversing the original High Court judgement are:

The future of adjudication cases for the construction industry

The adjudication process and Court of Appeal judgement has brought clarity to the interpretation of section 104(1) of the Housing Grants Construction and Regeneration Act 1996. It emphasises an extension of liability for contractors and consultants and provides that all end-users with an interest in the quality or future performance of a finished building may well have the similar rights as the parties involved with the original construction works when it comes to adjudication.

I believe this case will lead to a run of adjudications under collateral warranties and, consequently, the ruling has significant implications for contractors and consultants who have entered warranties, and of course insurers will be very interested in this judgement too.

This case emphasises that the adjudication process is invaluable for the swift and cost-effective resolution of construction contract disputes. Moving forward, more focus will be placed on the wording of collateral warranty contracts – especially those regarding promises of future performance – to avoid any frustrating or delayed outcomes in how these disputes are resolved.