Is a Collateral Warranty a Construction Contract?

In a recent judgment handed down by the Supreme Court in Abbey Healthcare (Mill Hill Ltd) v Augusta 2008 LLP (formerly Simply Construct (UK) LLP [2024] UKSC 23, the longstanding debate as to whether a collateral warranty is to be considered a construction contract has been further clarified.

A collateral warranty is a form of contract used commonly in construction projects. It involves a party, such as a contractor or consultant, agreeing to specific warranty terms with a third-party who has an interest in the construction works. The primary purpose of the collateral warranty therefore is to create a direct contractual link between entities that are not a party to existing contract, and entities who are engaged under various construction agreements. This in turn enables a third-party where relevant, to issue a breach of contract claim against a party who fails to perform its existing obligations.

In this case, the Abbey Healthcare was the tenant and occupier of the property. It was later discovered that there were alleged fire safety defects which required rectification works. The  contractor had failed to action this the – rectification works were ordered by the Landlord and paid by Abbey Healthcare on its behalf. In December 2020, both the landlord and Abbey Healthcare had referred the matter to adjudication, with Abbey Healthcare bringing its claim under the collateral warranty. The contractor challenged this, disputing that the claim lacked jurisdiction as the warranty was not a construction contract.

The Housing Grants, Construction and Regeneration Act 1996 (the ‘Act’) currently defines a construction contract. The Supreme Court considered two issues in its judgment, namely whether a collateral warranty was an agreement "for the carrying out of construction operations”, and how a collateral warranty is to construed in this context.

The Supreme Court unanimously held, that a collateral warranty is not a construction contract for the purposes of section 104(1) of the Act  “if it merely promises to perform obligations owed to someone else under the building contract.’ It was also decided that the specific collateral warranty between the parties in this case was not a construction contract because it was “an entirely derivative promise” – in this case the contractor had not promised anything that was not already promised under the existing building contract.

The decision has offered much needed certainty, and it’s likely to mean that most collateral warranties will no longer be considered as construction contracts under the Act. A third party therefore will no longer have a statutory right to refer a dispute to adjudication, unless the collateral warranty itself contains express provisions to enable it to do so. Where the warranty fails to address specific provisions, it shall be required to pursue a dispute through the courts.

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