Clarifying the Status of Collateral Warranties: The Supreme Court’s Ruling in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP [2024] UKSC 23

Case Background

In Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP), the key issue was whether a collateral warranty provided by Simply Construct (UK) LLP ("Simply") qualified as a "construction contract" under section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 ("the Act"). Simply had entered into a JCT Design and Build Contract 2011 with Sapphire Building Services Ltd to design and build a care home (referred to as "the Property" and "the Building Contract"). The Property was subsequently leased to Abbey Healthcare (Mill Hill) Ltd ("Abbey"), and Simply issued a collateral warranty to Abbey, which became the focal point of this appeal.

Following an adjudication in Abbey's favour, the question arose as to whether this decision could be enforced. Simply argued that the collateral warranty did not meet the definition of a "construction contract" under the Act. Section 104(1) defines a "construction contract" as an agreement that involves:

1. The carrying out of construction operations.
2. Arranging for the construction operations to be carried out by others.
3. Providing one's own or others' labour for carrying out construction operations.

Collateral warranties are commonly used in the construction industry to provide assurances to third parties. The specific warranty in this case included a clause in which Simply warranted its diligent performance of its obligations under the Building Contract. Abbey sought to enforce the adjudication decision via summary judgment.

Decisions of the High Court and Court of Appeal

At first instance, the High Court (presided over by Martin Bowdery QC, sitting as a Deputy High Court Judge) held that the collateral warranty did not constitute a construction contract and refused Abbey's application for summary judgment. However, the Court of Appeal, by a majority (Lord Justices Peter Jackson and Coulson, with Lord Justice Stuart-Smith dissenting), reversed this decision, ruling that the warranty did amount to a construction contract. Simply appealed this ruling to the Supreme Court.

Supreme Court's Findings

The Supreme Court, in a unanimous decision delivered by Lord Hamblen, overturned the Court of Appeal’s ruling and dismissed the application for summary judgment. which he explained signifies the purpose or objective of an agreement. The central issue was whether the agreement’s primary aim was to undertake construction operations.

Lord Hamblen reasoned that the main purpose of a collateral warranty is not to carry out construction operations, but rather to provide a right of recourse for any defective work. The warranty does not initiate the construction work; such work arises under the original building contract. Any obligations under the warranty are derivative of, and tied to, the obligations in the building contract, without creating separate or additional responsibilities for the warranty’s beneficiary.

This distinction is further underscored by the fact that the beneficiary of a collateral warranty has no authority over how construction operations are conducted. They cannot direct or modify the work, nor can they suspend or terminate it; they are reliant on the employer's position, but do not themselves assume the role of the employer.

In this particular case, Lord Hamblen dismissed the argument that clause 4.1(a) of the warranty created a direct obligation to perform construction work. He clarified that the term "warrants" was merely a promise, and any duties referenced in clause 4.1(a) were reflective of the existing obligations under the Building Contract.

Lord Hamblen concluded that, if the Court of Appeal's approach were correct, determining whether a collateral warranty is a construction contract would depend on its specific wording—an outcome he found undesirable. He argued for a clearer and more consistent distinction between collateral warranties and construction contracts, which would be simpler to apply. Consequently, the Supreme Court decided to overturn the precedent set in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC).

Implications of the Decision

This ruling provides much-needed clarity regarding what constitutes a construction contract under the Act. Given that adjudication is intended to expedite dispute resolution, this decision minimises delays caused by jurisdictional disputes reaching the High Court and reduces the likelihood of related satellite litigation.