Abbey Healthcase (Mill Hill) Ltd v Augusta 2008 LLP

Construction lawyers have been awaiting the Supreme Court's decision in this case with interest. We last reported on it in June 2022 when it was heard by the Court of Appeal.

The case concerns whether a collateral warranty is a construction contract, in accordance with s.104(1) of the Housing Grants (Construction and Regeneration Act) Act 1996 (the Act), thereby giving the parties a statutory right to adjudicate disputes under it. You can find our summary of the Court of Appeal decision here.

The Court of Appeal unanimously agreed that a collateral warranty could be a construction contract and a majority held that the specific warranty in the Abbey case was a construction contract.

The defendant (previously Simply Construct (UK) LLP) was granted permission to appeal to the Supreme Court the question of whether the Abbey warranty was a construction contract.

The Supreme Court handed down its judgment on 9 July and we summarise it below in five points:

• A collateral warranty will not be a construction contract if it merely promises to perform obligations owed to someone else under the building contract.
• Critical to the Court of Appeal's decision was that in the Abbey warranty the contractor promised that it 'has performed and will continue to perform' its obligations under the building contract, i.e., this was a promise to carry out works and therefore the warranty was a construction contract. In contrast, the Supreme Court found that this was an 'entirely derivative promise' and nothing was being promised beyond what was promised under the building contract.
• Accordingly, the Supreme Court concluded that the Abbey warranty was not a construction contract and that it was likely that most warranties would similarly not be construction contracts. The Supreme Court also noted that its rationale aligned with the intention of the Act to promote cashflow, as the payment provisions in the Act are inapplicable to collateral warranties.
• The Court of Appeal's ruling, along with the decision in Parkwood Leisure v Laing O'Rourke, which was decided over 10 years ago and upon which much of the Court of Appeal's decision was based, was overturned.
• The Supreme Court disagreed with the emphasis placed by the Court of Appeal on the distinction between (a) a warranty which provides a promise in respect of a past state of affairs and (b) a warranty which contains a promise in relation to past and future work. Indeed, the Supreme Court considered that this distinction could lead to 'fine distinctions being drawn and to disputes in relation both to the drafting of collateral warranties and to their proper interpretation'. To avoid this, and ensure a more 'workable' approach, the distinction should be between (a) the replication of undertakings in the building contract and (b) those which give rise to distinct undertakings for the carrying out of construction operations. It is only the latter which will be considered to be construction contracts.

Closing Comment: As the Supreme Court recognised, the consequence of this decision is that most collateral warranties will not be construction contracts and so there will not be a statutory right to adjudicate disputes arising under them. In his closing remarks, Lord Hamblen observed that the decision will 'assist those in the construction industry, and those advising them, to know where they stand'.

Of course, this does not preclude parties from providing for a contractual right to adjudicate in collateral warranties if they want to. However, this will be a question of choice rather than a statutory right.

_{1. Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23}

_{2. Parkwood Leisure Ltd v Laing O'Rourke Wales and West Limited [2013] EWHC 2665 (TCC)}

Authors: Sadia McEvoy, Expertise Counsel; Kevin Bassett, Junior Associate