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We examine how Toppan Holdings and Abbey Healthcare v Simply Construct helped clarify when ancillary warranties will be considered construction contracts for adjudication purposes.
The recent decision of the Technology and Construction Tribunal in Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP provides guidance on whether collateral guarantees will be considered “construction contracts†for the purposes of section 104 of the Housing, Construction and Regeneration Subsidies Act 1996 (the “Housing Act†construction of 1996 â€).
The case provided judicial guidance on an area of ​​construction law that has not benefited from a High Court judgment since Parkwood Leisure v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC). The judgment of Martin Bowdery QC (sitting as Deputy High Court judge) shows that the wording and the time of performance of collateral security are the two key factors in determining whether they are contracts of construction, and therefore subject to arbitration.
The facts and the issues
Simply Construct Ltd (“Simply”) had designed and built a Mill Hill nursing home for its original employer, Sapphire Building Services. After practical completion in October 2016, a dispute over defects and amounts due led the parties to reach an amicable agreement, which does not settle claims for latent defects.
Sapphire Building Services then assigned all of its rights and obligations to Toppan Holdings Ltd (“Toppan”), which granted a lease to a company from the same owner, Abbey Healthcare Ltd (“Abbey”), to occupy the care home. In 2018, fire safety flaws were discovered and simply have not been corrected. Toppan therefore hired another contractor to complete the work in 2019.
In October 2020, four years after the practical completion, a collateral guarantee was executed between Simply, Abbey and Toppan (the “Abbey Collateral Guaranteeâ€) in accordance with the original construction contract. Arbitration then began between Abbey and Simply over a loss of business profits suffered while remedying the fire safety flaws. When Simply failed to comply with the referee’s rulings, Toppan and Abbey sought to enforce them. Therefore, Simply objected to the performance and argued that the arbitrator lacked jurisdiction, on the grounds that the Abbey collateral guarantee was not a construction contract.
Collateral guarantees and the law
To be referred to arbitration under Section 108 of the Building Act 1996, the Abbey Collateral Guarantee had to be a construction contract for the purposes of Section 104 (1) (a) of the Building Act. 1996 construction. Section 104 (1) (a) clarifies that a construction contract is a contract for “the performance of construction operationsâ€.
Akenhead J has already answered the question of whether collateral guarantees could one day fall under this definition. Parkwood Leisure Ltd v Laing O’Rourke Wales and West Limited [2013] EWHC 2665 (TCC). Akenhead J had considered the wording of a collateral guarantee executed between the parties, and the time when it was executed, and came to the conclusion that it could be a construction contract for the purposes of the Law on construction of 1996. Toppan and Abbey were therefore seeking to rely on Parkwood Leisure as an authority that the Abbey collateral guarantee should also be regarded as a construction contract.
decision
In Toppan Holdings, the judge considered the reasoning of Akenhead J.in Parkwood Leisure and applied it to the present case. Distinguish the wording of the Abbey collateral guarantee from that in Parkwood Leisure, and stressing the importance of its different execution time, the judge considered that Abbey’s collateral guarantee was not a construction contract.
The judge recalled the reasoning in Parkwood Leisure, quoting the judgment of Akenhead J.: “It is primarily necessary to determine, in the light of the wording and the relevant factual context, each of these guarantees to see whether, correctly interpreted, it is a question of such a contract of construction for the execution of construction operations… A counter pointer may be that all work is completed and the contractor is simply justifying a past state of affairs as reaching a certain level, quality or standard. He also relayed Akenhead J’s statement in Parkwood Leisure that the expression “for … the carrying out of construction operations”, as it appears in section 104 of the Construction Act, was conceived by the legislature as a “broad definition”.
The judge in this case also noted that Lord Justice Coulson in ‘Coulson on Construction Adjudication’ did not criticize Akenhead J’s decision to examine the wording and time of performance of the security. The judge quoted Lord Coulson’s comment that “if the underlying contract was a construction contract, it makes business sense that any collateral warranty should be treated the same.”
Therefore, the judge considered Abbey’s collateral guarantee in light of its wording, as suggested by Justice Akenhead. Parkwood Leisure guarantee, was not present in Abbey’s collateral guarantee. Instead, Simply had guaranteed that it “has performed and will continue to diligently perform its obligations under the contract”. Although the judge admitted that this was both a past state of affairs and a future performance, he was quick to point out that, whatever the wording, the moment of the performance of the guarantee was problematic.
The judge then noted that the Abbey collateral guarantee between Abbey and Simply had been enforced four years after the practical completion and eight months after the completion of the repair work. He proposed that “when a contractor agrees to carry out unfinished work in the future, this will make it very clear that the collateral security is a construction contract and that the parties will have the right to adjudicate… when the work has already been done. completed, and since in this case even the latent defects have been corrected by other contractors, it is unlikely that a construction contract will arise and there will be no right to tender.
The judge said he did not see how an ancillary warranty executed years after the practical completion, and months after the repair of the works, could be considered an agreement to carry out construction operations. He pointed out that there was no evidence that Abbey or Simply were considering any construction operations actually carried out due to the warranty. Therefore, he concluded that the Abbey Collateral Guarantee was not a construction contract for the purposes of the Act. Therefore, there was no right to adjudicate and the arbitrator effectively lacked jurisdiction.
Commentary: The importance of formulation and timing
The judgment in Toppan Holdings confirms that there are two factors which are of primary importance in determining whether an ancillary warranty will be a construction contract and subject to arbitration. The main factor will be the factual background of the case, primarily the timing of the performance of the warranty versus the end of construction. In addition, the wording of the guarantee itself will be examined.
Parties performing collateral guarantees may therefore wish to review the progress of their construction work, in order to assess the impact that future construction work might have on their right to tender. In addition, guarantors may wish to consider whether the wording of their guarantee refers both to a past fact and future performance, in order to avoid being ambushed by subsequent tendering procedures. Conversely, if the parties are particularly keen to have the right to adjudicate, they could expressly include an adjudication provision in the collateral security itself.
Toppan Holdings once again illustrated that the “parasitic†collateral guarantees of construction contracts are in no way guaranteed to be construction contracts themselves. Collateral guarantees executed after the end of construction work will instead be treated as “akin to a manufacturer’s product guarantee”.
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