“From time-to-time lawyers get really excited about the latest landmark case. The recent Supreme Court judgement in Abbey Healthcare v Simply Construct (regarding collateral warranties) is a prime example.”
In this article, Sam Bawden from NAS legal partners Holmes and Hills takes a closer look at the recent Abbey Healthcare v Simply Construct case regarding collateral warranties. This case raises important points for NAS Members, particularly around the nature of contracts and their implications for dispute resolution. Sam breaks down the key findings and explains why understanding these changes can help you avoid potential legal risks when working with warranties in future projects. Read on to learn more about this landmark case and its relevance to our sector.
“Typically, there is lots of academic debate about the nuances of these sorts of decisions and how it will be applied (in all sorts of hypothetical scenarios) going forward. But that is not really of interest to a busy contractor, is it? In my experience, contractors just want to know what they (or those they are contracting with), can or cannot do. They do not generally want to know relevant
case names or sub-sections of statutes!
For that reason, I am not going to go into too much detail about Abbey Healthcare. In short, it was a decision about whether a collateral warranty is a “construction contract” for the purposes of the Housing Grants Construction and Regeneration Act 1996.
Decision: It may or may not be a construction contract, depending on the precise wording!
Why is that relevant, I hear you ask?
If it is a construction contract, the parties have an automatic right to refer disputes to Adjudication. If it is not, they don’t.
Why is that relevant, I hear you ask again?!
Adjudication is a means for resolving disputes in a short (28-day) period. Typically, the Responding Party has around 7 – 10 days within that process to file a response. Picture a project that completed a decade ago and, all of a sudden, you (and your insurers), are expected to answer within that short timescale, a claim that your works were defective. It must be self-evident that this is not an ideal position to be in. The terms of any proposed Collateral Warranty should therefore be closely scrutinised to ensure there is no potential for adjudication. Whilst considering the terms of the proposed warranty, contractors may also want to consider the following:
1. Who will obtain the benefit of the warranty?
This may be a single party (e.g. the employer under the main contract) or it may be a broader class of beneficiaries (e.g. any tenants). It is important to consider how broadly any class(es) of beneficiaries is/are defined. Parties should also be mindful of any right to assign the benefit of the warranty, often multiple times, such as to successive purchasers of a building. Are you certain that you know precisely how extensive your obligations will be if you cannot say for certain who every beneficiary will be?
2. How long will the collateral warranty last?
Typically, collateral warranties will specify a limitation period. Tthat is a long stop date within which any litigation must be commenced, of either 6 or 12 years from practical completion of the main contract works. In some instances, that may be substantially longer than the party’s primary obligations under the underlying construction contract.
3. What is the extent of the party’s liability?
It is important for a party to understand whether it is being asked to accept any greater obligations under the collateral warranty than it owes to its direct employer under the underlying construction contract. What, if any, express limitations are there on the party’s obligations?
4. Has the collateral warranty been drafted “back-to-back” with the underlying construction contract?
In order to avoid ambiguities in relation to what is required of the party giving the collateral warranty, it is important to ensure consistency between the terminology used in the collateral warranty and the underlying construction contract. Any inconsistencies can lead to uncertainty and increased potential for disputes to arise.
5. What are the party’s obligations to give and/or procure collateral warranties?
It is good practice for an employer not to enter into a construction contract unless the contractor simultaneously enters into (and procures from third parties), all relevant collateral warranties. However, that does not always happen. Where there is a delay in the contractor being asked to enter into, or procure, collateral warranties, the contractor should revert to the underlying construction contract to determine the extent of their liability to do so. If the form of collateral warranty has not been agreed (often this is seen in the context of incomplete drafts), then it may be that the contractor can refuse to do so. Depending on the parties’ relative bargaining positions, there may be scope for negotiating the terms of collateral warranties; if not, those being asked to give them should at least understand the degree of risk they are accepting.”
Anyone seeking advice on proposed collateral warranties can contact Holmes & Hills’ team of specialist Construction lawyers.
With thanks to Homes & Hills Solicitors for this informative article – originally published in Cutting Edge, the quarterly joint publication between the NAS & the IOC. To stay up to date with the latest news, trends and articles, and to benefit from a range of services, send us your Expression of Interest and get a quote for NAS Membership: https://www.shopfitters.org/membership/
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Holmes & Hills Solicitors are the national legal partners to the NAS. They offer NAS Members benefits including free initial consultations and preferential legal fees.
