The Court of Appeal decided in June that a collateral warranty agreement can be a ‘construction contract’ under the Housing Grants (Construction & Redevelopment) Act. This means that the beneficiary of a collateral warranty who has a claim against the contractor or consultant that provided the collateral warranty, is able to refer the claim to an adjudicator before going to court. The case was Abbey Healthcare (Mill Hill )Ltd. v Simply Construct (UK) LLP
For more details on the case, go to: Collateral-warranties-and-Adjudication-1.pdf (gilesdixon.com)
The aim of the Act was to give parties to a construction contract a quick and low cost way of resolving disputes before starting legal proceedings in the court. Under the Act, the adjudicator normally has to reach a decision within 28 days of being appointed to deal with the dispute. Either the parties or an organisation such as the RICS will appoint the adjudicator.
Under most developments of any size, the main contractor and consultants who are responsible for the design and/or construction of a building will be required by the developer to sign a collateral warranty agreement in favour of various third parties who have an interest in the development – e.g. a purchaser, tenant or funder of the building. Each of these is usually called a beneficiary.
The collateral warranty contains a promise or guarantee from the contractor/consultant that he will satisfactorily perform the contract he signed with the developer. So if, after the building is completed, a defect is found, the owner or tenant who has the benefit of the collateral warranty can sue the contractor/consultant for breach of contract. As most collateral warranties are signed as deeds and the period in which a claim can be brought is likely to be as long as 12 years after completion of the building, there is a long term risk for those in the construction industry, against which they need to maintain insurance.
The Construction Act has a long definition of what is meant by a “construction contract.” The Court of Appeal in Abbey Healthcare v Simply Construct decided that on a ‘broad interpretation’ of what is meant by an agreement for construction operations, a collateral warranty can be categorised as a construction contract. So, a buyer of a new building who finds a defect a couple of years after he moved in can bring an adjudication claim against the builder – if he has a collateral warranty agreement.
We can help
If you need an agreement to appoint an adjudicator, you can use our document B136 . And if you are involved in a building project where a collateral warranty is needed, we have some templates – see our Collateral Warranty Collection