Supreme Court clarifies meaning and application of collateral warranties 

The Supreme Court has clarified the meaning of collateral warranties in construction contracts and the circumstances in which they may take effect.

Mark Aspin Director and Head of Dispute Resolution provides an update.

Collateral warranties are issued on most construction projects. They create direct contractual relationships between contractors and third parties, granting them the right to sue a contractor for breach of contract if the contractor fails to fulfil its obligations – typically in cases of defective works.

An issue involving such a contract arose in a case involving Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP).

In June 2015, Simply Construct was contracted by Sapphire Building Services Ltd to design and build a care home in Mill Hill.

The work was completed in October 2016, and in June 2017, the contract was transferred to Toppan Holdings Ltd, the property owner. Toppan then leased the property to Abbey Healthcare (Mill Hill) Ltd in August 2017.

In August 2018, Toppan discovered fire safety defects at the property. Simply was asked to rectify these defects but failed to do so, leading Toppan to hire a third party for the necessary repairs, which were carried out between September 2019 and February 2020.

Abbey covered the cost of these remedial works on behalf of Toppan.

In June 2020, Toppan requested Simply to provide a collateral warranty to Abbey, as required under the original contract. Simply delayed until September 2020, executing the warranty only after Toppan initiated legal proceedings for specific performance.

Further legal proceedings followed with Simply arguing that the collateral warranty was not a construction contract. It submitted that the warranty was not a contract for carrying out works, but merely a contract warranting what had already been done.

The case went all the way to the Supreme Court, which ruled in favour of Simply. It held that a collateral warranty would not be considered an agreement “for…the carrying out of construction operations” if it merely promises to perform obligations owed to someone else under the building contract.

There needs to be a separate or distinct obligation to carry out construction operations for the beneficiary, not one that is merely derivative and reflective of obligations owed under the building contract.

In this case, the collateral warranty was not an agreement ‘for’ construction operations. The promises in the collateral warranty, though they covered past and future operations, were “entirely derivative.” Simply was promising nothing to Abbey that it had not already promised to the employer under the contract.

If you would like more information about the issues raised in this article or any aspect of contract law, please contact Mark Aspin on 01228 516666 or click here to send him an email.