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Can collateral guarantees be judged? | Comment


This case asks whether a collateral guarantee is liable to be judged like any other construction contract. Pause for a moment. A collateral guarantee creates a second direct link between, for example, an employer and a subcontractor – secondly in that an employer can then obtain remedial work either from the main contractor or from the subcontractor who actually did the work. This is another string to the employer’s bow. A contractual relationship is required to claim economic loss. Collateral is frequently used to bind a main contractor to a new owner of the constructed premises or to bind a tenant to the main contractor.

In Abbey Healthcare (Mill Hill) Ltd vs Simply Construct (UK) LLP, Abbey took a 25-year lease on a new building for a care home in Mill Hill, London, called Aarendale Manor. Abbey waved the collateral contract to the main contractor, Simply Construct, alleging the bulkhead was not fire resistant for 60 minutes. The claim was around £2million. Abbey’s lease required the tenant to claim faulty work via the main contractor’s collateral warranty, but when he refused, Abbey began an adjudication. Regardless of whether Abbey had a good claim, Simply Construct rolled out a debate we’ve had for 20 years: is a collateral warranty a building contract? If so, the adjudicator has jurisdiction; if not, it’s goodbye to the adjudicator.

Is an ancillary warranty a construction contract? If so, the adjudicator has jurisdiction; if not, it’s goodbye to the referee

The arbitrator dismissed the idea that he lacked jurisdiction. He decided that Simply Construct owed Abbey a lot of money. But the High Court’s application failed. The judge ruled that the adjudication did not apply because the repair work had already been completed by another contractor and no further work was to be completed when the actual collateral security was executed.

>> To read also: Is a collateral guarantee a construction contract?

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So he came to the Court of Appeal from three people. Simply Construct was determined not to obey the referee’s decision. His hat was firmly attached to the idea that the wording of the collateral contract did not provide for an auction. Lord Justice Coulson and Lord Justice Parker decided that the arbitrator was right to decide the dispute. Lord Justice Stuart-Smith said otherwise.

Let’s look at the wording of the document:

“4.1 The entrepreneur guarantees (simply) that:

(a) The Contractor (Simply Construct) has performed and will continue to perform diligently its obligations under the Contract;

(b) In carrying out and completing the Works, the Contractor (Simply Construct) has exercised and will continue to exercise all … reasonable skill, care and diligence.

As for the other provisions:

  • The Contract is defined in clause 1 as “the Contract in the form of a JCT Design and Build Contract dated 29th June 2015 entered into by Sapphire Building Services Ltd and the Contractor pursuant to which the Contractor shall perform the works”.
  • The works are defined in the same clause as “the construction of the development on the site”.
  • Clause 4.2 provides that if the contractor has performed any part of its obligations under the contract, the agreement shall take effect as if it predated such performance.
  • Clause 4.3 provides that the obligations owed by the Contractor to the Beneficiary under the ACW shall not be greater than those owed to the Beneficiary if the Beneficiary had been appointed employer under the Contract.

Focus intensely on the precise conditions which the contractor has substantiated to be true, Lord Justice Stuart-Smith said. The contractor warranted that it “has performed and will diligently perform its obligations under the contract”. This is a promise in relation to Simply Construct’s obligations which are owed to someone else and not to Abbey. This is evident from the last words of the sentence: what Simply Construct guaranteed was that it had performed and would perform its obligations “under the contract” (i.e. the obligations which it owed the employer under the JCT construction contract).

Lord Justice Stuart-Smith added: “There is […] nothing in the wording of the sentence that says or implies that Simply Construct undertakes direct obligations to Abbey: it merely guarantees its performance of obligations owed to someone else. Its argument is that Simply assumes no duty of skill, care or direct obligation to carry out the work for Abbey. On the contrary, the warranty gave Abbey a right of action for breach of warranty, not for breach of any direct obligation to perform the work. If this is the case, the guarantee does not fall under the Construction Act, the scope of which is the execution or organization of construction operations.

Lord Justice Coulson and Lord Justice Parker saw the guarantee as a promise by the contractor to continue to perform its obligations under the contract for someone else. These are the main promises of the JCT contract to the employer, but this does not preclude that the promise is also made by the contractor to others such as tenants or new owners. The dissenting judge might have been satisfied if the wording of the warranty actually stated that Simply Construct would perform construction operations.

In this case, the Court of Appeal granted summary judgment for Abbey and ordered Simply Construct to pay the amount awarded by the adjudicator.

Tony Bingham is an attorney and arbitrator at 3 Paper Buildings, Temple