Judge throws out collateral warranty adjudication award

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The Technology and Construction Court has ruled that an adjudication award made under a collateral warranty was unenforceable as it was not a ‘construction contract’. The case highlights that construction professionals must ensure that collateral warranties include explicit terms if they want the right to adjudicate in the future.

Toppan Holdings was the freehold owner of a luxury care home in Mill Hill, London, built by Simply Construct. Toppan let the home to Abbey Healthcare on a long lease.

A number of fire safety defects were discovered in the building, which were notified to Simply Construct, but repairs were undertaken by another contractor. Once the remedial works were complete Toppan Holdings exercised a clause in the building contract which required Simply Construct to execute a collateral warranty for the benefit of Abbey Healthcare as a tenant.

Toppan and Abbey Healthcare both started adjudications proceedings against Simply Construct to recover their losses resulting from the faulty work. The adjudicator awarded Toppan just over £1m under the construction contract and nearly £900k to Abbey under the collateral warranty.

Simply Construct failed to pay, so Toppan and Abbey started court proceedings to recover the awards. The court ordered Simply Construct to pay Toppan, but threw out Abbey’s claim as the collateral warranty did not include powers to adjudicate.

Under s.104 of the Housing Grants, Construction and Regeneration Act 1996 a ‘construction contract’ includes an implied right to adjudication. However because the collateral warranty provided by Simply Construct to Abbey Healthcare did not include any future construction works, the judge ruled that it was not a construction contract and so did not include an implied right to adjudication.

The judge decided the collateral warranty was more “akin to a manufacturer’s product warranty” than a construction contract.

James Burgoyne, Divisional Director – Claims & Technical, Brunel Professions said: “The decision in this case was fact specific, but it serves as a warning to construction professionals that they should include an explicit right to adjudication in a collateral warranty if they want to rely on the ability to do so in the future.”

Reports about the case have been published by Beale & Co and Hill Dickinson.

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