Abbey Healthcare v Augusta – A Change for Adjudication in Collateral Warranties

In its decision in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23, the Supreme Court established a test for whether a collateral warranty will be considered a ‘construction contract’ for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”). The decision is particularly notable in relation to the statutory right to adjudicate.

Is a Collateral Warranty a ‘Construction Contract’?

The Construction Act sets out the meaning of ‘construction contract’ as “an agreement with a person for… the carrying out of construction operations…”. In Abbey Healthcare, the Court concluded that a collateral warranty would meet this definition where the warrantor undertakes a contractual obligation to the beneficiary to carry out construction operations which is separate and distinct from the warrantor’s obligations under the underlying contract. On the flip side, it emphasised that where the warrantor merely warrants the performance of its obligations under the underlying contract owed to the employer, such a warranty would not constitute an agreement “for” the carrying out of construction operations for the purposes of the Construction Act, and the terms implied into construction contracts by the Construction Act (for example, in relation to payment and the statutory right to adjudication) will not automatically apply.

Implications for Adjudication

The Construction Act provides the parties to a ‘construction contract’ a statutory right to refer a dispute under the contract to adjudication (save where the employer as a residential occupier). In its decision in Abbey Healthcare, the Court has indicated that this right is not necessarily available to parties to collateral warranties. Therefore, where parties to collateral warranties want the option to use adjudication for resolving disputes, it is recommended that they include express wording providing for adjudication in the warranty.

For any beneficiaries with step-in rights, such as funders, the inclusion of adjudication provisions may be crucial to ensure minimal disruption occurs on ongoing projects in the event of a dispute. Beneficiaries may also want to adjudicate over matters arising post-practical completion (such as latent defects), albeit being aware of the temporarily-binding nature of an adjudicator’s decision.

Given the popularity of using adjudication as a relatively quick and lower-cost method of dispute resolution, both warrantors and beneficiaries should consider expressly incorporating adjudication provisions into their warranties going forward.

For more information on collateral warranties and adjudication, please contact our Construction team.

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