In a landmark ruling in the case of Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP, the Supreme Court of England and Wales ruled that ‘collateral warranty’ does not constitute a construction contract – and therefore cannot be taken to adjudication in the case of a dispute.
Collateral warranties are often used in construction contracts as a secondary agreement to the primary contract.
For example, a contract between two parties, such as a contractor and subcontractor (warrantor), a collateral warranty can be used to extend the right to pursue the warrantor for losses due to breach of contract to a third party, frequently an investor or buyer.
Given the number of parties often involved in large-scale construction projects, the timescales and level of investment involved, losses can be significant and therefore collateral warranties are common.
They ensure that, if work is delayed or of poor quality, the responsibility lies with the business contracted to do the work, rather than any other party.
However, the Supreme Court now rules that these agreements do not constitute a construction contract as defined by the Construction Act 1996, without a primary contract in place between two parties.
They therefore do not carry the automatic right to adjudication over disputes, although the judgement acknowledged that a clause relating to adjudication can be included in any warranty agreement if needed.
For projects where collateral warranties are used, this judgement highlights the importance of having the right contracts in place and seeking advice from a specialist as early as possible.
For advice on collateral warranties, please contact our team today.