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Access To Adjudication Restricted By Supreme Court Decision9 July 2024

Introduction

In a landmark decision, the UK Supreme Court has restricted access to an alternative form of dispute resolution for deciding construction disputes that is quicker and cheaper than litigation. By narrowly interpreting the reference to “construction contract” at section 104 of the Housing Grants, Construction and Regeneration Act 1996 (the “Act”), the Court has effectively confined statutory adjudication to the contracts under which the original works and services were performed. The Court has also reversed an important decision of the Technology and Construction Court from eleven years ago that confirmed statutory adjudication rights were available for collateral warranty claims.

"A collateral warranty will not be an agreement 'for' the carrying out of construction operations if it merely promises to perform obligations owed to someone else under the building contract."

The legal background

Under the Act, there is a statutory right for construction disputes to be decided on an interim basis by adjudication. That entitlement arises where there is a relevant “construction contract” for certain “construction operations”. Where the entitlement applies, statute implies that right into contracts even in the absence of express drafting.

Adjudication is a form of dispute resolution where a dispute is referred to a trained adjudicator, usually a specialist in construction work, for determination. It results in a legally enforceable decision, which is binding on parties on an interim basis until there is a final determination by arbitration, litigation or agreement.

It is common in the construction industry for those performing works or services to provide “collateral warranties” to third party beneficiaries. This practice arose from a legal restriction on who may recover losses from physical damage to buildings.¹ Without a contractual link to those performing the original works or services, losses are regarded as being too remote to be recoverable.

Eleven years ago, it was confirmed in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013]² (“Parkwood”) that a statutory right of adjudication applies not only to the contracts under which the original building work or professional services were performed, but also to claims under collateral warranties.

The factual background

Augusta 2008 LLP (formerly Simply Construct (UK) LLP (“Simply”) designed and constructed a care home in Mill Hill, London. Abbey Healthcare (Mill Hill) Limited (“Abbey”) is the tenant and operator of the care home.

After the care home was built and opened, defects in its design and construction were identified, including defects as to fire resistance, protection, stopping and doors. Although Simply was given an adequate opportunity to remedy the defects, they declined to do. The defects were subsequently remedied after receiving independent fire officers and surveyors’ reports and Abbey was one of the parties that incurred losses because of the remedial works. To recover its losses, Abbey successfully brought an adjudication claim against Simply under a collateral warranty that Simply had provided to Abbey.

Although Abbey’s adjudication award was enforced against Simply by the Court of Appeal in 2022,³ the case raised legal issues arising from Parkwood, eleven years earlier. Due to the public importance of the points in dispute, the legal issues came before the UK Supreme Court in April 2024 for resolution.

The Decision

By judgment dated 9 July 2024 the Court allowed the appeal and overruled Parkwood. Lord Hamblen, giving judgment, said that while adjudication provides an expeditious and cost-effective form of dispute resolution, those advantages cannot justify the expansion of the statutory right to adjudication outside its proper province. While the statutory scheme for adjudication is generally regarded as beneficial, parliament has chosen to impose limits upon it.

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"Despite statutory adjudication having existed for over twenty-six years, only now for the first time has the Supreme Court confirmed the meaning of a 'construction contract' under the Act."

The Court’s task is to interpret the words of the statute in section 104(1) of the Act where it refers to a “construction contract” being an agreement “for… the carrying out of construction operations”. That requires an assessment of whether the object or purpose of the agreement is the carrying out of construction operations. The Court said:

“…it is difficult to see how the object or purpose of a collateral warranty is the carrying out of construction operations. The main object or purpose of such a warranty is to afford a right of action in respect of defectively carried out construction work, not the carrying out of such work.
Whether or not the carrying out of construction operations has to be the main object or purpose of the agreement, it must be necessary for the agreement to give rise to the carrying out of such operations. A collateral warranty that merely promises to the beneficiary that construction operations under the building contract will be performed does not do so. In such a case, it is the building contract that gives rise to the carrying out of the construction operations; not the collateral warranty. Any obligation undertaken to the beneficiary to carry out construction operations derives from and mirrors the obligations already under the building contract. There is no promise to carry out any construction operation for the beneficiary; merely a promise to the beneficiary that the construction operations to be carried out for someone else under the building contract will be performed”.

Accordingly, a collateral warranty will not be an agreement “for” the carrying out of construction operations for section 104(1) of the Act if it merely promises to perform obligations owed to someone else under the building contract. There must be a separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract.

In terms of how the Abbey collateral warranty should be construed, the Court confirmed that the use of particular words such as “warrants”, “promise” or “undertakes” make no difference. The Court said that following the earlier Court of Appeal judgments, whether a collateral warranty falls within section 104(1) will always depend on the niceties of language. A far more principled and workable approach is for the dividing line to be between collateral warranties which merely replicate undertakings given in the building contract and those giving rise to separate or distinct undertakings for the carrying out of construction operations. That is a distinction which can be easily understood and applied. Adopting such an approach is likely to mean that most collateral warranties will not be construction contracts. There are, however, good policy reasons for reaching that conclusion. It is also in the interest of certainty that there is a dividing line which means that collateral warranties are generally outside the Act rather than everything being dependent on the wording of the particular collateral warranty in issue. The difficulties which may otherwise arise are illustrated by the present case and the differing answers given by experienced judges to the issue raised. Two of the judges concluded that the Abbey collateral warranty was a “construction contract” for purposes of section 104 of the Act, whilst two of the judges concluded that it was not, and differing reasons and rationales were provided by all four of them.

Commentary

Despite statutory adjudication having existed for over twenty-six years, only now for the first time has the Supreme Court confirmed the meaning of a “construction contract” under the Act. That meaning has long been the subject of debate and now we have clarity on the issue.

By interpreting the Act narrowly, the case confirms the limits of statutory adjudication. It removes a means of recovery that would otherwise have been available to collateral warranty beneficiaries. Those beneficiaries must now pursue construction disputes through the Courts. Collateral warranty beneficiaries no longer have access to the same means of dispute resolution as those under the original building contract or consultant’s appointment, despite such beneficiaries having an equal interest in the completed building as those who originally commissioned the works or services, even where losses to the original parties and beneficiaries arise from the same defects.

Some beneficiaries of collateral warranties may not have the time or financial means to pursue claims by court proceedings, where it can take years rather than months to obtain judgment. This decision could therefore make it less likely that those responsible for defects in buildings will be held accountable for shoddy workmanship or poor service.

The construction and property industries have grown used to the rights confirmed as being available by Parkwood eleven years ago. Even the Court of Appeal was unanimous that Parkwood was good law. That is no longer the case. In addition, the Court’s decision will affect other well-known construction law cases, such as Hurley Palmer Flatt Limited v Barclays Bank plc⁴ on the relationship between statutory adjudication and Third-Party Rights.

For a right to refer disputes to adjudication, it will now be necessary to add express drafting to collateral warranties and Third-Party Rights. Parties should therefore expect the inclusion or otherwise of adjudication dispute resolution clauses to become an issue in contract negotiations.

Barry Hembling (bhembling@wfw.com), Simon Jennings, Sam Goodwill, Abi Barrett and Henry Stevenson of WFW acted for the Respondent in these Supreme Court proceedings.

London trainees Abi Barrett and Henry Stevenson also contributed to this article.

Footnotes

[1] House of Lords decision in Murphy v Brentwood District Council [1991] 1 AC 398
[2] EWHC 2665 (TCC); [2013] BLR 589
[3] [2022] EWCA Civ 823
[4] [2015] Bus LR 106; [2014] EWHC 3042 (TCC)

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