Peter Vinden, CEO of Gateley Vinden, is investigating when a security guarantee does not qualify as a construction contract

Ancillary guarantees are a matter of course in the construction industry. A guarantee is a contractual relationship between two parties, primarily to give the person entitled to a guarantee the opportunity to sue in the event of a problem. Therefore, employers typically insist on obtaining collateral guarantees from key subcontractors for a project, especially if those key subcontractors were involved in providing the design.

Section 104 of the Housing Grants, Construction & Regeneration Act 1996 (“the Act”) defines construction contracts:

Construction contracts

(1) In this part, a “construction contract” means an agreement with a person for one of the following conditions:

(a) the implementation of construction work;

(b) arranging for construction work to be carried out by others, whether subcontracted to them or otherwise;

(c) Provision of own or third-party workers to carry out construction work.

(2) References in this part to a construction contract include an agreement –

(a) to carry out architectural, design or surveying work, or

(b) To provide advice on construction, engineering, interior or exterior decoration or the design of landscapes in relation to construction work.

If a contract is a “construction contract” within the meaning of Section 104 of the Act, there is an implied right to submit disputes arising from such a contract to a court at any time.

In Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC) noted Akenhead J that the parties’ security guarantee is a construction contract. Parkwood had the legal right to submit his dispute with Laing to a court decision.

At the center of the court’s decision in this case seems to be the use of certain words in the guarantee, which states that Laing “guarantees, recognizes and takes over” various things, including the execution of the work in accordance with the construction contract. The court concluded that those words meant that the document was not only a guarantee or guarantee of an earlier state of affairs, but also applied to work that Laing had yet to do in relation to the underlying construction contract.

In Toppan Holdings Limited and another v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC) (“the Toppan case”) the court gave further indications as to whether a decision can be made under a security guarantee. It now seems that the answer to this question depends not only on the specific wording of the guarantee, but also on the point in time when the guarantee is carried out.

In the Toppan case, the court ruled that a security guarantee carried out after the work was completed was not a construction contract and that the adjudicator was accordingly not competent in one of the two disputes submitted to him. The court refused to enforce any of the adjudicator’s decisions on which a summary judgment was requested.

Background to the toppan suitcase

Toppan Holdings Limited (“Toppan”) owns a luxury care home in London (“Nursing Home”) built by Simply Construct (UK) LLP (“Simply”). Once the work was completed, the construction contract was transferred from Simply to Toppan, creating a contractual relationship between these parties. The nursing home was rented to the tenant operator Abbey Healthcare (Mill Hill) Limited (“Abbey”). Simply did not enter into a collateral guarantee in favor of the tenant at the time Abbey began the lease.

After completion of the work and the opening of the nursing home, construction defects were found that required renovation. Certain damage from the rectification of defects was incurred by Toppan as the landlord and other damage by Abbey as the tenant. This meant that both Toppan and Abbey needed contractual ties to pursue their respective losses.

Since the construction contract had been transferred to Toppan, the dispute with Simply could be resolved directly. However, there was no contractual relationship between Simply and Abbey. Toppan then exercised its right to require Simply to enter into a security guarantee in favor of Abbey.

Toppan and Abbey then initiated parallel judgments against Simply to redress their respective losses in separate proceedings. The same adjudicator was appointed for both disputes and decided on April 30, 2021 in both proceedings.

Simply did not pay out on any of the decisions, and plaintiffs have initiated joint enforcement proceedings against Simply in the Technology and Construction Court (TCC). The Abbey lawsuit defended itself only on grounds of jurisdiction, namely that the security guarantee is not a construction contract within the meaning of the law and therefore the right to a judicial decision does not exist.

The judgment

The court found that although the security guarantee applied to past and future construction work, it was not carried out before the practical completion, but only after the discovery of hidden defects, which were rectified. During his stay in Parkwood, Akenhead J had noticed the following:

  1. a building contract can apply retrospectively and still fall under the law – it does not have to be “fully or partially prospective”;
  2. the law should give parliament a broad definition of “construction contracts” as defined by the law; and
  3. if the contract concerns the “execution and completion” of construction works, it falls under the law without exception.

These comments were tempered by his statement that an indication against an ancillary guarantee as a construction contract is that “all work has been completed and that the contractor only guarantees an earlier state of affairs with the achievement of a certain level, a certain quality or a certain standard “.

In the present case, the time of execution was decisive for the determination that the security guarantee is not a construction contract subject to the law. While express wording was included with regard to future construction work, the security guarantee could not relate to future construction work as it was carried out after the practical completion.

Although the security bond confirmed that Abbey did not acquire any rights under the security bond that were greater than what it would be entitled to under the construction contract, it did not mean that it extended equivalent rights to an authority to judge.

As a result, the court refused to enforce the award decision in favor of Abbey.

graduation

The Toppan case makes it clear that the court will consider the timing of the execution of the guarantee and the terms of the document as a determining factor in deciding whether the security guarantee is a construction contract.

If the guarantee is carried out on work that has not yet been completed, this is a “very strong indication” that this is a contract that falls under the building law. However, if the guarantee is carried out after the work has been completed, the guarantee is “unlikely” that it is a construction contract, even in the case of hidden defects that have been remedied.

I am aware that Toppan has appealed the ruling and that further guidance and clarification are expected from the court in the coming months.

It is clear that the Toppan ruling has created some uncertainty among security beneficiaries, legal advisors and the construction industry as a whole. Until this uncertainty has been eliminated in one way or another, it makes sense to introduce a contractual right to decide as an express condition of the security guarantee.

For more information or an informal conversation about collateral guarantees or building contracts in general, please contact us.

Peter Find

Managing Director

Gateley Vinden

T: 01204 362888

M: 07801 021000

Peter.Vinden@gateleyvinden.com

www.gateleyvinden.com

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