Cost of repair under assigned collateral warranty not too remote

Collateral warranties are now a common feature of most significant construction projects. This case concerned a contractor’s unsuccessful attempt to avoid liability for losses which, the contractor claimed, it did not envisage liability when it originally gave the warranty.

Facts

During 2007 and 2008, the freeholder of a property at Orchard Plaza (Coltham (Orchard) Limited) undertook a project to convert the existing 1970s office block into 115 residential apartments and two commercial units. Balfour Beatty Regional Construction Limited (then known as Mansell Construction Services Limited) was appointed as the contractor under a JCT Design and Build Contract. On 22 October 2007 Balfour granted an assignable collateral warranty to the funder, AIB Group (UK) PLC. In due course, Coltham sold the apartments and Orchard Plaza Management Co Ltd was established to hold a long lease of the property. In 2015 Orchard became aware of potential defects in the rainscreen cladding which had been installed at the development. It began obtaining reports, but did not carry out any remedial work. Around two years later AIB assigned its rights under the collateral warranty to the Coltham, who assigned these rights on again to Orchard. Investigations into the makeup of the external wall were carried out and it transpired that there were issues with fire safety and defective cladding. Orchard claimed damages from Balfour under the collateral warranty. The Proceedings Balfour admitted that it was in breach of the terms of the warranty. However, Balfour argued that the losses claimed were too remote to be recovered by Orchard. Specifically Balfour said that the warranty was initially given to AIB and was therefore only intended to cover the potential diminution in value of AIB security in the Property as funder: the warranty was not intended to cover the actual cost of repairing defects. Orchard filed an application to strike out Balfour’s defence on the basis that it had no reasonable chance of success. Judgment The Technology and Construction Court dismissed Balfour’s defence and ordered summary judgment in favour of Orchard. In finding for Orchard, the TCC gave the following reasons: 1 At the time Balfour issued the warranty to AIB it would have been within its reasonable contemplation that, if the works carried out were defective, the beneficiary of the warranty would incur repair costs, not just diminution of value as Balfour had argued. Accordingly, the losses claimed were held to be a foreseeable consequence of a breach of the Warranty: “I conclude that, at the time of the conclusion of the Collateral Warranty, it was within the reasonable contemplation of the Defendant as a serious possibility that an assignee of its benefit would incur the cost of repairs to the Property arising from the Defendant's breach of its terms.” 2 The warranty included common “no loss” wording, which stated that: “The Contractor agrees with the Beneficiary not to contend or argue that any person to whom the benefit of this Deed is assigned shall be precluded or prevented from recovering under this Deed any loss or damage resulting from any breach of this Deed by the Contractor by reason of the fact that such person is an assignee only or otherwise is not the original beneficiary or because the loss or damage suffered has been suffered by such person only and not by the original beneficiary, or because such loss is different to that which would have been suffered by the original beneficiary.” (emphasis added) As such, the express terms of the warranty specifically prevented Balfour from denying the claim due to the alleged remoteness of the loss. Comment While the outcome will also depend on the precise wording of the warranty in question, similar wording precluding “no loss” defence” is commonly found in most collateral warranties. The TCC’s decision serves as a reminder of the benefit such wording to the beneficiaries of warranties. Contractors and consultants who give collateral warranties (and their insurers) may now pay greater attention to the types of loss which they are prepared to accept under such warranties, and make sure the drafting is amended to reflect this. This decision may lead to more push back from developer parties when negotiating the terms of collateral warranties moving forward. And whilst it may seem, from a resident’s perspective, to be another avenue by which they may recover the cost of repairs to properties with fire safety defects, in practice the situation that arose here is uncommon. Rarely will residential purchasers receive the benefit of a collateral warranty.