28 July 2022
Under Construction - Q2 2022 – 2 of 5 Insights
The TCC heard an application by Orchard Plaza Management Company Limited (Orchard Plaza) for a summary judgment and/or to strike out Balfour Beatty Regional Construction Limited's (Balfour Beatty) defence that losses for remedial works carried out by Orchard Plaza were too remote.
Orchard Plaza is the management company and long leaseholder of an apartment block which is concurrently let to individual lessees of the various apartments. The apartment block was converted from an office block during 2007 and 2008 under an amended JCT Design and Building Contract entered into between the then freeholder of the property and Balfour Beatty.
Orchard Plaza has the benefit of a collateral warranty that Balfour Beatty originally granted to the development's funder by virtue of a subsequent assignment of the same in Orchard Plaza's favour.
In 2020, Bournemouth, Christchurch and Poole Council issued an improvement notice to Orchard Plaza requiring certain works to be carried out at the property, including the replacement of rainscreen cladding. Orchard Plaza was aware of possible defects in the cladding in 2015 but only began remedial works subsequent to the improvement notice.
Orchard Plaza's claim against Balfour Beatty under the collateral warranty is for recovery of the costs of the remedial works required to correct the defects that allegedly arose from Balfour Beatty's works.
Were the losses claimed under the collateral warranty too remote? Balfour Beatty argued that at the time of entry into the collateral warranty in favour of the funder, the losses contemplated did not include repair costs as claimed by Orchard Plaza and instead argued that loss would have been restricted to diminution in value of the lender's security in the property.
As contended by Orchard Plaza, a corollary issue at play was that even if the losses were too remote, Balfour Beatty should be barred from relying on such a remoteness defence owing to a clause 12.3 in the collateral warranty.
This clause provided that an assignee of the collateral warranty should not be precluded or prevented from recovering any loss or damage resulting from breach of the collateral warranty by reason of the fact that:
In reaching its decision, the judge took into account the previous authorities on remoteness of damage, including the decision in Attorney General of the Virgin Islands v Global Water Associates (2020) where Lord Hodge stated that to be recoverable, the type of loss must have been reasonably contemplated as a serious possibility, which depended on the state of knowledge at the time.
The judge noted that the fact that the benefit of a contract might be assigned to a third party is not sufficient to bring into contemplation the kind of loss which might be sustained by any assignee. However, in this instance, the collateral warranty expressly provided for a possibility of assignment by the funder and, as there was no restriction on the persons to whom the collateral warranty could be assigned, Balfour Beatty knew that losses might be claimed by an assignee who was not a funder.
As a result, the judge held that:
Therefore, the losses suffered by Orchard Plaza were not too remote.
Even if the cost of the remedial works as a loss suffered by Orchard Plaza was too remote, the judge concluded that by virtue of the clause 12.3 in the collateral warranty, Balfour Beatty should not be able to rely on remoteness of loss as a defence.
In reaching this conclusion, the judge noted that clause 12.3 explicitly provided for situations where an assignee's loss may be different in kind to the assignor's loss and so the ability of any assignee to recover "different" loss would easily be within the reasonable contemplation of Balfour Beatty at the time of entering into the collateral warranty.
The judge approached both issues having due regard to the construction of the assignment provision in the collateral warranty:
This decision is therefore a good indicator that the courts will lend appropriate weight to the drafting of such assignment provisions in collateral warranties, albeit in the context of the case law on remoteness and no loss issues.
by Rebecca May
by Emma Coates