Look closer at assigned warranties

You don’t see any cases on collateral warranties for months if not years, then two come along at once. Readers of this column will already be familiar with the recent case of Abbey vs Simply Construction and the issue of whether warranties are adjudicable or not. But another point on collateral warranties has recently come before the courts: what losses might a warrantor be liable for under a warranty?

This came up in Orchard Plaza Management Company Ltd vs Balfour Beatty Regional Construction Ltd [2022] EWHC 1490. Balfour Beatty (Mansell, as it then was) had given a warranty to a funder in respect of its obligations under a building contract for the conversion of an office block in Portsmouth to residential apartments and commercial units. The funder assigned the benefit of the warranty to the freeholder, who then assigned it to the management company for the block, Orchard Plaza. Defects were identified in the block, and Orchard Plaza brought a claim against Balfour Beatty for the costs of repair.

As part of its defence, Balfour Beatty argued that the claimed costs of repair by Orchard Plaza, as the management company, were not recoverable on the basis that they were too remote. It said they were too remote because those costs were not the type of loss that would have been reasonably contemplated by the parties at the time the warranty was entered into as a serious possibility of being a consequence of a breach of the warranty given to the funder. Orchard Plaza applied for summary judgment and/or to have those parts of the defence struck out, on the basis that they were bound to fail.

Balfour Beatty relied on two main arguments to support its assertion that Orchard Plaza’s remedial works claim was too remote.

It said that when assessing what losses would have been in contemplation at the time the warranty was entered into, the possibility of assignment should not be considered. And given that the original beneficiary of the warranty was a funder, then the funder’s losses – assuming it took security – should be assessed by calculating the diminution in value of its security. If the funder did not take security, then any defective work would not cause it any loss.

The court rejected this argument.

Balfour Beatty argued that the claimed costs of repair by the management company were not recoverable on the basis that they were too remote

Firstly it said that the possibility of assignment should be taken into account because the warranty included a clause expressly allowing the benefit of the warranty to be assigned on two occasions, without restricting the categories of potential assignees. Any assignee might carry out remedial works and therefore the costs of repair would have been in the parties’ contemplation at the time of entering into the warranty.

Secondly it said that while a diminution in value of security might be the most obvious type of loss to be suffered by a funder, a claim for costs of repairs by a funder was still a serious possibility. It would have been within the parties’ contemplation that in the event of breach the funder might have to take possession and carry out remedials works itself.

As well as the clause in the warranty that expressly allowed for assignment, there was a further clause that the court considered when looking at the remoteness point. That clause provided that the contractor could not argue that any assignee of the benefit of the warranty could not recover losses resulting from a breach of the warranty “by reason of the fact that [the assignee was] an assignee only […], or because the loss or damage 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”.

The court rejected this argument partly because the warranty included a clause expressly allowing the benefit of the warranty to be assigned on two occasions

Balfour Beatty argued that this clause was intended to cover “no loss” arguments only and was not intended to affect the usual rules that apply to remoteness and recoverability of losses. It said that the exception to the general rule that an assignee cannot recover more than an assignor could have recovered would not have applied in this situation and therefore the parties had included the clause to deal with this particular problem and not with any remoteness arguments. As such the last part of the clause should be construed as referring to losses that were different in amount only, and not different in type.

The court rejected this argument as well and said that the drafting of the clause precluded potential defences based not only on “no loss” principles but on remoteness as well. As such, even if the court had found that the claimed losses were too remote, Orchard Plaza’s claim for them would have been preserved by this clause.

As a result, assignment clauses – commonly found in warranties but present in other contracts as well – will need to be looked at carefully to see whether they include similar provisions. If they do, and the warranty has been assigned, the door could be open to claims for more types of losses than the warrantor had originally anticipated.

Victoria Peckett is a partner in the projects and construction team at Clyde & Co