Very often as construction lawyers we are asked "are collateral warranties really necessary?", or "does anyone actually claim under a collateral warranty?". There is not much caselaw in relation to collateral warranties, but just in the space of a couple of weeks there have been two new important decisions.

Queries and concerns can arise in relation to the extent to which a collateral warranty can be relied upon if the warranty has been assigned (i.e. rights under it have been transferred to another party) and the interests of the "assignor" and "assignee" are not the same - the most obvious difference being between a funder warranty (perhaps granted in relation to a particular financing) and a tenant/purchaser warranty.

The recent case of Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd [2022] EWHC 1490 has however reinforced the effectiveness of a well drafted collateral warranty agreement and the ability of an assignee to rely on an assigned collateral warranty in the context of a claim for losses (notwithstanding the fact that their interests in the underlying project may differ to that of the assignor). We take a closer look at how the courts have interpreted remoteness of loss and liability under the terms of an assigned funder collateral warranty.

Order of Events

The Defendant, Mansell Construction Services (now Balfour Beatty), designed and constructed the conversion of an existing office block into 115 residential apartments and two residential units during 2007 and 2008. The Employer under the Building Contract was Coltham (Orchard) Limited who was ultimately the freeholder of the property. The development's funder was AIB Group (UK) plc and Balfour Beatty granted a collateral warranty in favour of AIB in their capacity as funder. Coltham granted a lease of the Property to the Claimant, Orchard Plaza Management.

In 2015, the Claimant became aware of the possibility of defects in the rainscreen cladding but no remedial work was undertaken. In 2017, AIB (funder) assigned its rights under the collateral warranty to Coltham (freeholder) and Coltham thereafter assigned its rights to the Claimant (tenant). Years later in 2020, an improvement notice was issued to the Claimant from various Councils requiring it to carry out replacement rainscreen cladding.

The Claimant sought to recover from the Defendant the costs of the remedial works under the terms of the assigned Collateral Warranty granted by the Defendant.

The Issues

In short, the Defendant contended that the losses suffered were not the natural consequences of a breach of collateral warranty and that the loss was too remote. They argued that the type of loss within the original parties reasonable contemplation was not the cost of repair but the diminution in value of its security in the property.

The Claimant successfully countered the defence in a threefold argument that contented: -

  • that it was within the reasonable contemplation of the original parties that the funder might wish to claim for repair costs;
  • that clause 12.3 of the collateral warranty expressly provided that the Contractor agreed with the Beneficiary that it will not contend that any assignee shall be precluded or prevented from recovering under the collateral warranty any loss or damage resulting from any breach of the warranty by the Contractor by reason of the fact that such a person is an assignee and not the original beneficiary….(refer to clause 12.3 for exact drafting) and;
  • that if the Claimant's argument on remoteness of loss is accepted, then the court will create a "black hole" whereby neither the assignor or assignee could recover losses in respect of a breach resulting in cost of repair.

The Judgement

The Judge struck out the Defendant's argument and ordered summary judgement in favour of the Claimant on the basis that the losses were a foreseeable consequence of breaching the collateral warranty and were not limited to diminution of value. It was held that the no loss provision at clause 12.3 did not allow for the possibility that a claim could be denied by reason of remoteness.

The judgement is a helpful reminder to parties of the value of assigning collateral warranties (where permitted) and also that the effectiveness of no loss wording provisions should not be underestimated. Even if (1) no fresh collateral warranties are available and (2) permitted assignations may be used up for certain warranties, clearly it can be helpful to consider what other warranties could be available for assignation to an interested party.

If you require specific advice in relation to collateral warranties and assignation of rights, please get in touch with a member of our construction team.

Contributors

Anna Reilly

Senior Solicitor