ORCHARD PLAZA MANAGEMENT COMPANY LIMITED and BALFOUR BEATTY REGIONAL CONSTRUCTION LIMITED

Remoteness defence fails in latest cladding decision

In this case, Orchard Plaza Management Company Limited, (the Claimant) successfully applied for strike out and/ or summary judgement in respect of parts of the Defence of Balfour Beatty Regional Construction Limited (the Defendant). The Defendant had put forward a defence that the Claimant’s pleaded loss and damage was too remote to be recoverable. This case is a helpful illustration of how the courts will interpret remoteness of loss and specifically, under the terms of collateral warranties.

Background

The Claimant sought to recover the costs of remedial works to cladding at a development at Orchard Plaza, Poole (the Property) under the terms, and as assignee, of a collateral warranty given by the Defendant. The development was designed and constructed by the Defendant pursuant to a contract with Coltham Limited, the freeholder of the Property (Coltham). The funder was AIB Group (UK) plc (AIB) who lent sums to Coltham. The Defendant then entered into an assignable collateral warranty with AIB.

Coltham granted long leases to the purchasers of the apartments. The Claimant is the management company established to acquire and hold the long lease of the Property. Coltham granted a separate lease of the Property to the Claimant.

In 2015 the Claimant became aware of the possibility of defects in the rainscreen cladding. In 2017 AIB assigned its rights under the collateral warranty to Coltham. Coltham then assigned its rights to the Claimant. In 2020 the Council issued an improvement notice to the Claimant which required the Claimant to carry out works, including the replacement of the rainscreen cladding. The Claimant sought to recover from the Defendant the costs of the remedial works relying upon the collateral warranty. The application concerned the Defendant’s second defence, namely the ‘performance warranty defence,’ whereby the Defendant contended that the losses claimed by the Claimant were not the natural consequences of breaches of a warranty and thus are too remote.

The issues in the application

There were two issues for the court to address in the application:

1. Is the Claimant’s loss too remote?
2. Even if the Claimant’s loss is too remote, is the Defendant precluded from relying upon such a defence by Clause 12.3 of the Collateral Warranty?

Clause 12.3 of the Collateral Warranty states:

“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)

The Defendant contented the Claimant’s loss was too remote i.e. the type of loss (the costs of repair) was not within the reasonable contemplation of the parties to the collateral warranty. That loss would have been diminution in value of the lender’s security in the Property and not the costs of repairs. Further, the Defendant said that clause 12.3 would not preclude a defence of remoteness and its intention was to preclude a defence based on the rule than an assignee can recover no more than the assignor.

The Claimant contended that their loss was not too remote and the Defendant’s second argument would create a legal ‘black hole’ such that the assignor nor assignee could recover in respect of the breach of covenant giving rise to the costs of repair. Further, even if the Claimant’s loss was too remote, such a defence is precluded in Clause 12.3.

Relevant Legal Principles

The leading authority of Hadley v Baxendale (1854) was considered when analysing the rules of remoteness. The more recent case of Attorney General of the Virgin Islands v Global Water Associates Ltd (2020) stated that to be recoverable, the type of loss must have been reasonably contemplated as a serious possibility. This is based on the knowledge which the parties possessed at the time.

Offer-Hoar v Larkstore (2006) was considered in detail by the court. The principle that the assignee cannot recover more than the assignor does not assist this case, however, the purpose of the principle is to protect the contract breaker/debtor from being prejudiced by the assignment. The principle is not intended to enable the contract breaker/debtor to rely on the fact of the assignment in order to escape all legal liability for breach of contract. This was pivotal to the court’s assessment of this case, specifically in relation to the Defendant’s reliance on clause 12.3 of the collateral warranty.

Discussion and Analysis

Issue 1: Was the loss too remote?

The court found that it was within the reasonable contemplation of the Defendant at the time of entering into the collateral warranty that loss might be suffered by an assignee. It was further found that it was reasonably foreseeable that the funder might take possession of the Property and that it would sell the site to another landlord with the benefit of the collateral warranty and that person could carry out remedial works. It was equally foreseeable that upon repayment by the borrower, the funder would release its security and assign the benefit of the collateral warranty to the borrower, who in turn might carry out remedial works. As such, the cost of repairs incurred by the Claimant were found to be in the reasonable contemplation of the parties as a serious possibility when entering into the collateral warranty and thus, the Defendant’s remoteness defence failed and was struck out.

Issue 2: Clause 12.3

The question is whether the Defendant is precluded from relying upon such an argument by reason of the terms on clause 12.3? The court believed that both parties arguments had merit. On the one hand, there is no reason to limit the concluding words ‘such loss is different’ to ‘different in amount’ and to exclude ‘different in type of kind.’ The words used are ‘different’ in general and can cover both.

However, the purpose of clause 12.3 is to negate any possible ‘no loss’ type defence arising from the general rule on assignment. The clause provides that the Defendant is precluded from relying on three reasons for contending that the assignee cannot recover. 1) because the assignee is an assignee only and not the original party / funder, 2) because the assignor did not suffer that loss, and only the assignee has suffered the loss, and 3) that the loss suffered by the assignee is ‘different’ to the loss which would have been suffered by the assignor/ funder. The court approached this issue on the natural meaning of the words i.e. includes loss which is ‘different in kind.’ There is no limit to the word ‘different.’ Further it was found clause 12.3 was not intended to exclude the application of rules of remoteness. As such, even if the loss claimed by the Claimant was otherwise too remote to claim as damage, the Defendant was prevented from relying upon this by reason of clause 12.3. Again, the Defendant’s remoteness defence failed and was struck out.

Comment

The decision provides a useful example of the application of the test of remoteness and a further example that courts will not allow parties to collateral warranties to easily escape liability for (cladding fire safety) defects on this basis.

Interestingly, the case also shows the application in practice of clauses such as clause 12.3, which are common in collateral warranties. The decision displays how such clauses will be interpretated and applied to preclude defences that the losses suffered by an assignee of a collateral warranty are different from those which would have been suffered by the original beneficiary. Here, ‘different’ was interpreted broadly by the court, therefore restricting the Defendant’s ability to rely on their remoteness and/or ‘no loss’ defences, which were struck out.