Property Development: Assignment of collateral warranties and the effects on claims brought by warranty beneficiaries (Orchard Plaza Management Company Limited v Balfour Beatty Regional Construction Limited – 2022)

Whether a claim brought in the Technology and Construction Court should be struck out where remedial works undertaken were found to be too remote from the intended purpose of the collateral warranty relied upon.

The background

In Orchard Plaza Management Company Limited v Balfour Beatty Regional Construction Limited [2022], the claimant, Orchard, held a long lease of a development in Dorset. The freeholder Coltham (Orchard) Limited, which granted the lease in 2008, had entered into a design and build contract with Balfour Beatty to construct the development. A collateral warranty was granted to the funder of the development in 2007, which was assigned a number of times and eventually vested in Orchard in 2017.

Defects arose in the cladding of the development, for which Orchard instructed reports in 2015. Orchard did not undertake works to remedy the issues. The local authority served an improvement notice on Orchard in 2020, requiring it to remedy defects by replacing the cladding.

Orchard brought a claim on the warranty as an assignee of the collateral warranty to recover the costs of remedial works arising from the original construction by Balfour Beatty. Balfour Beatty defended the action, arguing that Orchard’s losses were too remote from the warranty; the losses were not a natural consequence of breaches of the collateral warranty and the claim could not therefore succeed.

Balfour Beatty argued that the collateral warranty had been originally granted to a funder. The losses incurred by Orchard could not have been an anticipated or foreseeable consequence of a breach of the warranty, and were too remote. Orchard argued that it was foreseeable that a funder’s claim may be to recover the costs of remedying construction defects, and that there was no restriction contained in the warranty as to who could benefit from it.

The decision

The Court found in favour of Orchard, agreeing that it could have been reasonably contemplated at the time the collateral warranty was granted that an assignee may seek to recover costs of repairs to defects as a result of a breach. Losses were not too remote to be claimed under the warranty.

The court stated that it must be reasonably contemplated whether a loss is a ‘serious possibility’. It was entirely possible that the warranty could be assigned, and the warranty contained no restriction on who it could be assigned to and who could benefit from it. It was found that there was a serious possibility that an assignee may seek to recover costs of repairs to defects under the warranty.

Under clause 12.3 of the warranty, Balfour Beatty covenants with the beneficiary of the warranty:

“..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”

As a result of this provision, an assignee of the warranty was able to recover losses of a kind which an assignor could not have suffered. Balfour Beatty’s defence that losses incurred by Orchard could not have been an anticipated or foreseeable consequence was struck out.

Advice and action for landlords

This case is of relevance for developers and those who are party to the assignment of collateral warranties. Where there is a serious possibility that an assignee may seek to recover the costs of repairs to defects under it, losses could not be considered too remote to be claimed by a future assignee.

Landlords and developers should seek advice on collateral warranties they grant or receive through assignment, ensuring that any limitations on who can claim under them or to which losses they will apply are expressly stated. In this case, the express wording of the warranty gave Orchard the ability to recover its remedial works costs because, although the original assignor may not have suffered such losses, future assignees could still claim under it.