Assignee claims under collateral warranties and “no loss” clauses

A recent TCC decision has considered the recoverability of assignee losses under a collateral warranty which contained an express “no loss” clause. The case involved an assignment by a funder through to a building owner who then made a claim for defects remediation. Such losses were held not to be too remote to be claimed by an assignee and that, even if they had been, the “no loss” clause would have protected the assignee. This is therefore an important case both for beneficiaries of collateral warranties and givers of the same.

Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd

Balfour Beatty constructed a residential and commercial property in Poole during 2007 and 2008, and granted a collateral warranty to the developer’s funder. In 2017, after defects became apparent in the rainscreen cladding, the funder assigned its warranty to the developer, who in turn assigned it to Orchard, being the management company with a long lease of the development. Orchard sought to recover the costs of remedial works for the defects from Balfour Beatty.

Balfour Beatty admitted breach of the collateral warranty, but contended that at the time of entry into the warranty, the losses now being claimed by Orchard were not a natural, likely and/or foreseeable consequence of a breach of the warranty and that Orchard could only recover losses of the sort that would ordinarily flow from a warranty to a funder. In other words, the losses claimed for by Orchard were too remote.

The warranty permitted up to two assignments without the consent of Balfour Beatty (clause 12.1). No limitation was stated as to the class of persons able to be assignees (such as a substitute funder). The warranty also contained a “no loss” provision in clause 12.3 as follows:

“The Contractor [defendant] agrees with the Beneficiary [funder] not to contend or argue that any person to whom the benefit of this Deed [the collateral warranty] 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 not the original beneficiary or because the loss or damage suffered has been suffered by such person and not by the original beneficiary, or because such loss is different to that which would have been suffered by the original beneficiary”.

Orchard sought to strike out Balfour Beatty’s defence in this respect on the grounds that (i) it was foreseeable that a funder might make a claim for remedial costs; (ii) the express permission to assign in the collateral warranty meant that Balfour Beatty had known that claims might be made by parties other than a funder who may have suffered a different loss; and (iii) in any event, the “no loss” wording at clause 12.3 of the collateral warranty expressly excluded such a defence.

Remoteness

Contractual rules of remoteness of damage date back to the well-known case of Hadley v Baxendale in 1854, subsequently developed in other well-known cases. In summary, a loss (meaning also a type or kind of loss) must have been reasonably contemplated as a serious possibility at the time that the contract was made.

The court considered in this case that the fact that the collateral warranty made express provision for its benefit to be assigned to persons other than funders meant that Balfour Beatty knew that losses might be claimed for by an assignee of the collateral warranty who was not a substitute funder, bringing such losses into its reasonable contemplation. It was reasonably foreseeable that such an assignee (be they a new landlord or the original borrower for example) might need to carry out remedial works and accordingly it was in Balfour Beatty’s reasonable contemplation as a serious possibility that an assignee would incur repair costs as a result of Balfour Beatty’s breach.

That conclusion notwithstanding, the court also determined that a claim for the cost of repairs by the funder itself would have been a serious possibility arising from a breach, as the borrower’s default under the loan leading to the funder’s taking possession of the development would have been in Balfour Beatty’s reasonable contemplation.

The “no loss” clause

Balfour Beatty’s remoteness defence therefore failed, but the court went on to consider the effect of the “no loss” wording in clause 12.3 of the collateral warranty. Such clauses are aimed at overcoming the general principle that an assignee cannot recover more than an assignor could have recovered absent the assignment, so as not to put the warranting party in a worse position as a result of the assignment. Such a situation could apply to cases where the loss claimed by the assignee would have been too remote a loss for the assignor, or that the type of loss suffered by the assignee was a type of loss that the assignor could not have suffered.

The judge found that clause 12.3, and its concluding words in particular, were successful in reversing this general principle of law. The use of the word “different” without further qualification captured loss different in amount or in kind. If Balfour Beatty’s position on remoteness were to survive clause 12.3, that part of the clause would be undermined, because remoteness would bite in every case where the assignee’s loss was different in kind.

The judge further supported his decision by saying that the combined effect of clauses 12.1 and 12.3, i.e. that the warranty could be assigned to any party who might suffer a “different” loss, was to put such a different type of loss squarely within Balfour Beatty’s reasonable contemplation at the time of providing the collateral warranty.

Conclusions and implications

This case has clear implications for beneficiaries and providers of collateral warranties alike. It will be a welcome decision for beneficiaries and for their potential assignees (such as purchasers, tenants, borrowers or funders) to know that a well drafted “no loss” provision does what it says it will do and will give them confidence in their ability to rely on collateral warranties. On the other hand, such provisions are not included in standard form warranties, such as under the JCT, and this decision may therefore encourage greater focus on the negotiation of such provisions in collateral warranties more generally as well as clauses conferring unqualified permission to assign.

References:

Hadley v Baxendale (1854) 9 Exch 341

Orchard Plaza Management Company Limited v Balfour Beatty Regional Construction Limited [2022] EWHC 1490 (TCC).