Avoiding cladding claims? Your prospects might be remote…
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In Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd [2022] EWHC 1490 (TCC) the TCC was asked to consider one specific aspect of Balfour Beatty's (Balfour) defence to the cladding related claim being pursued by Orchard Plaza Management (Orchard) the Management Company of a residential development known as Orchard Plaza, Poole, (the Property).
The Facts
The development at the Property involved the conversion of an existing 1970s office block into 115 residential apartments and two commercial units. The development was designed and constructed by Balfour (at the time called Mansell Construction Services Limited) during 2007 and 2008 pursuant to an amended JCT Design and Build contract with Coltham (Orchard) Limited (Coltham).
Coltham was the then freeholder of the Property. The funder of the project was AIB Group (UK) plc (AIB).
On 22 October 2007 Balfour granted a collateral warranty to AIB. In due course, Coltham granted long leases to the purchasers of the apartments. Orchard is the management company established to acquire and hold a long lease of the Property and, on 1 January 2008, Coltham granted a separate lease of the Property to the Claimant.
In 2015, Orchard became aware of the possibility of defects in the rainscreen cladding to the development. It began obtaining reports, but did not carry out any remedial work.
On 6 January 2020 Bournemouth, Christchurch and Poole Council issued an improvement notice to Orchard requiring it to carry out works, including the replacement of the rainscreen cladding. In the intervening period (in June 2017) AIB assigned its rights under its collateral warranty to Coltham and subsequently Coltham assigned its rights to Orchard.
In this claim, Orchard is seeking to recover from Balfour the costs of remedial works sufficient to correct the defects said to arise from the Balfour's works (namely cladding defects – the presence of some of which Balfour have accepted).
The Arguments
The key arguments before the court under this application were, in short, whether certain aspects of Balfour's defence should be struck out – namely those parts arguing that Orchard is not able to claim under the collateral warranty as it was issued to a funder and only losses that would usually be recoverable by a funder should be recoverable by Orchard.
Essentially Balfour were arguing that the losses claimed were not naturally foreseeable and were therefore too remote. Balfour's argument focused on the fact that the type of loss within the reasonable contemplation of the original parties to the collateral warranty was diminution in value of its security in the Property, and not cost of repairs.
Orchard applied to strike these paragraphs of the Defence out, arguing, in response, that it was within the reasonable contemplation at the time of the warranty that the funder would or might wish to claim for repair costs (i.e. that the losses were reasonably foreseeable and therefore not too remote).
Orchard also argued that Balfour's remoteness argument would create a legal black hole, such that neither assignor nor assignee could recover in respect of the breach giving rise to the costs of repair (and the Courts tend to look to avoid such legal black holes where possible).
Finally, Orchard also argued that even if Balfour's argument on remoteness was correct, the parties had expressly agreed a way around this and Orchard could rely on clause 12.3 of the warranty which provided:
"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."
Decision
The Judge decided that loss in the form of the costs of repairs incurred by Orchard was within the reasonable contemplation of Balfour as being a serious possibility at the time that the warranty was concluded and, in any event, such loss incurred by AIB was within the reasonable contemplation of Balfour at that time as being at least "a serious possibility".
Accordingly the loss now claimed by Orchard was not too remote and the offending paragraphs of Balfour's defence should be struck out.
Furthermore, the Court continued to conclude that, even if the loss claimed by Orchard was otherwise too remote, Balfour was precluded from so contending by reason of Clause 12.3 of the warranty. Clause 12.3 was held to reverse the rule that an assignee could only recover a loss that would have been incurred by the assignor and provided, expressly, that the assignee can recover loss of a kind which the assignor could or would not have suffered.
Comment
The decision appears to be a relatively common sense one given the relationship of a funder and the potential for them to step in - and potentially build out - the Property.
Nevertheless it serves as a useful reminder on the tests for remoteness of loss as well as providing guidance that provisions such as clause 12.3 (which we see in most collateral warranties) do have teeth.
Given the wider climate and focus on fire safety, the decision is also possibly a sign of the approach the Courts will take as more of these types of disputes reach the courtroom – not letting potential defendants escape liability easily.
The Court's judgment does not end this case but it remains to be seen whether this decision will lead to settlement with Balfour having accepted the existence of a number of defects (albeit not the scale of them) within their Defence.