Stuart Pemble looks at a decision that gave a narrow construction to a common limitation clause in a collateral warranty
Key point
- A standard limitation clause in a collateral warranty may not give as much protection as previously thought
Given their prevalence in construction projects, it is surprising how relatively few reported decisions there are regarding collateral warranties. Rarity alone would make Fraser J’s decision in Bloomberg LP v Sandberg (a firm) and others [2015] EWHC 2858 (TCC); [2015] PLSCS 291 a collector’s item. When the fact that it reaches a conclusion about the consequences of a commonly used limitation clause is added to the mix, it emerges as one of the most significant construction law decisions of 2015.
Why warranties matter
Collateral warranties exist to give third parties to construction projects the right to claim damages for defective design or construction work. They first came to prominence after Murphy v Brentwood District Council [1991] 1 AC 398; [1990] EGCS105. Before Murphy, British courts had accepted that third parties could recover their losses in the tort of negligence. Murphy changed that: the losses third parties suffered were properly categorised as pure economic loss and there was an insufficiently close relationship between the third parties and the warranty provider to allow for its recovery.
The solution to the problem is to create a cause of action in contract, using either a collateral warranty or the Contracts (Rights of Third Parties) Act 1999. The construction industry has yet to embrace third-party rights, so collateral warranties are the main way that funders, purchasers and tenants can be compensated for any loss.
The facts
Bloomberg was one such third party. It was the tenant of a London office block. Tenants are often offered a suite of collateral warranties from the landlord’s construction team in return for accepting a full repairing obligation under a lease. Because the tenant will be responsible for fixing any defects, it looks to the warranties to help recoup any repair costs.
In 1999, Malling Pre-Cast Ltd entered into a trade contract with the Bloomberg limited partnership’s landlord to carry out cladding work. Malling gave Bloomberg the benefit of a warranty that included this clause: “Notwithstanding the date hereof no proceedings shall be commenced against… [Malling]… after the expiry of twelve years from the date of issue of the last written statement by… [Bloomberg’s landlord]… that practical completion of the project has been achieved under… [Malling’s contract with Bloomberg’s landlord].”
Practical completion was achieved on 29 August 2000; so the time for Bloomberg bringing a claim under the warranty had expired on 28 August 2012.
Unfortunately for Bloomberg, there were problems with the cladding – initially in 2001 and again in July 2013. In 2013, Bloomberg paid £470,000 for temporary repair works and faced a bill of an extra £2m to fix the defective cladding. Sandberg and Buro Happold had also been employed by Bloomberg’s landlord to advise in relation to the cladding, and both had provided Bloomberg with collateral warranties.
The dispute
In November 2013, Bloomberg started proceedings against Malling, Sandberg and Buro Happold for breaches of the collateral warranties, although it dropped the case against Malling once it accepted that the limitation clause in that warranty was fatal to its case. Bloomberg was still able to proceed against Sandberg and Buro Happold.
Sandberg and Buro Happold argued that they could seek a contribution from Malling towards any liability they might owe Bloomberg under the Civil Liability (Contribution Act) 1978 (“the 1978 Act”). This allows one wrongdoer to seek compensation from another party who has contributed to the same loss or damage. If it could be shown that Malling had been at fault in addition to Sandberg and Buro Happold, it could be required to make a contribution.
Fraser J had to decide whether the contribution claim would succeed in theory. In a bid to strike out the contribution claim, Malling relied on section 1(3) of the 1978 Act. This provides that although a claim for contribution can succeed even in situations where the third party has ceased to be liable for the damage, it cannot succeed if the reason why the third party is no longer liable is that “a period of limitation… [has]… extinguished the right on which the claim against him… was based.”
Malling argued that the limitation clause in its warranty had done precisely that – extinguish the right for anyone to bring a claim (a substantive bar). Sandberg and Buro Happold argued that the limitation only applied to claims brought by Bloomberg (a procedural bar).
Having analysed the words used in the clause (it did not expressly exclude claims by third parties to the warranty), Fraser J was persuaded that permitting Malling to use the limitation clause to escape liability would be allowing it to contract out of the provisions of the 1978 Act. Since those provisions are designed to protect third parties to a contract (who might not be aware of its terms), the judge felt that it would require very clear words to achieve that goal (if, in fact, it was possible at all). The limitation clause in Malling’s warranty was not worded with sufficient clarity. As such, the clause was a procedural bar and a not a substantive one.
Consequences
Sandberg and Buro Happold can try to pursue Malling for a contribution. There is no guarantee that they will succeed.
So far as collateral warranties are concerned, however, the consequences might be more far-reaching. Warranty providers and their insurers are now aware of an issue from which they might have felt protected. Although Fraser J doubted whether anyone could contract out of the effects of the 1978 Act, the judgment may see warranty providers trying to do just that.
Stuart Pemble is a partner at Mills & Reeve LLP
