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Scottish Court reaffirms the commercial effect of collateral warranties

Scottish Widows Services Ltd. v Kershaw Mechanical Services Ltd and Building Design Partnership [2011] CSIH 35 IH (Ex. Div).

We previously commented on this case, which concerned claims under collateral warranties by Scottish Widows Services Limited ("SWS") the occupier of the Scottish Widows Headquarters in Edinburgh for the costs of repairing defects in the roof of the building in order to make it wind and watertight. Building Design Partnership ("BDP") were appointed as architects for the development. A collateral warranty granted to Scottish Widows Fund and Life Assurance Society (the "Society") by BDP was assigned by the Society to its subsidiary SWS after SWS arranged for the remedial works to be completed and it was under the assigned collateral warranty that SWS sought to recover its costs. The Society also assigned its interest under a sub-lease to SWS, however, under the sub-lease, SWS had no contractual obligation to carry out repairs.

• The court held that it was irrelevant that there was no contractual obligation on SWS to carry out repairs, as such repairs were required for SWS to use the building.
• Lord Drummond Young stated that the "essential purpose" of a collateral warranty is to ensure that the beneficiary of the warranty (even if that beneficiary has acquired the right by way of assignation) who has carried out the repair work has a right of action against the party responsible for the defects.
• The court's judgment thus reinforced the importance of collateral warranties as a protection for third parties suffering loss as a result of defects in the design of works.

In an appeal to the Inner House of the Court of Session in Scotland, BDP disputed the earlier court decision, arguing that the collateral warranty should be interpreted narrowly thereby limiting SW's entitlement to recovery. The court disagreed and stated if it could be shown that BDP were liable for the defects, it was irrelevant whether SWS required to remedy the defects for practical reasons, i.e., to make the building wind and water tight so as to be fit for occupation.

This was not the same as having a contractual obligation under the sub-lease to remedy the defects and suggests that occupiers could claim under collateral warranties even where they have no contractual obligation to repair the defects.

• The Inner House confirmed the view of the Outer House that, where an owner or tenant suffers loss due to defective work, and a contractual relationship exists between that party and the party responsible for the defective work (in this case by way of a collateral warranty) the owner or tenant can sue to recover the costs resulting from that loss.

The decision reaffirms again the effectiveness of collateral warranties and the importance of ensuring that third parties who may have an interest in a project obtain collateral warranties from all parties involved in the design and construction of a project.

Click here to view the Inner House judgment.

Jurisdiction of adjudicator

Witney Town Council v Beam Construction (Cheltenham) Limited [2011] EWHC 2332 (TCC)

This English case, heard in September of this year, concerns the number of disputes which could be referred to an adjudicator, and in what circumstances an adjudicator would be going beyond the scope of his jurisdiction.

Beam Construction (Cheltenham) Limited sought enforcement of the adjudicator's decision on one key point in dispute, whilst Witney Town Council argued that four separate disputes were referred to the adjudicator and it was outwith the jurisdiction of the adjudicator to decide them. The parties agreed that the terms of appointment of the adjudicator would be in line with the statutory Scheme for Construction Contracts which was expressly incorporated into the contract between the parties.

Mr Justice Akenhead stated in his decision that a dispute can metamorphose into something different from what it was originally envisaged as being and there are situations where everything in issue at the time adjudication commences comprise one dispute, although that may not always be the case. If more than one separate and distinct dispute is referred to an adjudicator, unless the parties agree otherwise, an adjudicator would not have jurisdiction to hear the different disputes under the Scheme. However, if more than one claim is referred to the adjudicator, if one claim cannot be decided without reference to another of the claims, more than one claim could be considered together as one general dispute.

In this case, Mr Justice Akenhead decided that the claim could all be treated as one dispute, with the other issues between the parties being considered as consequential matters to the main dispute in hand.

The key point to take out of the case is the reinforcement of the role of the adjudicator and that if parties contract specifically that only one dispute can be heard by the adjudicator, care must be taken that only one dispute is referred to the adjudicator with it being borne in mind that the scope of one dispute may be wider than some parties may first envisage.

Click here to view the case.  

Adjudicator entitled to his fees even when
he has breached the rules of natural justice

Systech International Limited v. PC Harrington Contractors Limited [2011] EWHC 2722 (TCC)

In the case of Systech International Ltd v PC Harrington Contractors Ltd, in the Technology and Construction Court in England, the adjudicator sought payment of his fees. The adjudicator had found against PC Harrington in an adjudication raised against them and ordered that PC Harrington pay his fees. PC Harrington had already been successful in an action in the TCC where the adjudicator's decision was found to be unenforceable because the adjudicator had breached the rules of natural justice. PC Harrington defended the payment action on the basis that the decision being unenforceable, there was a total failure of consideration and the adjudicator was not therefore entitled to his fees.

The court found in favour of the adjudicator holding that the role of the adjudicator was not merely to provide a decision, but to carry out a role, as intended by Parliament, to conduct the whole adjudication process. The adjudicator had carried out a substantial amount of work in performing his role and there could not therefore be said to have been a total failure of consideration. The courts said one should be slow to infer an intention on parties that there would be no payment due at all for services performed honestly, there having been no indication of bad faith, fraud or dishonesty on the part of the adjudicator.

Click here to view the case.

Signature and 'delivery' of a deed or guarantee is essential

Bibby Financial Services Ltd v Magson [2011] EWHC 2495 (QB)

This case concerns signing of deeds and is of relevance to documents which are subject to English law. The High Court was called upon to decide whether personal guarantees and warranties issued in the form of deeds signed by individual directors of a company (Magson) entering into a debt factoring agreement were binding.

The directors had made handwritten amendments to the documents and signed them, in their view, purely as indicative of their intent to proceed. They expected the factoring company (Bibby) to provide clean copies incorporating the handwritten amendments to be issued to them for signing and dating.

When Magson went into administration, Bibby demanded payment of its facility in terms of the debt factoring agreement. Magson argued it was not their intention to be bound by the copy of the agreement they signed since they had expected a further clean copy revised in accordance with the agreed amendments.

The court held, on the facts, that the deed was ineffective and none of the guarantees or the warranties in question handed to Bibby after signature were intended to be 'delivered' within the meaning of the Law of Property (Miscellaneous Provisions) Act 1989 s.1(3) and the Law of Property Act 1925 s.74A.

In order for a document to be enforceable as a deed, it is necessary for it to be 'delivered' as a deed and the person signing the deed must separately indicate that he intends to be bound by the deed. A signature alone is insufficient for it to be delivered.

It is important to remember that delivery does not concern simply the physical handing over of a document to another party/beneficiary, but whether the person who is providing the deed intends to be bound by the terms of the deed they have signed. To avoid uncertainty and satisfy the legislation, it is sensible to include a statement within a deed confirming that the deed is delivered when dated, having satisfied any pre-conditions or pre-requisites of delivery.

Click here to view the case.

Landfill site: Compliance with an Environmental
Permit affords protection against nuisance claim

Derrick Barr and others v Biffa Waste Services Limited [2011] EWHC 1003

The recent decision of the English Technology and Construction Court (TCC) illustrates that operators who comply with the terms and conditions of an Environmental Permit are afforded protection against a claim in nuisance.

The case was a group litigation brought by some of the residents of Vicarage Estate, which is located close to a landfill site in Ware, Hertfordshire. In 2004, Biffa began using the landfill site for tipping of pre-treated municipal waste. This tipping gave rise to odours.

Landfill sites are subject to significant environmental regulation. Such sites operate under Environmental Permits (in Scotland such permits are referred to as "PPC Permits") which are monitored for compliance by the Environment Agency. Environmental Permits place an obligation on the operator of the site 'to use the best available techniques for preventing or, where that is not practicable, reducing emissions from the installation'. Between 2004 and 2009 there were various disputes between Biffa and residents which resulted in successful prosecutions by the Environment Agency against Biffa for emissions in four separate incidents. Thereafter the residents of Vicarage Estate brought a group litigation against Biffa seeking damages for nuisance in relation to the landfill site.

The Hon. Mr Justice Coulson held:

• Planning permission for a particular use does not prevent an action in nuisance being brought against that particular use.
• Biffa could not rely on the defence of statutory authority because it was not a public body nor did it have any rights under statute to operate a landfill site.
• The wording of the Environmental Permit recognised that there could be some odours from the site on certain occasions, despite the use of best available techniques.
• Where legislation covers such an activity the law of nuisance will be of less significance. Consequently, where a company such as Biffa conducts its business entirely in accordance with an Environmental Permit, it will not ordinarily be faced with a slew of nuisance actions.
• The use of the land was reasonable given the expected concessions required from residents of neighbouring properties. Biffa had adopted various techniques to reduce the odours and was therefore not liable in nuisance.

The decision will have been welcomed by companies who operate landfill and other similar sites. Whilst the court stressed that the granting of planning permission does not prohibit an action in nuisance succeeding, it also made it clear that operators who conduct their business in accordance with an Environmental Permit and adopt reasonable techniques to reduce any nuisance are unlikely to be held liable. However, this position should be qualified. In the present case no allegations were levelled against Biffa for being negligent in failing to adopt the best available techniques required under the Environmental Permit. This was possibly due to a lack of available evidence. In the event that specific allegations were made, and proven, it seems unlikely that operators would be afforded such protection in the absence of mitigating circumstances.

The decision of the TCC has now been appealed and is due to be heard by the Court of Appeal in late January 2012.

JCT courts the Public Sector

In public sector projects the NEC3 suite of contracts continues to have a high profile and is well supported. The JCT has recently taken steps to facilitate the use of the JCT set of contracts in a public sector context through the publication of the "JCT 2011 Public Sector Supplement - Fair Payment, Transparency and Building Information Modelling".

The document is for use with the JCT main contracts and also provides suggested modifications for use with the corresponding JCT Sub-Contracts. In Scotland similar amendments could be used where required with the published SBCC contracts.

The section describing the relationship between Building Information Modelling ("BIM") Protocols and the JCT contracts is useful and will be of interest to both the public and private sector.

It will be interesting to see what the take up is on public sector projects. A copy of the supplement is available free of charge from the JCT.

Click here to order a copy.

Bondsman unsuccessfully resists claim

Hackney Empire Limited v Aviva insurance UK Limited (formerly trading as Norwich Union Insurance Limited) [2011] EWHC 2378 (TCC)

The recent English case of Hackney Empire Ltd v Aviva Insurance UK Ltd, is just one example of the increasing resistance being shown recently by bondsmen to claims against bonds.

Hackney Empire were the beneficiaries of a bond guaranteeing the performance of their contractor's obligations under a building contract. During the contract, the contractor, Sunley Turiff Construction Ltd ("STC") made numerous claims and Hackney Empire agreed (on the recommendation of Lord Sugar) to advance £1 million in respect of these claims. £750,000 of the agreed sum was paid to STC, but they then went into administration before substantiating the claims.

Hackney Empire sought to recover the advanced sums from Aviva under the bond claiming Aviva guaranteed the obligation on STC to repay the sums which had been paid in respect of unsubstantiated claims. Aviva tried to argue that the agreement reached was outwith the scope of the guarantee and also that the agreement reached was prejudicial to it as bondsman.

The court found in favour of Hackney Empire finding that the terms of a separate agreement were only relevant if they varied the original contract, but the contract as varied had to remain within the scope of the original guarantee. The court also held that there had not been any prejudice to Aviva as there was no evidence to suggest STC would be any more likely to default as a result of the agreement reached.

Click here to view the case.

The amended Construction Act

Following our recent high level seminars on the Local Democracy, Economic Development and Construction Act 2009, which is now in force across the UK, we are offering in-house seminars providing more of a view "from the coal face" and discussing some of the day to day practical implications of the Act. Please get in touch with Mark Macaulay or Kirsti Olson or your usual construction contact if you would be interested in receiving these seminars in house at your business.

Contact us

If you think your business may be affected by any of the above, or if you have any other questions, please contact:

Mark Macaulay
Partner
0141 303 2343
mark.macaulay@mms.co.uk

Kirsti Olson
Partner
0131 228 7211
kirsti.olson@mms.co.uk

This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.