Chelverton Properties Ltd, property developers, entered into a contract with Safeway under which Chelverton were to design and construct a supermarket which included a two-deck car park. Chelverton entered into a building contract with Interserve. Interserve entered into a warranty with Safeway and Chelverton. A dispute arose about the surface of the car park. Chelverton and Interserve entered into a compromise agreement. Chelverton then became insolvent and Safeway having carried out remedial works, sought to recover the costs of those remedial works under the warranty from Interserve. Clause 3.3 of the warranty provided as follows:-
"The Contractor shall owe no duties or have any liability under this deed which are greater or of longer duration in that which it owes to the Developer under the Building Contract."
Mr Justice Ramsey had to consider whether the effect of Clause 3.3 was to prevent Safeway from recovering damages otherwise due from Interserve because Chelverton owed Interserve a debt of a greater sum than under the building contract. As Chelverton were insolvent, they had not paid Interserve the agreed compromise sum of some Ł1.2 million. Accordingly, it was argued that Interserve would not themselves be liable to pay Chelverton damages, because they would have a set-off claim against that sum which would be a complete defence.
Against this, it was argued that Chelverton had not sought to recover the remedial work costs claimed by Safeway and could not have done so as they had not suffered the loss. Or was it the case that the liability to Safeway under the warranty could not be greater than the liability that Interserve owed to Chelverton under the building contract? The cost of the remedial works was afterall the costs of the remedial works. Alternatively, did the set-off merely prevented Chelverton from enforcing the liability without taking into account the costs claimed?
The Judge noted that the warranty provided an alternative way for Safeway to obtain rights against Interserve. Without Clause 3.3, Safeway could have proceeded against Interserve without any consideration of any parallel liability to Chelverton. However the Judge felt that the purpose of Clause 3.3 was:-
"to restrict Interserve's liability to Safeway to its equivalent liability to Chelverton under the Building Contract. It still provides a direct route for Safeway to bring proceedings against Interserve, but it ensures that the extent of that liability is no greater than the liability of Interserve to Chelverton."
The liability of Interserve to pay damages to Chelverton for breach of contract in relation to the car park defects, was subject to Interserve's right of set-off. Therefore, on the facts here, Interserve had no liability to Chelverton for damages for breach of contract for the car park defects. Clause 3.3 did prevent Safeway from recovering damages from Interserve in respect of the car park defects. The liability of Interserve to Safeway could not be greater than the liability of Interserve to Chelverton under the building contract. The amount to be set-off was greater than the damages claim. Accordingly, Interserve was not liable to Chelverton.
Of course, had Clause 3.3 not been in the warranty then Safeway would have been able to successfully advance a claim for a significant sum from Interserve.
This article was taken from the latest issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.
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Back in Issue 05 of IQ, we examined the decision in Yam Seng PTE Ltd v International Trade Corporation Ltd and looked at whether a general obligation of good faith could be implied into contracts made in accordance with English law.
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