Assignment of defect warranties: Is your drafting sufficient? - Construction & Planning

Modern commercial structures frequently involve the builder who is responsible for the work being retained by someone other than the end user. Where such an end user wants recourse to the builder, rights are sometimes transferred by assignment.

In Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd [2017] NSWCA 27 (WGC v Tzaneros), the NSW Supreme Court of Appeal has clarified that a broad assignment of rights will enable a purchaser to sue on the transferred warranty – regardless of whether the purchaser knew of the relevant defects at the time of the acquisition.

The facts of the case

P&O Trans Australia Holdings Ltd (P&O) engaged Walker Group Constructions Pty Ltd (WGC) to design and construct a container grade pavement on land leased by P&O. Under its contract, WGC warranted to P&O that the pavement would withstand forklifts carrying certain loads and that the pavement would have a minimum design life of 20 years.

Later, P&O's leasehold interest was transferred to Tzaneros Investments Pty Ltd (Tzaneros). P&O also assigned by deed "all of the benefit of the Building Warranties" to Tzaneros. This was done with WGC's written consent, as required by the design and construct contract.

Cracks in the pavement appeared before the assignment of the warranties. The cracks were inspected by Tzaneros.

Following Tzaneros' acquisition of the leasehold and the warranties, the cracks were revealed to be a design defect. Tzaneros claimed the cost of replacing the pavement directly from WGC under the assigned warranties.

The decision

WGC was ordered to pay Tzaneros the cost of replacing all of the pavement that had been, or might be, used by the forklifts transporting the specified loads. WGC appealed.

Following an earlier decision, Allianz v Waterbrook¹, WGC argued that Tzaneros had full knowledge of the defects when it acquired the leasehold, such that Tzaneros suffered no loss from the defects. At first instance, Ball J found that the Allianz decision did not apply to cases involving the assignment of warranties where these warranties had formed part of the purchase price. In any case, Ball J determined that Tzaneros did not know that there was a design defect with the pavement at the time of the acquisition and thus did not have full knowledge of the defects.

On appeal, the Court held that as Tzaneros had been assigned the right to sue for accrued causes of action, Tzaneros had stepped into the shoes of P&O for the purpose of pursuing this right, and was entitled to recover damages of the same kind as P&O could have recovered.

Tzaneros' knowledge of the defects at the time of acquisition was irrelevant, as WGC was still liable for its breach of the design and construct contract. Therefore, it was not necessary to consider whether Allianz applied or if it had been decided correctly.

WGC also contended, on appeal, that even if Tzaneros did not have full knowledge of the defects at the time of the acquisition, Tzaneros knew that there was cracking and had failed to carry out reasonable investigations. The Court found that this was not relevant as Allianz did not extend to an assignee who has constructive knowledge by failing to properly investigate the extent of a patent defect.

Further, WGC argued that because some of the pavement panels had not cracked or might not crack, Tzaneros was not entitled to the cost of the full replacement of the pavement. This betterment argument was rejected at first instance and on appeal.

At first instance, Tzaneros' entitlement to damages was calculated according to the well-established measure in Bellgrove v Eldridge² – namely, that the innocent party is entitled to recover the cost of rectifying defects, except where the rectification would be unreasonable. It was reasonable for Tzaneros to recover the cost of replacing any part of the pavement that had been, or might be, used by the forklifts carrying the loads specified in the design and construct contract, given that the pavement had not been designed to bear these loads. This included recovery for the cost of replacing panels that had not yet cracked, or that ultimately might not crack, on the basis that there was a realistic possibility that these panels may crack.

The Court of Appeal upheld this approach, noting that it was not unreasonable for Tzaneros to decline to bear the risk that the panels may or may not crack but rather seek compensation sufficient to enable the repair work to ensure that the pavement was in conformity with the contract.

If the terms of an assignment clearly identify the intention of the parties, then the assignee's knowledge concerning the risk that is being transferred and whether the risk has materialised should not matter. When negotiating and documenting the assignment of rights, what matters is that the scope of the assignment is drafted clearly so as to objectively identify the intention of the parties. When the assignment is complete, the assignee must take care not to break any chain of causation in order to maintain the right to damages.

Footnote

¹ Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224

² (1954) 90 CLR 613

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