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How to Avoid Duplication of Payment for the Same Loss

on Tuesday, 30 October 2018.

Mrs Justice O'Farrell's recent judgment (June 2018) in Office Depot International (UK) Ltd v UBS Asset Management (UK) Ltd and others [2018] EWHC 1494 (TCC) provides a stern and salutary warning to those who provide collateral warranties to third parties.

Separate causes of action arise in favour of beneficiaries to whom collateral warranties have been given. Thus there is a risk that monies paid earlier, in satisfaction of a perceived liability for the cost of repairs, may not in fact be spent in the performance of these repairs. This leaves a party vulnerable for a similar claim for the cost of repairs from another beneficiary to whom a warranty has been provided.

The Facts

  • UBS Asset Management (UK) Ltd (UBS Asset) entered into a long lease of a warehouse designed and constructed by Amec Foster Wheeler Group Limited (Amec).
  • Under a sub-contract, Amec engaged FK Facades Limited (FK Facades) to carry out the design, supply and installation of the roofing and cladding works.
  • Following practical completion, Office Depot International (UK) Ltd (Office Depot) was granted a lease (the Lease) which contained a tenant's repairing covenant.
  • Amec and FK Facades executed deeds of collateral warranty in favour of Office Depot.
  • UBS Asset brought a claim against Amec in May 2010 alleging that defects had become apparent in the design and construction of the warehouse. The claim was settled but the settlement monies were not used by UBS Asset to rectify the defects.
  • UBS Asset subsequently assigned the Lease to UBS Triton General Partner Limited (UBS Trident).

The Claim

Conscious of invoking the repairing covenant in the lease, and concerned that it would lose its ability to claim under the collateral warranties due to limitation, Office Depot commenced proceedings seeking:

  1. declaratory relief against UBS Asset and UBS Trident as to what works, if any, they were required to carry out under their repairing covenants
  2. a declaration that any remedial works required under the repairing covenant were caused by the design and/or construction defects associated with the works carried out by Amec and FK Facades and covered by the collateral warranties they entered into
  3. an indemnity for the cost of carrying out any remedial works

Three of the defendants made applications to strike out the claim and/or for summary judgment.

The Court's Findings

It was accepted that the claim against UBS Asset should be struck out on the basis that it was no longer the landlord of the warehouse having assigned the lease to UBS Trident.

In reaching its decision as to the claim against UBS Trident, the court considered its discretion to grant declaratory relief in detail and confirmed that, although it had a wide discretion to grant declaratory relief, such relief will only be granted where there is a real dispute between the parties and where the terms of the declaration sought are specified precisely.

When considering the above, the court found that Office Depot had no real prospect of succeeding with its claim against UBS Trident and so UBS Trident was entitled to an order striking out the claim against it.

With regards to the claims against Amec and FK Facades, it was accepted that the pleaded claims were flawed as they required the court to determine a particular scheme of remedial works to accord with the tenant's repairing covenant.

Despite the above, the court considered that Office Depot had adequately set out the alleged defects in the design and construction of the roof and had clearly identified the alleged breaches of Amec and FK Facades which arose pursuant to the collateral warranties in its favour. Accordingly, the court concluded that Office Depot would have grounds to argue a claim for breach of the collateral warranties.

When considering whether to allow Office Depot to amend its proceedings, the court determined that:

  • there must be finality in litigation
  • there would be a potential injustice to Amec and FK Facades to have an unknown claim hanging over them
  • the parties were each entitled to a fair and expeditious determination of the dispute
  • there would be a potential injustice to Office Depot in not giving it an opportunity to amend its claim, which would likely deprive it of any remedy for limitation reasons

In light of the above, the court held that Office Depot should be entitled to amend its particulars of claim against Amec and FK Facades although it was also ordered to pay costs in respect of all four defendants.

Conclusions

The judgment highlights the following points:

  1. tenants must make a positive case as to any remedial works required under their repairing obligations in the event of a dispute with their landlord
  2. tenants will ultimately bear the risk under a full repairing lease in the case of a defective building where remedial works have either failed or simply not been carried out and this risk dramatically increases in matters where the benefit of any collateral warranties has expired
  3. on the basis that collateral warranties granted in favour of third parties create separate causes of action, there is a risk that monies paid earlier, in satisfaction of a perceived liability, may not in fact be spent on the repairs. On this basis, if a party is seeking to settle a claim based on the presence of building defects, it is always worth considering whether the remedial works should be performed by itself in the first instance. This will avoid being penalised twice for costs of repair for the same defects

This article was drafted with assistance from Stephanie CookeFor more information please contact Huw Morgan in our Construction Law team on 0117 314 5293.

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