Shortly after entering into the building contract Interserve also entered into a collateral warranty with Safeway.  This warranty was in a form which was quite similar to the standard JCT collateral warranties which are widely used across the industry.  The purpose of warranties such as these is to provide to the ultimate owner of the project, in this case Safeway, a direct legal recourse against the building contractor in respect of liabilities that the building contractor would generally owe to the employer under the building contract, for example in respect of defects in the works.

It is commonly the case that when contractors or specialist sub-contractors grant warranties to third parties in this way they do so on the basis that the obligations and duties owed under the warranty are no greater than the duties owed under the main contract or relevant sub-contract.  Indeed clause 3.3 of the warranty granted to Safeway contained the following term “the contractor shall owe no duty or have any liability under this deed which are greater or of longer duration than that which it owes to the developer under the building contract”.

Following practical completion of the supermarket building defects were discovered in the surfacing of the car park which had started to debond from the concrete structure.  Repairs were carried out on a patchwork basis but it was soon determined that more substantive remedial works would have to be undertaken.  Investigations were commenced in order to determine the cause of the defective surfacing and meetings were held by the parties to agree a way forward.  These were inconclusive but sufficient for Safeway to recognise that neither Interserve nor its specialist sub-contractor were willing to accept liability for the defects and therefore would not voluntarily carry out the remedial works.  In the event Safeway subsequently carried out the remedial works itself to the upper level car park and commenced proceedings against Interserve under the warranty to recover the costs it had incurred which it claimed in the sum of approximately £400,000. 

One other important component to this story however weighed heavily upon Safeway’s claim against Interserve under the collateral warranty.  In January 2002, before Safeway’s proceedings had been commenced, Interserve had reached a compromise agreement with Chelverton in which Chelverton agreed that Interserve was entitled to be paid approximately £1.3million in full and final settlement of all monies due to Interserve under the building contract.  Unfortunately however, shortly after that agreement, Chelverton had become insolvent and gone into liquidation without any payment being made to Interserve. 

Plainly, Interserve were not overly enthusiastic about the prospect of paying £400,000 to Safeway against a claim for alleged defects in the works in circumstances where they had not been paid for the works.  Interserve argued that if the claim for rectification works had been being made by Chelverton under the building contract, Interserve would have a substantive defence to that claim by way of an equitable set-off taking into account the monies owed by Chelverton.  Interserve argued that clause 3.3 of the warranty should operate to the same effect.  In other words, a defence of equitable set-off should equally apply to the claims being made by Safeway under the collateral warranty. 

Interserve accordingly defended the proceedings by arguing that the fact that Chelverton owed Interserve £1.3million was an immediate answer to Interserve’s liability to pay the debt otherwise due. There could be no liability to Chelverton for £400,000 in respect of the remedial works and clause 3.3 of the warranty was clearly intended to prevent Interserve from having a liability to Safeway which was greater than any liability it would have to Chelverton. 

Safeway responded that clause 3.3 of the warranty should not be applied in such a way that it would defeat Safeway’s entitlement in the precise circumstances where Safeway’s rights were intended to be applied under the warranty, such as in the event of Chelverton’s liquidation.  Chelverton’s failure to pay sums under the building contract had nothing to do with the car park defects and should not prevent Safeway from recovering damages from Interserve.

In conclusion Mr Justice Ramsey agreed with Interserve.  The purpose of clause 3.3 of the warranty was to restrict Interserve’s liability to Safeway to its equivalent liability to Chelverton under the building contract.  This was consistent with the step-in rights that Safeway enjoyed under the warranty.  If Chelverton had gone into liquidation during the performance of the building contract then Safeway could have taken over the contract but would have had to have first paid Interserve any sums which were due under the contract.  In effect clause 3.3 of the warranty preserved that situation such that Safeway could not recover from Interserve unless Interserve had been fully paid under the building contract.

- Geoff Brewer