Key facts: TCC Considers limitation for tort claims against subcontractors and sub-consultants and when an implied trust may be created

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1 TCC Considers limitation for tort claims against subcontractors and sub-consultants and when an implied trust may be created In the recent judgment in Co-operative Group Limited v Birse Developments Limited, Stuarts Industrial Flooring Limited, Jubb & Partners and Geofirma Soils Engineering Limited, Stuart-Smith J considered when limitation begins to run for claims in tort against a sub-consultant as a result of defective works under the main contract and when a prohibited assignment without consent will give rise to a trust. Background This case concerns a claim by the Co-operative Group ( the Co-op ) against Birse Developments Limited ( Birse ) for defective works in relation to the design and construction of a large warehouse near Rugby. Co-op had issued its claim about 12 years after practical completion and Birse commenced proceedings in tort and in contract against its flooring sub-contractor, Stuarts Industrial Flooring ( Stuarts ), and its geotechnical and engineering sub-consultants, Geofirma Soils Engineering Limited ( Geofirma ), and Jubb & Partners ( Jubb ), who were represented by Beale & Company. Birse s claim in contract relied upon the parties subcontracts and collateral warranties they had provided to the original leaseholder. Key facts: The limitation period in tort for claims under sub-consultancy appointments was considered to accrue from, at the latest, the point of practical completion, when the main contractor handed over the defective development in breach of contract, and not at the later notification of a claim. A possible future liability may rise to an actual present liability where there is measureable loss. In limited circumstances assignment of a collateral warranty, which prohibits assignment without consent, may still be effective between the intended assignor and intended assignee. However, the parties to the intended assignment will have to demonstrate a clear intention that such intended assignment was to be by trust. The collateral warranty provided by Jubb restricted the number of permitted assignments without consent to two. The collateral warranty was assigned twice before a further purported assignment to the Coop without Jubb s consent. Two preliminary issues arose in relation to the contribution claims as to whether: 1. Birse s causes of action in negligence against Geofirma and Jubb were time barred under section 2 of the Limitation Act 1980; and 2. the attempt to assign Jubb s collateral warranty to the Co-op without consent gave rise to an implied trust of the benefit of that warranty to the Co-op.

2 1) Limitation The issues Birse, amongst other things, alleged that Jubb was in breach of its duty at common law which was claimed to be concurrent and coextensive with its implied contractual duty to exercise reasonable skill and care. Birse was seeking to recover from Jubb the financial damage it would be liable to suffer in satisfying any liability to [the Coop] which it may be held to have as a result of Jubb s negligence. In essence, Birse was seeking to make Jubb liable on a back-toback basis. The claims against the other sub-contractors were formulated in essentially the same way. Given that 12 years had passed since practical completion, Jubb and Geofirma argued that Birse s claim in tort was time barred under s2 of the Limitation Act 1980, which prohibits claims in negligence being commenced after the expiry of 6 years from the date the cause of action accrued. Birse alleged that its cause of action was not time barred, as the limitation period did not commence until liability has been ascertained i.e. until after a future hearing had taken place. In the alternative it claimed that time only began to run when Co-op made its claim against Birse in June Actionable Damage The Court first asked, what damage [in this case] was capable of constituting actionable damage? Having considered the purpose and expectation in the sub-consultants duty to exercise reasonable care Stuart Smith J concluded that where the main contractor is not the ultimate client, the primary risk will be that the main contactor will build and hand over a defective building to the employer and thereby incur liability. At this point, liability will usually be measurable as the cost of repairs or the sums necessary to compensate the main contractor - i.e. a risk of incurring pure economic loss. Birse s argument that actionable damage is not suffered until a loss is ascertained was considered to be unprincipled and unacceptable on the basis that the liability to be ascertained had not changed in character following Birse s initial breach of contract and because the

3 effect of the sub-consultant s breach of contract was to reduce the value of Birse s rights under the main contract by giving rise to a financial liability to carry out remedial works or pay damages, which was quantifiable. Future liability In making his decision Stuart Smith J considered Arden LJ s summary of the present law on limitation in Axa Insurance v Akther & Darby and ors [2010], including the two categories of case where a possible future liability may give rise to an actual present liability as identified in Law Society v Sephton [2006]: 1. cases where measurable devaluation of an asset is the trigger for limitation to begin to run ( the damaged asset rule ); and 2. cases where certain benefits which the claimant should have received are not received owing to the negligence of the defendant ( the package of rights rule ). Arden LJ considered that the central idea underlying these rules is that for a possible future liability to give rise to an actual present liability there must also be a measurable loss for time to begin running for limitation purposes. Decision Stuart-Smith J concluded that as Birse was responsible for the construction until handover, or practical completion it had at least a possessory interest in the development as well as accrued rights under the main contract (e.g. to payment). These interests were to be regarded as assets under the damaged asset rule, which were capable of devaluation and measurable as the cost of remedying the defects. Accordingly, Stuart Smith J concluded that Birse suffered measurable financial detriment on constructing in accordance with the defective design or following negligent inspection, and a present liability arose at the latest on practical completion. Accordingly, time began to run at the latest from practical completion, which means that the claim against Jubb, Beale & Company s client, in tort was time barred. Stuart-Smith J also considered that this case fell within the package of rights rule. [W]hen Birse transferred the defective development to

4 the employer, its legal position changed to its financial detriment as it became a contract-breaker whose rights under the main contract were devalued by its liability to the employer. This was a case of an accrued liability and not a purely contingent liability; the value of Birse s interest in the development and in its right under the contract had been affected on transfer of the defective development to the employer. Birse s claim in tort was therefore time barred under s2 of the Limitation Act 1980 on the basis that at the latest, the cause of action accrued on practical completion. 2) The Implied Trust Argument The Collateral Warranty The collateral warranty entered into by Jubb included the following prohibition against assignment: The benefit of this agreement may be assigned on two occasions only without the consent of the Consultant. The benefit of this agreement may not be assigned further without the prior written consent of the Consultant, which consent shall not be unreasonably withheld or delayed. The warranty was assigned twice without consent. Woolworths, who held the benefit of the warranties, then wanted to effect a third assignment and purported to assign the benefit of the warranty to the Co-op via a deed of assignment. The parties to the deed neither appreciated the need for, nor obtained, consent for the assignment of the warranties. Legal Principles The implied trust argument relied upon the principles that: an assignment that fails because of a lack of necessary consent may be effective between the assignor and assignee (Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994]); and it is possible for a contract worded as an assignment, which cannot take effect as an assignment, to be interpreted as intending to create a trust (Don King Productions Inc v Warren [2000])

5 Decision Having considered the authorities on the creation of an implied trust Stuart-Smith J held that the attempt to assign the benefit of the warranties did not give rise to a trust of the benefit of the warranties in favour of the Co-op. The intention of the parties in the deed was clearly to assign, not to hold on trust, which was fatal to Birse s argument. The Don King case was distinguished on the basis that there was no language in the deed of assignment in any way redolent of the language of trusts. The meaning of the deed did not change simply because the parties failed to obtain a consent that was necessary to render the assignment effective. Implications This case suggests that the limitation period in tort for a claim against a sub-consultant which relates to defective works under the main contract is likely to start running, at the latest, on practical completion. The main contractor is unlikely to be able to argue that the limitation period has not commenced because the losses payable by it to the ultimate client have not yet been determined. This case also suggests that the Court will only permit an assignment without consent which is expressly prohibited in the original agreement to give rise to a trust in limited circumstances. The mere fact of a failed assignment will not give effect to a trust of the benefit of the relevant contract. Whilst the position will always depend upon the basis on which the purported assignment takes place, this underlines the importance that the grantor of a collateral warranty ensures that such collateral warranty includes an express clause restricting the number of assignments. February 2014 For further information please contact: Antony Smith Partner T: +44 (0) E: a.smith@beale-law.com Andrew Croft Solicitor T: +44 (0) E: a.croft@beale-law.com

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