In the recent case of Co-operative Group Ltd v Birse Developments Ltd (In Liquidation) and Others, England’s Technology and Construction Court held that a building contractor’s claim in tort against its subcontractors accrued on or before practical completion and was therefore time-barred in this case. It was also held that a failed assignment of a collateral warranty did not give rise to a trust of the benefit of that warranty.

Background

Birse Developments Ltd (“Birse”) was the design and build main contractor for the construction of a warehouse. Birse’s subcontractors included Stuarts Industrial Flooring Ltd (“Stuarts”), Jubb & Partners (“Jubb”) and Geofirma Soils Engineering Ltd (“Geofirma”).

Building of the warehouse was completed in September 1998, after which it was leased to Co-Operative Retail Services Ltd (“CRS”). Collateral warranties were given to CRS by Birse, Stuarts and Jubb. The Stuarts and Jubb warranties provided that they could be assigned twice without the warrantor’s consent, but thereafter could only be assigned with consent. CRS assigned the Jubb warranty to the Co-operative Group Ltd (“CG”) who in turn assigned the warranty and underlet the warehouse to Woolworths. After Woolworth’s collapse, the warranty was assigned back to CG. Consent was not obtained for the last assignment.

In September 2010 (about 12 years after practical completion), CG commenced proceedings against Birse for defects in the construction of the warehouse. Birse, in turn, commenced proceedings against its subcontractors, Stuarts, Jubb and Geofirma for the defects in question.

Two issues to be determined by he court

The court ordered a trial of two preliminary issues, namely:-

  1. Whether Birse’s causes of action in negligence against Jubb and Geofirma were time-barred by virtue of section 2 of the Limitation Act 1980; and  
  2. Whether the attempt to assign the benefit of the Jubb warranty to CG, without obtaining Jubb’s consent, gave rise to a trust of the benefit of that warranty in CG’s favour.

The Limitation Issue

The Court held that Birse’s claims in negligence against Jupp and Geofirma were time barred under section 2 of the Limitation Act 1980, which required an action founded in tort to be brought within six years from the date on which the cause of action accrued.

Birse had argued that the six years did not start to run until the claim by CG was intimated or commenced. Jubb and Geofirma argued that time started to run on the handover of the relevant works or on practical completion.

The Court held that where a development was being constructed for someone other than the main contractor, the primary risk would be that the main contractor would build and hand over a defective building to the employer and thereby incur liability. That liability would usually be measured by the cost of undertaking the repairs or the sums necessary to compensate for the defects.

The court looked at the two rules used to determine whether Birse had suffered any actionable damage, namely the “damaged asset rule” and the “package of rights rule”. 

The Court held that actionable damage had occurred in this case. Birse’s interests in the development and in the benefit of its contractual rights were “assets” within the “damaged assets rule”. The object of the subcontracts was to provide the necessary design and inspection to ensure that the development was satisfactory and Birse’s rights were not prejudiced. The “assets” were capable of being devalued and the devaluation was measurable by reference to the costs of remedying the defects. There was a present liability which arose, at the latest, on practical completion.  Therefore the requirements of the “damaged assets rule” were satisfied and time began to run by practical completion, at the latest.

The Court said that the case was also within the “package of rights rule” because when Birse transferred the defective development to the employer, it became a contract breaker whose rights under the main contract were devalued by its liability to the employer.     

The Assignment Issue

The Court held that the attempt to assign the benefit of Jubb's warranty did not give rise to a trust of the benefit of the warranty in CG’s favour, for the following reasons:-

  1. The existence of a trust depends on the parties’ intentions, as derived from the contract and admissible factual matrix.  
  2. In the present case, the assignor intended to assign all of its rights in the warranties to the assignee.  
  3. The deed was a formal document executed by commercial parties and, as such, should be given its ordinary meaning. If the assignment had not failed, it would never have been suggested that the deed was meant to be a declaration of trust; the express intention of the parties was to assign, not hold on trust. The meaning of the deed did not change simply because the parties failed to obtain the necessary consent.      

Our comments

When a cause of action accrued, for the purposes of section 4 of Hong Kong’s Limitation Ordinance (which is identical to section 2 of the Limitation Act 1980) is controversial in defective building cases, especially in tortious claims.  Sometimes, the employer may argue that the cause of action has not accrued at the time of practical completion since the contract invariably provides a mechanism for the contractor to come back to the site to rectify its own defects within the defects liability period (usually 1 year) after the practical completion. As such, the contractor has not yet breached its duty owed under contract and in tort on practical completion and it is not until the expiry of the defects liability period or a reasonable time after the expiry of the defects liability. For cases in tort, employers will argue that the date of accrual is even later, since it counts from the date of damage.

The English Court in this case decided that the cause of action in tort accrued on or before practical completion of the building. It appears that the analysis is also applicable to claims under contract, where the cause of action accrues upon the date of breach of contract. Interestingly, an argument relying on the defects liability period was not discussed in the judgment (apparently, it is not good enough for the plaintiff to do so in order to bring its claim within the limitation period) and the Court only focused on the “damaged assets rule” and “package of rights rule”.