On 31 July 2013, the Technology and Construction Court handed down judgment in Oakapple Homes (Glossop) Limited v DTR (2009) Limited (In Liquidation) & Ors  EWHC 2394 (TCC). The case sought to address two knotty issues of contractual interpretation. First, whether a consultant could rely on the contributory negligence of a contractor to whom its appointment had been novated in a claim by beneficiaries of a collateral warranty executed by the consultant. Secondly, if not, whether the warranty fell within a policy exclusion in respect of warranties in more onerous terms than the consultant’s original appointment.
The Claimant property developer, Oakapple Homes, appointed the First Defendant, DTR, as architect for the conversion of a nineteenth century former cotton mill into residential apartments and commercial units. DTR was obliged under its letter of appointment (the “Appointment”) to enter into collateral warranties for the benefit of purchasers and tenants of the property (the “Beneficiaries”). Oakapple Homes entered into a building contract with the contractor Oakapple Construction. DTR was obliged by the Appointment to enter into a novation agreement with Oakapple Construction, which it later did.
Following completion of the works, the majority of the residential flats were let but in April 2007 the property was largely destroyed by fire. In a Letter of Claim sent to DTR, Oakapple Homes alleged that there were breaches by DTR of their design and inspection duties which had led to the fire and its rapid spread. Oakapple Homes called on DTR to execute collateral warranties in favour of the residential lessees of the property.
DTR’s liquidator sought to disclaim the obligation to enter into the warranty. The judge identified the following as requiring determination before Oakapple’s challenge to the disclaimer could be considered:
- Would DTR be entitled to defend claims by the Beneficiaries to the warranties on the basis of Oakapple Construction’s negligence as contractor?
- If not, would exclusion 5.9 of DTR’s insurance policy entitle its insurers to decline to indemnify DTR for any liability which it might have to the Beneficiaries of the warranties?
Mr Justice Ramsey considered the effect of Clause 1.2 of the collateral warranty which stated:
“The Consultant has no liability hereunder which is greater or of longer duration than it would have had if the Beneficiary had been a party to the Appointment as joint employer PROVIDED THAT the Consultant shall not be entitled to raise under this Deed any set-off or counterclaim in respect of sums due under the Appointment.”
DTR’s argument was simple: Oakapple Homes was both the beneficiary and the joint employer under the collateral warranty. In such circumstances, DTR would be permitted to rely on defences based on Oakapple Homes being responsible for any defaults of its contractor - Oakapple Construction - particularly given the close relationship of the two Oakapple companies. In addition, there was no restriction on DTR’s entitlement to raise contributory negligence within the Appointment as novated, which merely restricted DTR's right to defend claims by Oakapple Construction for set-off. Further still, there was nothing in the draft warranty which diminished or excluded DTR’s ability to rely on contributory negligence.
Oakapple Homes submitted that contributory negligence apportionment is only permissible where the defendant’s contractual liability is the same as liability in negligence and a duty of care at common law arises independently of any contract. Secondly, any party which had been an employer of DTR jointly with Oakapple Homes could not, in effect, become vicariously liable to any third party which had sustained loss as a result of the negligence of Oakapple Construction.
Mr Justice Ramsey held that the damages due to Oakapple Homes could not be reduced to take account of contributory negligence by Oakapple Construction because an employer under a construction contract is not liable for the negligence of the contractor. The Judge also found that DTR could not defend a claim by the Beneficiaries so as to reduce the damages payable to the Beneficiaries on the basis of contributory negligence by Oakapple Construction.
DTR insurers submitted that it would be entitled to defend claims brought under the Appointment by Oakapple Construction on the basis of Oakapple Construction’s contributory negligence. However, in circumstances where it was not entitled to defend claims by Beneficiaries on the basis of Oakapple Construction’s contributory negligence, the Beneficiaries would enjoy a greater benefit under the collateral warranty than was enjoyed by Oakapple Construction under the Appointment. It was DTR’s insurers' position that in such circumstances any liability established under the warranty would come within exclusion 5.9 of the policy.
By contrast, Oakapple Homes submitted that the phrase “the benefit of such warranties…is no greater…than that in the original contract” did not refer to the amount of the damages recoverable by the Beneficiaries but rather it should be construed as a reference to the nature of the rights conferred by the warranty, in particular to have the works completed with reasonable skill and care. For DTR to assert that the policy should not respond to a claim because DTR could claim contributory negligence against the novated party but not the Beneficiaries would make a nonsense of the common schemes under which the architect’s appointment is novated.
Mr Justice Ramsey found in favour of Oakapple Homes that exclusion 5.9 would not entitle DTR’s insurers to decline to indemnify DTR for any liability that DTR might have to Beneficiaries. In reaching this conclusion, the judge found that the “original contract” was a reference to the Appointment and not the Appointment as novated. The judge also found that “the benefit of the warranty” was not a reference to the damages claimable. Were it otherwise, the Beneficiaries would have to prove that the damages Oakapple Construction might have suffered were at least as much as the damages suffered by the Beneficiaries. He considered that evidencing this would not be practicable and favoured Oakapple Homes' interpretation: that the benefit of the warranty was the benefit in providing contractual liability by DTR to the Beneficiaries, so the fact that DTR could not rely on any contributory negligence of Oakapple Construction was irrelevant.
The case highlights a risk for consultant whose appointments are novated to a design and build contractor and who are then required to enter into a collateral warranty with the original employer. This arrangement carries a latent conflict for the consultant because his “new” client will be looking for cost savings whereas the “original” client will want the integrity and quality of the original design to be preserved. The problem is even worse if the contractor changes the design or executes it badly whilst at the same time restricting the consultant’s duties of inspection (or preventing access in practice). The decision is Oakapple makes it clear that in the absence of very clear language which enables the consultant to rely on defaults or breaches of the contractor to defend himself, he can face claims under the collateral warranty which would have been difficult to sustain in full or in part under the original appointment.
It remains to be seen whether policy language will be adjusted in the light of the decision to exclude the greater financial exposure that can result from inadequately worded warranties entered into following the novations of appointments to design and build contractors.