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How deep are black holes?
The recent decision of the English Court of Appeal in Technograde Ltd v Larkstore Ltd (July 2006) revisited an issue familiar to construction lawyers as “black holes” ie situations where as a result of an assignment of a contract, a loss resulting from its breach may not be recoverable because, for example, it was incurred by the assignee after the date of the assignment. Whilst the decision is an English one, it is of interest in the Isle of Man since the law relating to contracts is similar.
The basic principles are that an assignee cannot recover more from a contract breaker than could the assignor of the contract if no assignment had taken place. However, the courts have recognized an exception to this general rule where the assignee is or will become the owner of a damaged or defective building.
In Technograde the Appellant, a provider of professional services, supplied a site geophysical survey for a development site which was then sold to a developer. A landslip occurred in the course of the construction work requiring expensive remedial work and the site survey was later assigned to the developer.
The Appellant argued that, at the date of the assignment, the former site owner would have been entitled only to nominal damages because it no longer owned the site; accordingly, the developer should not by virtue of the assignment acquire any greater rights than the former owner, and should not be entitled to recover substantial damages. The appeal was dismissed on the grounds that the Appellant was not prejudiced by the assignment because it was simply a delayed consequence of the earlier sale of the site; accordingly, if the previous owner had not sold the site and had carried out the work (including the remedial work) itself, it could have recovered substantial damages from the Appellant. Therefore, there could be no justification for the Appellant to escape liability for its breach of contract merely because its survey had been assigned by the former site owner to the developer. This outcome is not surprising, but the decision is of interest to the extent it illustrates the willingness of the court to review and apply the basic principles.
The case is also of interest in illustrating a practical point. The survey was assigned only because the terms of the Appellant’s appointment did not prohibit its transfer. These days, such a prohibition is commonplace at least in UK and those engaged in the supply of construction services in the Island should check their contractual arrangements to ensure that such a prohibition is in place, and that the application of the Contracts (Rights of Third Parties) Act 2001 (corresponding to the English Act of the same title of 1999) is excluded. If so, any remedy on the part of a purchaser or tenant of the property or other interested party has to be negotiated for directly through the well-worn route of a collateral warranty, with the focus on the nature and scope of the relevant insurance arrangements which that exercise usually involves.
Technograde may also have a bearing on some forms of collateral warranty. It is not unusual to encounter attempts by a warrantor to qualify its liability on the basis that it is to owe no greater duty to the covenantee than if the covenantee had been named as an original party to the contractual arrangements in question. What Technograde underlines is that it is necessary to look not only at the scope of the duty but at the nature of any loss which might arise from its breach and the circumstances in which such loss might arise. Accordingly, such a qualification of the warrantor’s duty may give rise to uncertainty so far as the covenantee is concerned, whilst in most cases probably affording the warrantor little or no protection.
Adam Kelly
