Assignment, construction law, and legal black holes: another illustration

The decision of Jefford J in Aviva Investors Ground Rent Group GP Ltd v Shepherd Construction Ltd [2021] EWHC 1921 (TCC) illustrates one of the potential difficulties encountered when the current owner of a building, who was not the original contracting party with the contractor, seeks to bring a claim for construction defects. The new building owner has a loss in the form of remediation costs, but no contractual claim. The original employer has the benefit of the contract, but no practical interest in bringing a claim. An assignment of the original employer’s rights to the current owner is a commonly used device to bridge that gap, which has sometimes been described as a ‘legal black hole’. The Aviva v Shepherd case demonstrates some of the difficulties that may be encountered in the process.

<

The importance of assignment

Subject to limited exceptions, the normal rule in English contract law is that for a party to bring a successful claim for breach of contract, they have to be a party to that contract. There are many reasons, however, why a contracting party may want to allow another party to take on their right to claim under a contract. In construction, the party engaging the contractor (the employer) might want to allow a new owner of the building to claim for any breach of contract against the contractor in their own name. Subject to any contractual prohibition, it is generally possible for the employer to transfer the benefit of the construction contract to the new owner by way of assignment.

By an assignment, the party who has suffered the loss can acquire the benefit of the construction contract. The original employer is often not the party who now owns the building suffering from construction defects. The party with the claim for breach of contract would not be the party who has suffered the loss. The danger is that the financial loss for the cost of remediating those defects may “disappear . . . into some legal black hole, so that the wrongdoer escaped scot-free” (Lord Keith of Kinkel in G.U.S. Property Management Ltd. v. Littlewoods Mail Order Stores Ltd 1982 SLT 533, 538). The House of Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  accepted that the original contracting party may be entitled to enforce against the contractor on behalf of the third party. This option, however, may not be open to the new owners. The original employer might not exist anymore or be insolvent, or otherwise unwilling or unable to bring a claim on behalf of the new owners. Instead, it is often preferable for the new owners to have the benefit of the construction contract themselves by way of an assignment.

The law of assignment is, however, technical. As Hudson on Construction Contracts (14^th edition, Sweet & Maxwell, 2021) accurately reflects at paragraph 9-002:

“The pitfalls associated with the assignment of the benefit of quality obligations have not yet been resolved so satisfactorily. The standard forms of contract have not solved all of them, nor have they been solved by legislation.”

The facts of the case

The claimants in Aviva v Shepherd had to overcome a contractual prohibition on the employer being able to assign the benefit of the construction contract. The House of Lords in Linden Gardens upheld the validity of such prohibitions on contractual assignments. The standard form construction contracts (including the commonly used JCT contracts) reflect the fact that the contractor will want to deal with the original employer during the construction phase, but that the employer may well want to assign the benefit of the construction contract after practical completion. If the assignment was invalid, then the Aviva claimants had no claim.

The original employer, Camstead Ltd, had engaged Shepherd to build new student apartments in Cambridge. After practical completion, Camstead conveyed the freehold interest in the property to a group of companies. The freehold was conveyed a second time to the Aviva claimants. It was then discovered that the building had a number of construction defects relating to both fire safety and other issues.

Camstead entered into a deed of assignment with the Aviva companies, transferring its rights under the contract. The Aviva claimants issued proceedings against Shepherd. Shepherd applied to strike out the claim on the basis that there was no valid assignment from Camstead to the Aviva claimants.

The ultimate conclusion of the case was that the new owners of the building had failed to circumvent the prohibition on assignment and that consequently the assignment from Camstead to them was ineffective, leaving them without a claim.

The prohibition on assignment

The contract in the Aviva v Shepherd case contained a slightly modified form of the standard JCT wording, at clauses 7.1.1 and 7.2.

Clause 7.1.1 stated that, “The Employer shall be entitled upon giving the Contractor 14 days’ written notice of its intention to do so, to assign the benefit of this contract by absolute assignment to any person (save any to whom the Contractor makes reasonable objection in writing before the expiry of the said period of 14 days) and in this contract the term “Employer” shall be construed accordingly.”

Clause 7.1.1, therefore, allowed the original Employer to assign the benefit of the contract to any person before or after practical completion, but only upon giving notice to the Contractor, Shepherd, who was able to make a reasonable objection.

Clause 7.2 stated that, “…in the event of transfer by the Employer of his freehold or leasehold interest in or of a grant by the Employer of a leasehold interest in the whole of the premises comprising the Works or (if the Contract Particulars so state) any Section, the Employer may at any time after practical completion of the works or of the relevant Section grant or assign to any such transferee or lessee the right to bring proceedings in the name of the Employer (whether by arbitration or litigation whichever applies under this Contract) to enforce any of the terms of this Contract made for the benefit of the Employer …..”.

Clause 7.2 provides for an exception to the requirement for notice and implied consent under Clause 7.1.1: after practical completion of the works and in the event of the original Employer transferring their freehold or leasehold interest in the premises, the Employer could grant or assign to that transferee or lessee the right to bring proceedings in the name of the Employer without notice to or consent from the Contractor.

No notice of the assignment to Aviva had been given. It was accepted that they could not rely on Clause 7.1.1. The question for Jefford J was whether they could, instead, rely on Clause 7.2.

The answer to this turned on its correct interpretation. For a number of reasons, it was held that the assignment was ineffective and that Aviva therefore did not have a claim against Shepherd. The main point for Jefford J was that the reference to ‘the Employer’ in Clause 7.2 was held to be to the original employer. The transfer of the freehold to Aviva was not from Camstead, but from a subsequent transferee. Clause 7.2 did not encompass a transfer from that first transferee to a second onward purchaser. That was enough to dispose of the claim. Jefford J then went on to hold that, in any case, all that Clause 7.2 allowed to be assigned was the right to bring proceedings in Camstead’s name, as opposed to bringing them in the Aviva claimants’ own name.

No assignment of the tortious claim

The Aviva companies’ argument that Clause 7.2 did not prohibit an assignment of any rights in tort was also rejected. It was unclear how far this argument would have got the Aviva companies in any case: following Robinson v PE Jones (Contractors) Ltd [2011] EWCA Civ 9, it was extremely doubtful that Shepherd owed Camstead a relevant duty of care in tort. Jefford J noted that there was no apparent authority as to whether these clauses prohibited transfers of claims in tort. She ultimately concluded that any duty that Camstead could rely on would only arise from the existence of the contract and the contractual obligations. This was a benefit of the contract which was therefore caught by Clause 7.1.1.

Conclusion - technical difficulties

The technical difficulties encountered by the Aviva claimants were real ones. It is quite common for contracts and collateral warranties to contain a prohibition on onward assignment of the benefit of the construction contract to subsequent transferees after the first transfer from the original employer to a new lessee or freehold owner. This can be overlooked in company group restructuring or in other conveyances. Assignment provisions need to be read carefully and complied with to avoid falling into the kind of pitfalls encountered in this case. Unfortunately, this is yet another illustration of the potential obstacles that a subsequent owner of a defective building might face when seeking to recover their losses from the original contractor.

-

How to cite this blogpost (Harvard style)

Sawtell, D. (2021) Assignment, construction law, and legal black holes: another illustration. Available at: https://www.law.ox.ac.uk/housing-after-grenfell/blog/2021/08/assignment-construction-law-and-legal-black-holes-another (Accessed [date])