Joint Contracts Tribunal sound a warning regarding assignment clauses
Aviva learn a £4 million lesson when it comes to the interpretation of assignment clauses.
The Technology and Construction Court (TCC) has recently delivered its judgment relating to the interpretation of assignment clauses within Joint Contracts Tribunal (JCT) design and build contracts, specifically Clause 7.2. In this case the ill-conceived interpretation of assignment clauses resulted in a costly lesson to Aviva, a beneficiary of a purported assignment, who sought to advance a claim for recovery of damages against a building contractor.
The case relied on the interpretation of a provision relating to the employer to assign the contract that permits the employer to bring proceedings in its name to a subsequent owner of the property.
Camstead Limited, a developer, employed Shepherd Construction Limited to demolish existing buildings and build student apartments pursuant to a JCT Design & Build Contract 2005.
Following completion, the freehold interest was transferred twice in quick succession to an investor and then subsequently to Aviva. Following the Grenfell Tower fire in 2017, the Government ensured that fire safety assessments were enhanced which Aviva complied with. The report that followed highlighted a number of fire safety defects at the property. Aviva issued proceedings against Shepherd in September 2020. To advance the claim, Aviva relied on a purported deed of assignment between Camstead and Aviva, whereby full benefit of the JCT Contract and a right for Aviva to bring proceedings had been assigned.
During the course of the case, it transpired that the deed of assignment was executed around the time court proceedings were issued. Aviva were pursuing a claim for damages in excess of £4million, being the cost of remedial works needing to be carried out following commission of the fire safety assessment findings.
The judgment had to consider two applications:
- Aviva joining Camstead as a second claimant to proceedings
- Shepherd to strike out Aviva’s claim.
It was argued by Shepherd that there was no valid assignment and no legal basis to join Camstead into proceedings. The argument advanced required the TCC to forensically analyse two clauses under the contract (i) Clause 7.1.1 (ii) Clause 7,2.
Clause 7.1.1 (as amended from the standard form) states:
"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 7.2 (unamended from the standard form) states:
"Where clause 7.2 is stated in the Contract Particulars to apply then 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…"
The TCC noted that Clause 7.1.1 required Camstead to give notice of assignment, effectively seeking consent from Shepherd. In practice the restriction was limited because Shepherd could only raise an objection once that notice has been provided. Aviva conceded that no assignment had been given to Shepherd.
As an alternative, Aviva relied on assignment based on the interpretation of Clause 7.2.
Shepherd argued that Clause 7.2:
- only permitted assignment to the first assignee i.e., not Aviva as it was the second owner of the property
- only allowed proceedings to be commenced on behalf of Camstead as the original Employer under the building contract and not Aviva.
The TCC agreed with arguments submitted by Shepherd. Clause 7.2 was found to be concerned exclusively with a transfer by the Employer of a freehold or leasehold interest and there was ‘no wording that would encompass a subsequent transfer by the first transferee to another’. The TCC had made a distinction between: (a) the initial transfer of the freehold interest of the Property to Camstead to the developer and (b) any subsequent transfer of the freehold interest to Aviva.
It was held that any assignment between Camstead to Aviva (second owner) could not take effect under Clause 7.2. The TCC further added that ‘all that can be assigned is the right to bring proceedings in the name of the Employer’. The TCC found that the only claimant in these proceedings could be Camstead. Aviva was precluded the right to advance a claim for its own losses. The TCC concluded that Clause 7.2 should be read on strict interpretation. The TCC went on to say if Clause 7.2 permitted Camstead to assign to Aviva the right to bring proceedings and claim subsequent losses it would have the effect of permitting assignment of the benefit of the JCT contract without notice or consent to Shepherd which would render Clause 7.1.1 ineffective.
In light of the above findings, the TCC proceeded to deny Aviva the right to join Camstead to proceedings and struck out Aviva’s claim entirely.
Key learning points
The judgment provides a good source of guidance for parties engaged in construction disputes looking to issue court proceedings. It is paramount that the validity of any assignment be considered beforehand. In summary:
- the TCC found that Clause 7.2 only permits assignment to the first assignee and the right does not extend to subsequent assignees. If Aviva had the benefit of a valid assignment under Clause 7.1.1 i.e., by serving a valid notice of assignment, it would not have needed to rely on Clause 7.2 and this would have prevented the claim from being struck out
- this recent decision serves as a cautionary reminder to ensure that parties subject to a building contract, particularly a JCT, should ensure strict compliance with the assignment clause within the contract. A failure to do so will see you with no avenue for redress should a legal dispute arise
- Clause 7.2 only permits assignment of the right to bring proceedings in the name of the employer only. The judgment fails to address the issue as to whether the employer is able to bring a claim for damages on behalf of a new property owner
- in light of this judgment it is advised that any assignment should take place under a clause similar to that of 7.1.1 i.e. by service of a required notice.
For further information about this case, or a discussion about construction and engineering disputes, contact our comprehensive team of construction solicitors.