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Good news for owners – Assigned warranties and defect rectification

The New South Wales Court of Appeal recently handed down an instructive decision on common questions that arise in construction disputes.

The Court dealt with the assignment of contractual warranties by deed, what evidence can be used to interpret a construction contract, and the scope of rectification required where building works are defective.

The case of Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd related to a container terminal at Port Botany. Walker Group had been engaged to design and build five warehouses, including a large volume of concrete paving for P&O. P&O, the original lessee, transferred the lease to Smith Brothers who in turn transferred the lease to Tzaneros Investments.

P&O, Smith Brothers and Tzaneros also then entered into a tripartite deed which had the effect of assigning to Tzaneros any rights of P&O and the warranties provided by the builder in relation to the works.

At the trial, the parties agreed that the concrete paving installed by the builder did not meet the contractual specifications. The Court then was required to answer the following questions.

Did the terms of the assignment deed transfer any existing causes of action for breach of the warranties?

The Court found that, as the assignment clause expressly assigned all the benefits of the warranties, this included any right to sue for any existing breach of the warranties in the building contract and any future breaches.

Was evidence of the negotiations able to be used to interpret the contract?

Evidence of deleted contractual text, which was removed during negotiations, was not admissible, as it concerned negotiations or it simply went to subjective intention and therefore was not evidence of what was agreed.

Further, evidence of text deleted from standard forms is only able to be relied upon where the wording of the contract is ambiguous.

Did knowledge of defects at the time of assignment mean that Tzaneros suffered no actual loss by virtue of it being aware of the defects when negotiating the price and terms of the assignment?

The builder argued that Tzaneros could not suffer any loss because if it knew of the defects, it should be assumed that it paid less for what was assigned to it as a result of its knowledge of the defects.

Interestingly, the Court found that Tzaneros’ ability to recover its loss as a result of the defects was not diminished by any failure by it to properly investigate the extent of a patent defect.

Builders should fully disclose any known defects to an assignee, and discuss the effect on the purchase price, rather than try to gloss over the defects.

Was Tzaneros entitled to replacement of all of the pavement not constructed to standard or only the portion that had actually failed?

The Court referred to the evidence that showed the defective design affected the majority of the relevant pavement. Tzaneros led evidence that it would in fact perform the rectification work as and when required.

In effect, the Court found that where an owner of works intends to actually carry out the rectification works, it is reasonable for it to replace all of the works that do not comply with the relevant standard, rather than just those parts which will or have failed.

Conceptually, this is not a novel remedy as the normal measure of contractual damages is to put a party in the position it would have been had the other complied with the contract. Here, the owner was entitled to have all of the pavement constructed in accordance with the relevant standard and the Court’s orders simply gave effect to that agreement between the parties.

Would replacement of all of the pavement amount to an impermissible betterment of Tzaneros’ position or was it appropriate in the circumstances?

The builder argued that as the contract provided for a design working life of 20 years, the rectification works would in effect produce a 50 year design life which would see Tzaneros in a better position than it otherwise would have been under the contract.

However, the Court found that because the builder was not able to point to any other method of repair which would cost less than what was proposed by Tzaneros and would be able to produce pavement in compliance with the contract, the Court would not allow a credit to the damages otherwise payable due to an increased design life.

The owner’s position here was well preserved due to careful drafting of the assignment documents. This case demonstrates why it is important to seek specialist legal advice when drafting contracts or deeds of assignment, when assessing damages for defective design, or when defending a claim made for these costs.

"The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication."