James Duckworth and Charles Jakeman Transferring construction agreement benefits between parties requires care and attention, especially when dealing with the ‘no loss’ defence
With commercial property transactions now recovering, the assignment of properly drafted construction agreements is of key relevance. Assignment is the transfer of a benefit under an agreement from one party (an assignor) to another (an assignee). For instance, a developer could assign a building contract to the purchaser of a property that it had developed. The aim would typically be to allow the assignee to bring proceedings, for example for defective work or design, against the contractor.
One important issue to consider when assigning construction agreements is the defence of “no loss”. This principle dictates that an assignee may not recover more than an assignor would have recovered had the assignment not taken place. That is, where an assignor would have suffered no loss or a loss different to that suffered by the assignee, the assignee can only recover nominal damages.
The development of case law in this area makes it unlikely, with certain exceptions, that the defence of no loss will succeed, but assignment provisions should be carefully drafted to prevent the possibility. They should be as clear as possible and unclouded by obligations other than those specifically required to effect successful assignments.
he most recent substantive case looking at the no loss defence was that of Technotrade. In this case, the Court of Appeal held that an assignee of the benefit of a construction agreement may recover its full loss even when, having discovered a defect, the assignee received the benefit of the construction agreement some years after the purchase of the property.
Technotrade (the defaulting consultant) argued that, at the time of the sale, the assignor had suffered no loss and also that the loss had been suffered by the assignee before the benefit of the construction agreement was assigned so, based on the defence of “no loss”, the assignee should not be able to recover its loss. However, the Court of Appeal disagreed with this and held that what was assigned was not the loss that the assignor could or would have suffered later on, but the assignee’s right to claim against the consultant and the consequential remedy for any losses the assignee suffered as a result of defective work. Technotrade was groundbreaking in its approach, and underpinned a series of cases where the courts similarly tried to neutralise the defence of “no loss”.
In the St Martin’s Property Corporation vs Sir Robert McAlpine case, despite there being no valid assignment of a construction contract, the House of Lords also prevented the “no loss” defence from prevailing. The justification given was that the contractor should have been aware that, after the completion of the building contract, it was contemplated that a third party may occupy or take an interest in the property. By that very fact, the contractor could have foreseen that any defective work attributable to it could cause a loss to the third party. A similar approach was adopted by the Court of Appeal in Darlington council vs Wiltshier Northern.
The Technotrade case, to a considerable extent, closed the loophole suggested by the no loss argument. It is, however, worth noting that the Court of Appeal said that this case could be distinguished from cases where the loss suffered by an assignee was not one that would ever have been recoverable by the assignor.
It is perhaps a sign of the times that there has been no significant case law since the Technotrade case in 2006 that has sought to challenge or digress from the principles that were established in this case and other cases starting with St Martin’s in 1992. Moreover, it is now common practice (and generally accepted by contractors and consultants) that the drafting of collateral warranties should include a provision whereby a contractor or consultant is excluded from raising a defence of no loss in the event of an assignment of a collateral warranty to third parties acquiring an interest in the property. This suggests that contractors and consultants are facing the inevitable – the defence of no loss is in most instances no longer legitimate.
James Duckworth is a partner and Charles Jakeman is an associate at Nabarro