Contractual Warranties: Can an assignee sue for pre-assignment breaches?

Introduction

An assignee is a person (or entity) to whom a right or liability has legally been transferred. In business, it’s quite common for parties to a commercial contract to assign certain rights to other third parties. For example, a global building company engaged in a large building contract might assign rights to a national building company, making them an assignee. Those contractual rights might then be assigned from the national company to several building contractors, making them all assignees as well.

Whenever a spider-web of assigned rights like this occurs, things get legally complicated. Could the contractors seek to claim against a counterparty for pre-assignment breaches? Would the contractors face any limits to the enforcement of their rights?

A recent case in the NSW Court of Appeal (Walker Group Investments Pty Ltd v Tzaneros Investments Pty Ltd [2017] NSWCA 27) has provided answers to these questions and some much-needed clarity.

The Background

P&O Trans Australia Holdings Ltd (“P&O”), the global shipping company, had leased a docking space for their ships from the Sydney Ports Corporation. P&O then entered into a design and construction contract (“D&C Contract”) with Walker Group Investments Pty Ltd (“WGC”) to build a container terminal on the leased premises. A standard clause within the D&C Contract related to a range of warranties, in favour of P&O, that the terminal would be “fit for purpose” – a statement found in just about every building/construction contract.

WGC then engaged AMT Engineers Pty Ltd (“AMT”) to pave the terminal with concrete. Construction of the terminal began in 2003 and continued into 2004. At the same time, P&O transferred the docking space leasehold to a subsidiary, who then transferred it on again to Tzaneros Investments Pty Ltd (“TI”).

To further complicate matters, P&O, its subsidiary and TI all entered a deed of assignment (Deed) in 2005 which appeared to assign the warranties given by WGC in the D&C Contract from P&O to TI, effectively meaning that WGC now had an obligation to TI, not P&O, to ensure the terminal was “fit for purpose”.

As is standard practice in these kinds of matters, and as required as per the terms of the D&C Contract, WGC issued a notice to all parties indicating its consent to the assignment of warranties, to ensure everyone had been made aware.

Shortly after, TI became very concerned about defects in the concrete paved by AMT, despite having already known about the defects before the leasehold was transferred to them. Consequently, TI sued both WGC and AMT for the cost of replacing the concrete, which was close to $15 million.

Initial Decision by the Trial Judge

• WGC disputed that TI was entitled to claim for the full cost because their consent to the assignment did not extend that far.
• WGC’s position was that the cause of the action (defective concrete) occurred before TI had the leasehold transferred to them, i.e. the concrete pavement was installed in 2004, a year before TI had the leasehold transferred to them in 2005.
• The trial Judge rejected WGC’s position, stating that all involved parties (assignor and assignee) were aware of defects when the assignment of warranties changed hands, which included knowledge of the defective concrete which might permit a cause of action to be pursued in the future.
• WGC appealed.

Court of Appeal’s Decision

• The appeal was dismissed on the basis that the terms of any commercial contract, including both the D&C Contract and Deed, are to be determined (interpreted) by what a “reasonable businessperson” would have understood those terms to mean.
• It was found that the Deed clearly assigned all building warranties to TI, effectively giving TI the legal right to sue for any existing breaches of those warranties in the D&C Contract.
• The date on which TI was assigned those rights marked the date from which TI could begin to enjoy the assigned rights, and the date did not amount to a restriction on its rights, and there were no such restrictions clearly outlined in the contract.
• The Court of Appeal added that, had TI been denied the right to sue for existing breaches, the Deed itself would have produced an uncommercial result and effectively deprive the assignment of much of its purpose.

Conclusion

This important judgment drives home the message that:

“…a commercial contract should be given a business-like interpretation with regard to the language actually used by the parties, the surrounding circumstances known to the parties at the time the contract is made, and the objects that are to be secured by the contract. Further, if a party wishes to place restrictions on the rights of its counterparty (or the counterparty’s assignees) to sue that party, or to assign its rights, then it should carefully draft the original contract to provide those restrictions. An attempt to assert such a restriction, when it is not contained in the contract itself, is likely to fail.” – Paul Martin, Solicitor, April 2017

Take-away Message

Can an assignee sue for pre-assignment breaches? Yes, unless the terms of the commercial contract specifically state that they cannot.