Set-off in warranty claims

1 June, 2005

It is generally considered that collateral warranties from key sub-contractors or sub-consultants with design responsibility are required so that the beneficiary can bring a claim against someone with potential liability, even if the main contractor has become insolvent and ceased trading. However there is a catch which has been revealed in the case of Safeway Stores Ltd v Interserve Project Services Ltd.

The employer was Safeway Stores who wanted a new supermarket and 2-storey car park in Oxted, Surrey. They employed Chelverton Properties as their developer (the Developer) who in turn employed a contractor Tilbury Douglas (now known as Interserve) and various professionals. The Contractor (Interserve) employed a specialist sub-contractor to install a waterproof surface to the car park.

The Contractor provided a collateral warranty to Safeway.

Clause 3.3 of the warranty stated: “The Contractor shall owe no duty or have any liability under this deed which are greater or of longer duration than that which it owes to the Developer under the Building Contract.”

Debonding between the waterproof membrane and the concrete surface of the car park occurred, post completion. Despite remedial work by Interserve and its sub-contractors, the problem was not resolved.

Subsequently Safeway carried out remedial works in the sum of £413,048.82. The Developer was by this time in liquidation so Safeway claimed under its warranty with the Contractor Interserve.

One of the defences relied upon by Interserve was clause 3.3 of the warranty which it argued, allowed it to rely upon the defence of equitable set-off. The Developer owed the Contractor over £1m when it went into liquidation. Had the Developer brought the claim for £413,000 against the Contractor, Interserve could have relied on its larger claim of £1m by way of set-off.

Because of the existence of clause 3.3 Interserve had a complete defence against the claim by Safeway.

Thus because the Developer became insolvent without having paid everything it owed to the Contractor, the warranty that Safeway had obtained in case of that very situation, developer insolvency, was of no use to them precisely because of the same insolvency.

So what are the lessons for the beneficiary?

  1. Try to obtain sub-contractor warranties as well as the warranty from the main contractor. Assuming Interserve had paid the waterproofing sub-contractor then the specialist sub-contractor could have been liable to Safeway even if its warranty contained a clause similar to clause 3.3.
  2. Obtain a manufacturer’s guarantee for any specialist product.
  3. Clause 3.3 or similar is a fairly standard clause. Consider excluding it or amending it, particularly where there is a developer/special purpose vehicle (SPV) in the chain who may not be around for long!

Reviewed in 2015