What a waste – collateral warranties

23 June, 2008
by: Cripps

The case of Biffa Waste Services Limited v Maschinenfabrik Ernst Hese GmbH highlights the way in which a collateral warranty must be read in conjunction with the primary contract.

Biffa Leicester (“Biffa”) entered into a 25-year lease of a recycling plant with the local authority under a PFI scheme. Biffa entered into a back to back contract with an associated company, Biffa Waste, for the construction of the plant. Biffa Waste employed MEH to design and build the plant, and MEH provided a collateral warranty to Biffa as the tenant.

MEH sub-contracted work to HU who in turn entered into a supply contract with OT for the Ball Mill (a drum which broke down the waste into smaller parts for recycling). During the commissioning stage of the Ball Mill it was decided that some modifications needed to be made. OT employed Pickfords to do some further work. During a tea break a fire broke out and substantially damaged the Ball Mill and other parts of the recycling plant, thus delaying completion.

It was found by the Judge that the fire was caused by the negligence of personnel of HU and Pickfords. MEH was in breach of its contractual obligations to Biffa Waste under the design and build contract and to Biffa under the collateral warranty but Biffa and Biffa Waste’s claims against the design and build contractor, MEH, both failed.

The costs of reinstating the works had been covered by a PFI insurance policy but Biffa and Biffa Waste sued MEH for delay costs over and above what Biffa Waste could recover as liquidated damages under the building contract. Biffa Waste argued that the liquidated damages provision was only an exhaustive remedy for a “simple” delay, i.e. a failure to complete on time, not as a result of breach of another obligation such as a duty to carry out the works in a proper and workmanlike manner, which in turn caused delay. Mr Justice Ramsey said “no”. The provision in the contract was a complete remedy in damages for delayed completion howsoever caused.

Moreover Biffa Waste could not recover the cost of trying to mitigate the delay by running the Mill with temporary parts, as such steps were included in the pre-estimate of loss which formed the basis of the liquidated damages clause. Biffa were claiming unliquidated damages pursuant to the collateral warranty under which they were the beneficiary. But MEH argued that because they had already paid the liquidated damages to Biffa Waste they should not have to pay up twice over. Whilst a cause of action existed for both Biffa and Biffa Waste, this gave rise to the spectre of double recovery.

Mr Justice Ramsey agreed with the defendant. The warranty provided that the liability of MEH to Biffa should be no greater than if Biffa had been named in place of Biffa Waste under the design and build contract. By paying the liquidated damages to Biffa Waste the defendant had complied with the terms of the design and build contract and had no remaining liability. It was an exhaustive remedy. Biffa could recover nothing from MEH under the warranty and accordingly its claim against MEH was stayed.

Biffa and Biffa Waste as associated companies were left to divide the limited spoils recovered through the liquidated damages procedure. This case highlights the need to carefully estimate liquidated damages, particularly in the context of PFI schemes or large projects with many parties in the chain. It also emphasises the need for the draftsman of the warranty to carefully consider the effect of any cap on liability that may be imposed through the primary contract from which the collateral warranty takes its strength.

Reviewed in 2015