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06 Aug 2021

Assignment under JCT: a costly lesson for beneficiaries

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In the recent judgment of Aviva Investors Ground Rent Group GP Limited and Aviva Investors Ground Rent Holdco Limited v Shepherd Construction Limited [2021] EWHC 1921 (TCC), the TCC has taught a costly lesson to the beneficiary of a purported assignment who was seeking to pursue a claim against a contractor under a JCT building contract.

The crux of the case depended on the interpretation of an assignment provision in the contract that permitted the Employer to assign the right to bring proceedings in its name to a subsequent owner of the property. Despite the clause first featuring in the JCT standard form in 1987, there had been little commentary on it prior to this case.

Background to the claim

A developer called Camstead Limited employed Shepherd Construction Limited to demolish an existing building and construct new self-contained student apartments in Cambridge pursuant to an amended JCT Design and Build Contract 2005 Edition.

After completion of the works, the freehold interest in the property was conveyed twice, first to an investor called RMB and then to Aviva.

Following the tragic Grenfell Tower fire in 2017 and subsequent government guidance relating to fire risk assessments, Aviva investigated and identified various fire safety defects at the Property. Aviva issued proceedings against Shepherd in September 2020 and relied on a deed of assignment between Aviva and Camstead that purported to assign to Aviva the full benefit of the JCT contract and the right to bring proceedings. The deed of assignment was executed at or around the same time as the issue of the court proceedings in which Aviva advanced claims for damages of over £4 million, being the alleged cost of the necessary remedial works.

The court applications and assignment provisions

The judgment deals with two interim applications, the first from Aviva to join Camstead as a Claimant and the other from Shepherd to strike out Aviva's claim.

It was Shepherd's case that there was no valid assignment and so no basis to join Camstead. This argument turned on the proper interpretation of two clauses under the JCT contract, namely:

  • Clause 7.1.1 (amended from the standard form):
    "The Employer shall be entitled upon giving the Contractor 14 days' written notice of its intention to do so, to assign the benefit of this contract by absolute assignment to any person (save any to whom the Contractor makes reasonable objection in writing before the expiry of the said period of 14 days) and in this contract the term "Employer" shall be construed accordingly."
  • Clause 7.2 (unamended from the standard form):
    "Where clause 7.2 is stated in the Contract Particulars to apply then in the event of transfer by the Employer of his freehold or leasehold interest in or of a grant by the Employer of a leasehold interest in the whole of the premises comprising the Works or (if the Contract Particulars so state) any Section, the Employer may at any time after practical completion of the works or of the relevant Section grant or assign to any such transferee or lessee the right to bring proceedings in the name of the Employer (whether by arbitration or litigation whichever applies under this Contract) to enforce any of the terms of this Contract made for the benefit of the Employer…"

The TCC noted that whilst clause 7.1.1 required Camstead to give notice of the assignment and in effect to seek Shepherd's consent, that restriction was limited in practice because Shepherd could only raise a reasonable objection once that notice was given. However, on the facts of the case, Aviva accepted that there had been no assignment under clause 7.1.1 because no notice of the purported assignment had been given to Shepherd. In the words of the TCC, Aviva had therefore 'pinned its colours to the mast' by relying on a purported assignment under clause 7.2 instead.

In response, Shepherd submitted that clause 7.2:

  • only permitted assignment to the first assignee (i.e. not Aviva who was the second owner of the Property); and/or
  • only allowed proceedings to be commenced in the name of Camstead as the original Employer under the JCT contract.

Decision

The TCC (Mrs Justice Jefford) agreed with Shepherd's arguments.

First, the TCC found that clause 7.2 is expressly concerned with a transfer by the Employer of a freehold or leasehold interest and there was "no wording that would encompass a subsequent transfer by [the first] transferee to another". A distinction was therefore drawn between (a) the initial transfer of the freehold interest of the Property from Camstead to RMB and (b) any subsequent transfer of the freehold interest. Accordingly, the purported assignment from Camstead to Aviva, as the second owner of the Property, could not take effect under clause 7.2. The TCC went on to say that, even if clause 7.2 could be interpreted as applying to subsequent owners as well as the first transferee, it would nevertheless make commercial sense for it to be construed in a limited way. This is because, if clause 7.2 permitted Camstead to assign to any subsequent owner without consent, it would render clause 7.1.1 largely superfluous.

Secondly, the TCC found that "all that can be assigned [under clause 7.2]… is the right to bring proceedings in the name of the Employer" (emphasis added). Thus, the claim should have been brought in the name of Camstead, and Aviva could not advance a claim for its own losses. The TCC came to this conclusion because that is what the clause says and, if clause 7.2 permitted Camstead to assign to a subsequent freehold owner the right to bring proceedings and claim that subsequent owner's losses, it would have the effect of permitting an assignment of the benefit of the JCT contract without notice or consent, which would again render clause 7.1.1 pointless.

In light of those findings, the TCC accepted Shepherd's application to strike out Aviva's claim and denied Aviva's application to join Camstead to the proceedings.

Practical lessons

The TCC's primary finding that clause 7.2 only permits an assignment to the first assignee, and not any subsequent assignees, limits its application significantly. Had Aviva had the benefit of a valid assignment under clause 7.1.1 (i.e. with notice), it would not have needed to rely on clause 7.2 and that would have ultimately saved its claim from being struck out. This case is therefore a salutary reminder to ensure that you comply strictly with the assignment clause, or else risk having no recourse should things go wrong.

The other decision from the TCC that clause 7.2 only permits the assignment of the right to bring proceedings in the name of the Employer is perhaps unsurprising given the clause's clear and unambiguous wording. However, it does call into question what purpose the clause has if the assignee cannot rely on an assignment under clause 7.2 to bring a claim for its own losses. The TCC's response to this is that such an assignment gives the assignee the right to enforce the obligations of the Contractor after practical completion, such as the obligations to make good defects or to pay liquidated damages for delay. Further, although not addressed in the judgment, it is possible in limited circumstances for an Employer to recover losses sustained by a new building owner. However, the claims that a new owner can bring pursuant to a clause 7.2 assignment are not as far-reaching as might have been expected. It follows that the new owner would be well advised to seek an assignment under a provision like clause 7.1.1 instead.

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