Safeway Stores Ltd v Interserve Project Services Ltd [2005] EWHC 3085 (TCC)

Case No HT 04 204

[2005] EWHC 3085 (TCC)

IN THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

St Dunstan’s House

Venue 133-137 Fetter Lane

Date Thursday, 1 December 2005

London EC4A 1HD

Before

THE HONOURABLE MR JUSTICE RAMSEY

Between

SAFEWAY STORES LIMITEDClaimant

INTERSERVE PROJECT SERVICES LIMITEDDefendant

(formerly known as Tilbury Douglas Consrtruction Limited)Defendant

Tape Transcript of Smith Bernal Wordwave Limited

183 Clarence Street Kingston-Upon-Thames Surrey KT1 1QT

Tel No: 020 8974 7300 Fax No: 020 8974 7301

MR P BOULDING QC (Instructed by Messrs TLT Solicitors) appeared for Claimant

MR DAVID THOMAS QC (Instructed by Messrs Wragge & Co) appeared for Defendant

Judgment

Thursday, 1 December 2005

[1]This case concerns liability for defects in the upper level car park of a Safeway supermarket development in Oxted Surrey. On 22 April 1993, Chelverton Properties Limited (“Chelverton”), as property developers, entered into an agreement (as subsequently varied) with Safeway Stores Plc under which Chelverton agreed to design and construct the supermarket, with a two deck car park.

[2]In order to carry out its obligations, Chelverton engaged various professionals including Watson Whittaker Partnership as project managers, Mountford Pigott Partnership as the architect and Roger Stagg as structural engineers. It also entered into a building contract on 26 April 1995 under the JCT 1980 Private Edition with Quantities (as amended) with Tilbury Douglas Construction Limited, now Interserve Project Services Limited (“Interserve”). In turn, Interserve engaged Connaught Group Limited as subcontractor to supply, deliver and install the Tretodek waterproof wearing surface. The Tretodek being manufactured by Tremco Ltd.

[3]On 9 May 1995, Interserve entered into a contractor’s warranty (“the Warranty”) with Safeway and Chelverton, the terms of which are particularly relevant to the matters I must consider.

[4]The history of the project so far as is relevant, is that practical completion was achieved in sections between 8 February 1996 and 30 January 1997 and a certificate of making good defects for each section were issued between 7 January 1998 and 30 November 1999. In relation to the upper level car park this formed part of section 2, which achieved practical completion on 12 March 1996 and had a certificate of making good defects on 14 January 1999.

[5]By the spring of 1997 debonding had occurred between the waterproof membrane and the concrete surface of the car park and some remedial works were eventually carried out on a patchwork basis. By early 2001 it had become apparent that the patchwork repairs, which had been undertaken by Interserve and its subcontractors, had not resolved the problem with the Tretodek and the surface was showing signs of failure at various points.

[6]On 26 June 2001, a meeting was held on site. The purpose of the meeting was to endeavour to understand the reasons for the failure at the surface. It was attended by representatives of Safeway, WWP, Connaught and Tremco but not Interserve, as it appears that, because of internal reasons, the invitation was not received until too late. It was agreed at the meeting that Interserve, Connaught and Tremco would produce their own joint report on the failure of the surface. This led to a report produced by Interserve on 2 November 2001.

[7]The material part of the conclusions of that report stated that no evidence was found that led to the conclusion that workmanship was at fault. The specialist subcontractor, it said, was approved to install the membrane and was overseen and inspected by the manufacturer. It said that it could be concluded that at the time of design, criteria were considered with respect to design load, utilisation, usage and an inspection/damage/maintenance/repair regime was established and set down against which the performance of the installation might be measured. It was clear, it said, that mechanical damage must be quickly identified and repaired to ensure further damage is not allowed to migrate into much larger areas. It said that no evidence of an inspection/maintenance regime has in place, this being a specific requirement of the warranty issued by Tremco. It said damage had occurred and still was occurring without any means of identifying such occurrences and a method of stopping ongoing deterioration.

[8]The Report reached three conclusions. It said it could be concluded that the failure of the membrane to perform was due to(1) lack of maintenance;

(2) lack of action in timely response for repairs to damaged areas;

(3) inability of the material to deal with the imposed loading in the critical areas of the car park. Notwithstanding any shortcomings of the material, it stated that the lifetime period of any material would be prolonged with regular maintenance and timely repair.

[9]Subsequently, it was then agreed that there should be a further meeting and this was held on 30 November 2001. The report of 2 November was discussed at that meeting and a decision was taken as to how Safeway were to proceed with the remedial work. I shall return to this meeting, because it is relied on by Interserve as necessary background to the issues with which I am concerned.

[10]Following that meeting, there was another meeting on 5 December 2001 at which a compromise agreement (“the January compromise”) was reached between Chelverton and Interserve. The precise scope of that compromise agreement is a matter which I have to resolve. In the event, Safeway subsequently carried out remedial works to the upper level car park and in these proceedings, commenced by a claim form on 5 July 2004, they seek to recover the cost of those remedial works in the sum of £413,048.82 from Interserve under the Warranty.

[11]In the Particulars of Claim, the claim made is a simple one for the sum expended on the remedial work. It was met by a Defence from Interserve based, essentially on two matters: the January compromise and the subsequent insolvency of Chelverton. This was pleaded in paragraphs 23 to 41.2 of the Re-re-amended Defence and Counterclaim and was responded to by Safeway in paragraphs 14 to 24D of the Re-re-amended Reply and Defence to Counterclaim. At a hearing on 11 March 2005, His Honour Judge Thornton QC ordered the trial of certain preliminary issues by reference to those contentions. Counsel have happily been able to agree the formulation of four issues which encapsulate those pleaded contentions.

[12]Because the parties disagree as to the matters discussed and the outcome of the meetings held on 30 November 2001 and 5 December 2001, I heard evidence from a number of witnesses present at those meetings. Unsurprisingly, the recollections of the witnesses about what was said at those meetings four years ago differed. Any differences between the witnesses were, I find, solely due to genuine differences of recollection rather than for any other reason. Issue 1

[13]I now turn to consider the four agreed issues. The first one is this: did Interserve and Chelverton settle any claim Chelverton may have had against Interserve in respect of defects in the car park and, if so, when was that settlement made and what were its terms? This issue requires a consideration of the meetings on 30 November and 5 December 2001. However, Interserve rely on the meeting of 30 November merely by way of background to the meeting on 5 December and do not contend that the meeting on 30 November gave rise itself to a compromise agreement. 30 November 2001 meeting

[14]I now turn to 30 November meeting. This meeting took place at Oxted and was attended by Mr Arbuthnott and Mr Davidson of Safeway, Mr Cairns and Mr Holloman of Interserve, Mr Liddle of Tremco, Mr Evans of Connaught and Mr Whittaker of WWP. There are two contemporaneous documents which refer to the matters discussed. First, there were minutes produced by Mr Whittaker which were circulated to Interserve. Secondly, there was a letter of 4 December 2001 which was written by Mr Holloman, setting out various matters, some of which are controversial and do not appear in the minutes.

[15]The following aspects are common ground in respect of the meeting on 30 November. First, the report of 2 November 2001 was tabled and discussed. Secondly, Tremco contended that they were not liable under the warranty (page D13) because proper notice had not been given. Thirdly, Safeway proposed to proceed by asking Tremco or Connaught to provide a quotation for remedial works, Interserve indicating that they were not interested in doing so. Interserve plead that at that meeting “it was agreed that Interserve were not responsible for those remedial works”.

[16]It seems to me that there is an initial problem in reliance on that meeting as being admissible background or matrix in relation to matters discussed at the meeting of 5 December 2001. The meeting on 5 December was attended by Mr Watson of WWP and Mr Clogg of Chelverton, neither of those persons was present at the meeting on 30 November and I am not satisfied on the evidence that they knew of the outcome of the meeting on 30 November 2001.

[17]Interserve rely on the letter subsequently written by Mr Russell of Interserve on 7 August 2002 in which he says that “Interserve deny liability for the car park defects” and states that this fact was confirmed by Jonathan Clogg and Peter Watson at the meeting on 5 December 2001. As I state below, I am not satisfied that this was said at the meeting of 5 December 2001.

[18]However, more importantly, I find that there was no agreement at the meeting that Interserve were not responsible for those remedial works. Rather the totality of the evidence leads me to these conclusions. First, the report of 2 November 2001 by Interserve meant that Interserve, Tremco and Connaught were not liable for defects. In the context of Safeway needing to carry out remedial works to satisfy the retail staff and the environmental health officer, Safeway had to have the remedial work carried out as soon as possible.

[19]In the light of the report of 2 November 2001 and Tremco’s reliance on a term of their warranty to avoid liability, Safeway had to accept that Interserve, Tremco and Connaught would not carry out the work voluntarily. Faced with that position, Safeway had to obtain quotations to carry out the work and would have to pay for that remedial work. This, I find, is the combined effect of the evidence of Mr Whittaker, Mr Arbuthnott and Mr Davison, and is consistent with the minutes. Mr Holloman’s letter of 4 December 2001 drew inferences which I find, and to some extent he accepted, were not the result of express statements. Rather, the findings and recommendations of the Interserve report were “accepted” in the sense that Safeway proceeded on the basis of that report, knowing that the report found that Interserve, Tremco and Connaught were not liable and therefore that the would not voluntarily carry out the remedial work.

[20]Further, when Mr Holloman says that Interserve would not be held responsible for any costs or liabilities of replacing the existing material, this was because Safeway would be paying another party, Tremco, Connaught or another, to carry out the work. This was not because Safeway was waiving any liability. That was not the purpose of the meeting on 30 November 2001 and such matters were not the function of Mr Arbuthnott or Mr Whittaker or indeed Mr Davison.

[21]In fact, while the car park defects were being dealt with, a separate meeting involving Mr Lowe of Interserve, Mr Clogg of Chelverton and Mr Watson of WWP had already been set up on 19 November 2001 to take place on 5 December 2001. I now turn to that meeting of 5 December 2001. Meeting of 5 December 2001

[22]This meeting involved Mr Lowe and Mr Russell of Interserve, Mr Clogg of Chelverton and Mr Watson of WWP. I heard from Mr Lowe, Mr Clogg and Mr Watson. There is a manuscript note produced by Mr Watson that same day from notes made at the meeting. In addition, Mr Lowe prepared a draft letter on 6 December which he sent to Mr Clogg by email. It is common ground between the parties that there was a compromise agreement (the January compromise), but there is a difference as to the scope of that compromise.

[23]The issue is whether the compromise covered defects and in particular the defects in the car park. In principle, parties to a building contract can, at a final account stage, make a compromise in a number of ways. First, they can resolve sums due under the contract so as simply to determine the payment due. Secondly, they can resolve not only sums due but also claims for damages for breach of contract, including latent and/or patent defects. In essence, Safeway say that what happened on 5 December 2001 was the first, while Interserve says that what happened was the second, at least in relation to patent defects.

[24]Mr David Thomas QC, who appears for Interserve relies on four particular matters to establish Interserve’s case. First he says that the defects were dealt with at the meeting. Secondly, he says that Interserve were keen to have copies of the certificate of making good defects and this indicated an interest in defects. Thirdly, he says that a £10,000 retention was swept up in the settlement and this again related to the defects in the car park. Fourthly, he says that the letter written in August 2002 confirmed that there was agreement that Interserve had no liability.

[25]While it is common ground that there was some reference to defects being dealt with, there is a difference of recollection as to what was said. Mr Clogg did not remember any substantial discussion. He was aware that the car park defects were outstanding and understood that progress was being made. The purpose of the meeting, he said, was to see if an agreement could be reached on the financial account for the project. He did not recall any discussion in detail on the car park defects or liability for them. Mr Watson said he was sure that the car park defects were not discussed in detail. He added that if Mr Lowe had said that Interserve were not responsible, he said he would have been very surprised. He recalled no comment to the effect that Interserve were “off the hook” in respect of defects.

[26]Mr Lowe confirmed that Mr Watson’s manuscript note of the meeting on 5 December 2001 accorded with his recollection. He accepted that there was no reference to defects or the car park defects in that note, but he correctly pointed out that there was no reference in the note to the production of the making good certificates which, it is common ground, was a matter mentioned at the end of the meeting. He said that he asked for the certificate of making good defects as he did not want anyone to come back with a defect. However, he accepted that there were no words used to the effect that the final account settlement included all defects. He stated that he referred to the meeting on 30 November, and said that it was agreed that the car park defect was not an Interserve problem and that Mr Watson agreed to this.

[27]I have come to the conclusion that Mr Lowe is not correct about his recollection of what was said at the meeting on 5 December as to the meeting of 30 November, or Mr Watson or Mr Clogg’s reaction to it. Again, I consider that whilst defects were mentioned in passing, and whilst Mr Lowe clearly sought the certificate of making good defects, there was no intention by the parties at that meeting to compromise any claim for damages for breach of contract in respect of the car park defects, rather there was a compromise of the financial position on the final account which was intended to compromise the sums due under the contract. Mr Watson’s note indicates that the compromise was based on the tender value, the value of variations and claims from Chelverton’s point of view, and Interserve’s view of what it had cost them. There was no reference in the discussion to a compromise in respect of car park defects or an agreement that there was no liability.

[28]The release of retention is consistent with that position. No retention would be withheld, but that did not settle any claim for damages. Equally, the certificates of making good defects would ensure that Interserve did not themselves have an obligation to make good defects, but would not settle any claim for damages. This I find is also the result of the draft letter from Mr Lowe and in particular the amended version sent by Mr Clogg. The version of 6 December 2001 in draft and the final version sent by Mr Lowe of 7 December 2001, state that there was an “agreement to a final account value of £8.55 million in full and final settlement in respect of our contract”. Mr Clogg’s addition by way of clarification which was agreed to by Mr Lowe, confirms “our” (and I find that means Interserve’s) “agreement to a final account value of £8.55 million in full and final settlement of all present and future claims that may be made by us in respect of our contract at Oxted”.

[29]When read in the context of it being a letter written by Mr Lowe of Interserve, I consider that this makes it clear that it settled Interserve’s claims not Chelverton’s claims for defects. As a result I find that the agreement of 5 December 2001, referred to as the January compromise, and which was set out in the letters of 6 and 7 December 2001, 16 and 18 January 2002, did not settle any claims by Chelverton against Interserve for the car park defects. In light of that finding, I can deal briefly with issues 2 and 3. Issue 2

[30]Issue 2 is this: if the January compromise did settle claims for car park defects is the effect of clause 3.3 of the Warranty that Safeway has no claim against Interserve under that warranty in respect of the defects in the car park set out in the Particulars of Claim. On the basis that there was no compromise of defects, then clause 3.3 would, on no view, affect the position. I deal with the meaning of clause 3.3 under issue 4 and in doing so deal with the position if, contrary to my finding, there was a compromise of defects. Issue 3

[31]Issue 3 is this: are Interserve prevented from relying on clause 3.3 by failing to serve notice of the January compromise with Chelverton under clause 4.1.1 of the Contractor’s Warranty? This raises an issue as to the effect of clause 4.1.1 on clause 3.3. In the absence of the compromise of liability of defects, then clause 4.1.1 can have no affect on the position. However, I look at the position on the basis that there was a compromise.

[32]Clause 4.1.1 provides as follows:

“The contractor will not exercise or seek to exercise any right which it may now or at any time hereafter have to terminate or treat as terminated the Building Contract or to discontinue the performance of any of its obligations thereunder without first giving to Safeway not less than 28 days’ prior written notice of the Contractor’s intention so to do and specifying the grounds for the proposed determination and notwithstanding any provision contained therein the Building Contract shall not otherwise be terminated by the Contractor.”

[33]The question arises as to the effect of the compromise in the context of the provisions of clause 4.1.1. Mr Boulding QC who appears for Safeway, says that the compromise would be a case where the contractor discontinued the performance of obligations under the contract. I do not consider that to be correct. Clause4.1.1 is concerned with the position where there is a right to determine the building contract or discontinue performance. Safeway can then give notice under clause

4.1.2 to take over the role of the developer, including the obligation to make payment: see clause 4.3. A compromise of rights to damages for breach of contracts does not, in my judgment, come within the category of matters referred to in clause 4.1.1, such as a right to discontinue performance of its obligations under the building contract. In any event, I do not consider that a failure to give notice under clause 4.1.1 would affect the rights of the parties under clause 3.3. First, I do not find that there is any connection between clause 4.1.1 and 3.3 so as to make the extent of liability under clause 3.3 dependent on the notice under clause 4.1.1. There is simply not sufficient language to have that effect or to make it a condition precedent.

[34]Equally, I do not find that the principal in Alghussein Establishment v Eton College

[1988] 1 WLR 587

applies to this case, assuming that there was an obligation to give a notice under clause 4.1.1 and assuming the relevant factual position. There is, in my judgment, no presumption to the effect that Interserve could not rely on clause 4.1.1, a clause providing for the extent of Interserve’s liability if it failed to give notice of an event which might affect that liability. It is not, in my judgment, taking advantage of its own wrong. In failing to give notice before it enters into a compromise. It is relying on what its right would have been, whether or not it gave notice. Rather I find that Safeway’s remedy, if any, will be a remedy for damages for breach of contract in failing to give notice. Issue 4

[35]I now turn to issue 4, which is in these terms: in the event that the January compromise does not bar Safeway’s claim in its entirety, is the effect of clause 3.3 of the warranty to prevent Safeway from recovering damages otherwise due from Interserve under the warranty because a debt of a greater sum was owing from Chelverton to Interserve under the building contract? This raises an issue as to the meaning of clause 3.3 in the context of the events which occurred in this case.

[36]Although under the January compromise, Chelverton agreed that Interserve was entitled to be paid £1,261,664.21, Chelverton became insolvent and went into liquidation without any payment being made to Interserve. In such circumstances, it is common ground that first, if Chelverton pursued a claim for car park defects itself of £413,000 against Interserve, it would be met by a complete Defence of set-off. Secondly, if the warranty did not contain clause 3.3, the fact that payment had not been made by Chelverton to Interserve under the building contract, would not prevent Safeway from recovering any damages to which it might be entitled for any car park defects for which Interserve might be liable.

[37]In essence, the question is whether the risk of Chelverton’s insolvency and its failure to pay Interserve, falls on Interserve or Safeway under the terms of the warranty and, in particular, clause 3.3. Clause 3.3 provides as follows:

“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.”

[38]Mr Boulding submits that the clause, when properly construed in its context as being clause 3.3 within clause 3, must be limited to dealing with the scope of the duty and liability for breach of the duty under clause 3. Whilst I accept that the location of the clause might suggest that and the reference to “duty” in clause 3.3 is also consistent with that, the provision that the contractor shall owe no duty “or have any liability under this Deed” cannot, in my judgment, possibly be construed as limited to liability under clause 3.

[39]Mr Thomas contends that in this case the relevant wording in clause 3.3 means that the contractor shall not “have any liability under this Deed which [is] greater than that which [it has] to the developer under the building contract”. As I have rejected the argument that there was a full and final settlement between Chelverton and Interserve, I do not need to consider the import of such a settlement on validity. I therefore concentrate on Mr Thomas’ contention that because Chelverton has not paid Interserve the agreed sum of £1.261 million, Interserve would not be liable to pay Chelverton damages of £413,000 because it would have a set-off against that sum which, in law, is a complete substantive Defence.

[40]Mr Boulding submits that, if clause 3.3 applies to liability outside clause 3, as I have held it does, then that clause does not apply to the circumstances of this case for the following reasons.(1) Chelverton did not seek to recover the £413,000 claimed by Safeway and could not have done so as it had not suffered the loss. In this context, the word “liability” cannot be referring to financial liability, rather, he submits, this is a reference to liability in the legal sense of failing to observe the terms of or the obligations arising under the contractor’s warranty and the building contract. In other words, he submits, that it is only necessary to consider the terms of the building contract.

(2) He says alternatively, that the liability of £413,000 to Safeway under the warranty would not be greater in fact than the liability that Interserve owed to Chelverton under the building contract. The liability in respect of the defects would be identical.

(3) Further he says that the existence of a defence of set-off by Interserve does not mean that Interserve had no liability to Chelverton under the building contract. He submits that the set-off merely prevents Chelverton from enforcing the liability without taking into account the cross-claim. He refers to a passage from the judgment of Morris LJ at page 26 of Hanak v Green

[1958] 2 QB 9

at 26.

(4) Mr Boulding also submits that to construe clause 3.3 as excluding a claim in this case would defeat Safeway’s entitlement in circumstances where the rights were intended to exist, such as Chelverton’s liquidation. It is, he submits, absurd for Chelverton’s failure to pay sums which have nothing to do with car park defects, to prevent Safeway from recovering damages from Interserve.

[41]Mr Thomas submits that, first, liability is a matter not just of the terms of the contract, but depends on the existence of defences. In this case a defence of set-off, he submits, defeats the claim. He refers first to Wood on English and International Set-Off at paragraph 1-3. In that passage, the author refers to the definition of set-off and says:

“In substance, however, where a creditor claims a debt from his debtor and the debtor has a cross-claim on the creditor, then, if the debtor can reduce or extinguish the amount of the creditor’s claim by his cross-claim, the debtor is said to set-off. The set-off operates as a double payment or discharge of the reciprocal claims.”

He also refers to Hanak v Green at page 26, as indeed Mr Boulding did. At page 26 Morris LJ says this:

“On the authorities to which I have referred, it seems to me that a court of equity would say that neither of these claims ought to be insisted upon without taking the other into account. … The position would be comparable with that in Young v Kitchin to which I have referred above, and the passage from the judgment of Cleasby B becomes applicable. It would be a case where in equity the whole matter could be dealt with. The assignee would take subject to equities and the plaintiff, if sued for the £81 18s. 6d., would be entitled "by way of set-off or deduction" to the damages which she had sustained by the non-performance or faulty performance of the contract on the part of the defendant. On the authorities to which I have referred, it seems to me that the defendant had an equitable set-off which defeated the plaintiff's claim. This conclusion does not in any way depend upon the terms used in the defence to the counterclaim. The question as to what is a set-off is to be determined as a matter of law and is not in any way governed by the language used by the parties in their pleadings.”

[42]Mr Thomas thirdly refers to Derham: The Law of Set-Off (3rd Ed.) at paragraphs 4.29 to 4.30 where the author deals with the substantive nature of equitable set-off and says in paragraph 4.29:

“However, a characteristic of the form of equitable set-off under discussion which has emerged in recent years, is that it operates as a true, or substantive, defence. It may be invoked independently of any order of the court or of arbitrators. It may be set up by a person indebted to another, not merely as a means of preventing that other person from obtaining judgment, but also as an immediate answer to his liability to pay the debt otherwise due. Whilst it is only recently that the substantive nature of this defence has come into prominence…”

And in respect to that point the author, in a footnote, refers to Federal Commerce v Molena

[1978] 1 QB 927

at 997 where Cumming-Bruce LJ said this:

“… it is probably true to say that it was only Morris LJ's judgment in Hanak v Greenjavascript:Link(338, '', 542909, 41, 0);[1958] 2 QB 9 that brought clearly to the attention of the legal profession and the commercial world the possibilities of equitable set off as a defence.”

The author continues by saying that such an approach is consistent with the tenor of Lord Cottenham’s judgment in Rawson v Samuel (1841) CR&PL 161 at 179. He then adds. “The Lord Chancellor referred to earlier cases in which an equitable set-off had been allowed as cases in which ‘the equity of the bill impeached the title to the legal demand.’ It was not merely the right to obtain judgment on the demand that was impeached, but the title to the demand itself.” At paragraph 4.30 the author continues:

“Notwithstanding various judicial statements which may suggest the contrary, the view that the defence is substantive does not mean that it operates as an automatic extinction of cross-demands. Rather the creditor’s conscience is affected so that the creditor is not permitted in equity to treat the debtor as being indebted to him to the extent of the debtor’s cross-claim. At law, the cross-demands remain in existence and retain their separate identities until extinguished by judgment or agreement, but as far as equity is concerned, it is unconscionable for the creditor, even before judgment, to regard the debtor as a debtor to the extent of the debtor’s cross-demand or to treat the debtor as having defaulted in payment to that extent if circumstances exist which support an equitable set-off. In this sense it operates in equity as a complete or a partial defeasance of the plaintiff’s claim. A court of equity can protect the debtor’s position by means of an injunction and the debtor’s right may be subject of a declaration. This explains how equitable set-off can operate substantively without working an automatic discharge.”

[43]Mr Thomas fourthly refers to Aectra Refining v Exmar

[1994] 1 WLR 1634

and in particular to the passages in the judgment of Hoffmann LJ at pages 1648 to 1650. That case concerned the availability of a defence of set-off where one claim had to be litigated in court and another claim had to be dealt with by arbitration. In that context Hoffmann LJ said:

“This is a difficult point on which there is no authority. The answer must be deduced from first principles. For this purpose it is necessary to distinguish between what Mr. Philip Wood, in his valuable book on English and International Set-Off (1989), calls "independent set-off” and "transaction set-off".”

[44]Hoffmann LJ then deals with independent set-off and comes at page 1649B to transaction set-off:

“Transaction set-off, on the other hand, is a cross-claim arising out of the same transaction or one so closely related that it operates in law or in equity as a complete or partial defeasance of the plaintiff's claim. The category covers a common law abatement of the price of goods or services for breach of warranty, as explained by Parke B in Mondel v. Steel (1841) 8 M&W 858, 872 and equitable set-off, as explained by Morris LJ in Hanak v. Green [1958] 2 QB 9, 19. At common law, as Parke B. said, the purchaser "defend[s] himself by showing how much less the subject matter of the action was worth" and in equitable set-off the defendant asserts what Morris LJ called "an equity which went to impeach 'the title to the legal demand".”

[45]Hoffmann LJ then continues at page 1650:

“In cases of transaction set-off, this obviously makes good sense. Mondel v. Steel (1841) 8 M&W 858 is, as Lord Diplock emphasised in Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd [1974] AC 689, 717, "no mere procedural rule designed to avoid circuity of action but a substantive defence at common law." The same is true of set-off in equity. The defendant is pleading a confession and avoidance to the plaintiff's claim. He is saying that, although the facts alleged by the plaintiff entitle him to judgment for the amount claimed, a wider examination of related facts would show that the claim is wholly or partly extinguished.”

[46]Finally, Mr Thomas refers to Fuller v Happy Shopper

[2001] 1 WLR 1681

at 1690 where Lightman J deals with equity or transaction set-off at paragraph 22 and he says:

“An equitable (or transaction) set-off is a cross-claim arising out of the same transaction as the claimant's claim or one so closely connected that it operates in law or in equity as a complete or partial defeasance of the claimant's claim: see the Aectra case, p 1649a-b per Hoffmann LJ. The cross-claim is so closely connected if it would be unconscionable for the claimant to insist on satisfaction for his claim without giving credit for the claim made against him by the other party. Equitable set-off operates not merely procedurally, but substantively as a defence.”

[47]Mr Thomas says that it is therefore wrong to consider liability to Chelverton without taking into account the set-off. He says there is no liability and could be no liability to Chelverton for £413,000. He says that the purpose of the warranty would not be defeated in this case. It is the particular circumstances of this case, in that Chelverton had not paid Interserve the final account sum which means there is no liability. He says that clause 3.3 was clearly intended to prevent Interserve from having liability to Safeway which was greater than Interserve’s liability to Chelverton.

[48]I now turn to consider these arguments. In principle, the existence of a warranty between Interserve and Safeway is an alternative way for Safeway to obtain rights against Interserve. Another way would be for Safeway to bring proceedings against Chelverton under the development agreement and for Chelverton to bring proceedings against Interserve under the building contract.

[49]The second alternative would be for Safeway to take an assignment of Chelverton’s rights against Interserve under the building contract. The first of these alternatives would require Chelverton to be solvent, otherwise the contractual chain would break down. This is a situation which is effectively prevented by the warranty in this case.

[50]The second (that is the question of assignment) means that Safeway generally takes Chelverton’s rights, subject to the equities, which would include the fact that the final account sum had not been paid. Whether this is the same under the warranty depends on the meaning of clause 3.3.

[51]In this case, absent clause 3.3, Safeway could have proceeded against Interserve without any consideration of parallel liability to Chelverton. However, in my judgment, the purpose of clause 3.3 is clear: it is to restrict Interserve’s liability to Safeway to its equivalent liability to Chelverton under the building contract. It still provides a direct route for Safeway to bring proceedings against Interserve, but it ensures that the extent of that liability is no greater than the liability of Interserve to Chelverton.

[52]In this case, the liability of Interserve to pay damages to Chelverton for breach of contract in relation to car park defects is, as is common ground, subject to Interserve’s right of set-off. That set-off is of a type described as “equitable” or “transaction” set-off. As stated by Hoffmann LJ in Aectra at 1650, referring to Mondel v Steel and Lord Diplock’s speech in Modern Engineering v Gilbert Ash, such a set-off is not merely a procedural rule designed to avoid circuity of action, but a substantive defence at common law.

[53]That substantive defence, in my judgment, means that Interserve has no liability to Chelverton for damages for breach of contract for the car park defects. I do not consider that it is correct to consider merely the building contract as it stands at the date it is signed, or as varied by the internal variation mechanism. Liability under the building contract must, it seems to me, depend on the factual and legal position. In this context, if there had been a full and final settlement between Chelverton and Interserve in respect of the defects under the building contract, taking account of a set-off for car park defects, I consider that, quite apart from any principles of double recovery, clause 3.3 would be apt to cover that position.

[54]In the circumstances, I find that clause 3.3 does prevent Safeway from recovering damages from Interserve in respect of the car park defects. Interserve’s liability to Safeway cannot be greater than Interserve’s liability to Chelverton under the building contract and because the amount to be set-off is greater than the damages claim, Interserve is not liable to Chelverton.

[55]I would observe that this apportionment of risk is, in my judgment, consistent with the position under clause 4 of the warranty. If Chelverton had gone into liquidation during the performance of the building contract, then Safeway could have taken over the contract but would have had to have paid Interserve any sums which were due under the building contract. In this case, the effect of clause 3.3 is to prevent Safeway from recovering from Interserve, unless Interserve has been fully paid under the building contract. Summary

[56]I now summarise those findings. As a result, subject to any submission from counsel, I would propose making the following declarations:(1) That Interserve and Chelverton did not settle any claim which Chelverton may have had against Interserve in respect of the defects in the car park;

(2) That Interserve are not prevented from relying on clause 3.3 by failing to serve notice under clause 4.1.1 of the contractor’s warranty;

(3) that clause 3.3 of the warranty prevents Safeway from recovering damages otherwise due from Interserve under the warranty because Interserve would not be liable to Chelverton for such damages because of the set-off of a greater sum which was owing by Chelverton to Interserve in respect of the final account under the building contracts.

[57]Finally, as always, I am grateful for the clear and concise submissions which have enabled these issues to be heard and determined in the allocated time. - - - - - -