Safeway Stores Ltd v Interserve Project Services Ltd

A final-account compromise in a building contract does not ordinarily settle the employer’s separate claims for damages for defects unless that is its proper construction. A contractual notice provision concerning termination or discontinuance of performance does not apply to a compromise of claims for damages, and failure to give such notice does not enlarge liability under a separate limitation clause. Where a warranty provides that the contractor’s liability to a beneficiary cannot exceed its liability to the developer, the comparison includes substantive defences available under the building contract. An equitable or transaction set-off may therefore reduce the contractor’s liability to nil, preventing recovery under the warranty.

Safeway sought £413,048.82 from Interserve under a contractor’s warranty for remedial works to defects in an upper-level supermarket car park. Interserve relied on a compromise reached between Interserve and the developer, Chelverton, and on Chelverton’s insolvency and unpaid final account.

The court determined four preliminary issues: whether the compromise settled Chelverton’s defect claims; whether clause 3.3 of the warranty barred Safeway’s claim; whether Interserve’s failure to give notice under clause 4.1.1 prevented reliance on clause 3.3; and whether the set-off arising from the unpaid final account meant that Interserve had no liability to Chelverton for the defects.

1. The January compromise. The agreement reached on 5 December 2001, recorded in subsequent correspondence, compromised the financial position on Interserve’s final account. It settled sums due under the building contract, including the final account value, but did not settle Chelverton’s separate claims for damages for the car-park defects. The release of retention and certificates of making good defects did not alter that conclusion.
2. Clause 4.1.1. A compromise of rights to damages for breach of contract was not a matter falling within clause 4.1.1, which concerned termination of the building contract or discontinuance of contractual performance. There was no sufficient connection between clause 4.1.1 and clause 3.3 to make notice a condition precedent to reliance on clause 3.3. The principle in Alghussein Establishment v Eton College [1988] 1 WLR 587 did not apply. Any remedy for failure to give notice would be damages for breach of the notice obligation.
3. Clause 3.3. The words preventing Interserve from having liability under the warranty greater than its liability to the developer were not confined to liability under clause 3 of the warranty. They limited the extent of Safeway’s direct right against Interserve by reference to Interserve’s actual liability to Chelverton under the building contract.
4. Set-off. The equitable or transaction set-off available to Interserve was a substantive defence, not merely a procedural device. Applying the approach described in Aectra Refining v Exmar [1994] 1 WLR 1634, with reference to Mondel v Steel and Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd, Interserve had no liability to Chelverton for the car-park defects because the set-off exceeded the defects claim. Clause 3.3 therefore prevented Safeway recovering damages under the warranty.

Declarations were proposed accordingly.