Assignment of contracts – pre-existing knowledge

Posted on March 27th, 2017

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Where contractual rights are assigned; can the recipient’s pre-existing knowledge invalidate those rights?

In Walker Group Constructions Pty Limited v Tzaneros Investments Pty Limited [2017] NSWCA 27 just such an issue arose.

The case is both factually and legally complex but the relevant parts can be summarised as follows. Walker constructed some concrete pavements at the Port Botany Container Terminal. The construction contract included warranties to make good any defects in the construction. At the time of the construction, the relevant land was leased by P&O. The lease was later transferred to Tzaneros as was the benefit of the warranties to Tzaneros.

Defects in the concrete were later detected and Tzaneros sued on the contractual warranties that had been assigned under the deed.

One of the (many) issues that emerged in the case, was a suggestion that because Tzaneros acquired the lease and warranties with full knowledge of pre-existing defects, it was not entitled to rely on the warranties.

The Court was referred to earlier English authority to the effect that prior knowledge of a defect which constituted a breach of a warranty, precluded reliance on the warranty. In the English case there had been a conscious decision to use machinery that was known to be defective, and that decision broke in the chain of causation. Whilst Tzaneros had some limited knowledge of defects in the concrete it was not aware of the full extent of them.  There was no analogy to the ‘conscious decision’ in the English case.

The Court said the particular terms of the warranty and of its assignment permitted Tzaneros to sue for any pre-existing but uncompensated construction defects covered by the warranty. The Court suggested that a failure to properly or fully investigate known defects was not enough to preclude reliance on the warranty.

Whilst this is a (very) simplistic summary of a complex case it highlights an issue that many people do not think about when accepting the assignment of rights that already exist: namely whether their existing knowledge might (as in the English case) result in them not getting the benefit of the rights that are assigned or whether (as in the Tzaneros case) the assigned rights can be relied upon even though there was pre-existing knowledge of a problem covered by the warranty. These are issues that should probably be given close attention by parties accepting an assignment of rights (and by their advisors, including transactional lawyers) to address the risk that pre-existing knowledge may invalidate reliance on the assigned rights.

Tony Cavanagh Director at Mullane & Lindsay Solicitors NewcastleTony Cavanagh is a Director at Mullane & Lindsay Solicitors and practises extensively in Commercial dispute resolution and litigation, and employment law. If you require any assistance in these areas please contact Tony Cavanagh or contact our Newcastle or Sydney office. 

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