URS v BDW: a milestone decision from the Supreme Court – but does it break new ground?
The Supreme Court has handed down its long-awaited judgment in URS v BDW. The judgment considers a number of important issues for construction professionals including limitation, liability in tort, and the interplay between the Defective Premises Act 1972 (“the DPA”) and the Building Safety Act 2022 (“the BSA”).
Background
BDW, a well-known developer (whose brand names include Barratt Homes and David Wilson Homes) engaged URS, a designer, to carry out design work on two apartment blocks called Capital East and Freemans Meadow (“the Blocks”). Practical completion of the Blocks took place in 2012, and the apartments were then sold to individual purchasers.
Following the tragic Grenfell Tower fire in 2017, BDW undertook a wholesale review of its developments and discovered that the Blocks’ design was seriously defective, and that they were at risk of structural failure.
It is relevant to note that, at the time the defects were discovered:
a) There was no damage or cracking at the Blocks, even though it was accepted that that they were dangerous.
b) BDW had sold all the flats in the Blocks (thus retaining no interest in them).
c) BDW’s contractual limitation period for defective design had expired, and the then applicable six-year limitation period to bring a claim under the DPA had also expired.
Despite not owing the Blocks, nor facing claims from their owners or occupiers, BDW felt that it could not ignore the problems once they came to light, and incurred costs running to “many millions” to carry out investigations, temporary works, evacuation and a permanent remedial solution. Accordingly, in 2020, BDW issued proceedings against URS to recover the cost of the remedial works, which at the time was confined to a claim in negligence.
At a preliminary issues hearing, Fraser J held that BDW’s alleged losses were recoverable in principle, and agreed with BDW that its cause of action accrued on practical completion, not, as URS contended, when the defects were discovered.
In 2022, following the advent of the BSA, s135 of which extended the limitation period to claim under section 1 of the DPA from 6 to 30 years, BDW was permitted to add new claims under (1) Section 1 of the DPA; and (2) the Civil Liability (Contribution) Act 1978 (the “CL(C)A”).
URS appealed both decisions unsuccessfully, and was then granted permission to appeal to the Supreme Court on the basis of certain “assumed facts”.
The Grounds of Appeal
URS’ grounds of appeal were as follows:
(1) As to BDW’s claim in negligence, had BDW suffered actionable damage, or was the damage too remote because it was voluntarily incurred? If the damage was too remote, did BDW already have an accrued cause of action in tort at the time it sold the Developments? (“Ground 1”)
(2) Did s135 of the BSA apply here, and if so, what was its effect? (“Ground 2”)
(3) Did URS owe a duty to BDW under s1 of the DPA, and if so, are BDW’s alleged losses of a type which are recoverable? (“Ground 3”)
(4) Was BDW entitled to bring a claim against URS under s1 of the CL(C)A, notwithstanding that there had been no judgment or settlement between BDW and any third party? (“Ground 4”).
The appeal was heard by seven Justices, who unanimously dismissed it.
Ground 1
As a preliminary point, the Supreme Court explained that BDW’s claim against URS was for pure economic loss ie., compensation for financial loss (because the Blocks has a lower value and required repair), not physical damage. Nevertheless, it was accepted that there was an “assumption of responsibility” by URS to BDW, such that, if URS was in breach of its duty by its negligent design, BDW’s losses would be recoverable.
The issue to be decided here, however, was whether BDW’s losses could be recovered in circumstances where BDW had “voluntarily” repaired the Blocks, it being noted that any claims by the Blocks’ owners would, by that time, have been time-barred.
The Court rejected a principle of voluntariness which established a “bright line” rule of law which would render BDW’s losses too remote. In any event, there were powerful features of the case to suggest that BDW’s actions were not ‘voluntary’ in the true sense of the word. Those included that: (1) if BDW had not repaired the Blocks, there was a risk that they would cause personal injury (or at worst death) to the owners; (2) even though any claims by the owners would have been time barred, that would only provide BDW with a limitation defence, which it was not obliged to take – it did not extinguish the owners’ rights altogether; and (3) BDW would be exposed to reputational damage if it ignored the problems, including the danger to homeowners, once they had been discovered.
On the basis that there was no automatic “voluntariness principle”, the Court declined to consider when the tortious cause of action accrued. As such, the much-maligned decision in Pirelli - in which it was held that limitation in negligence against a designer runs from the date of the damage, not when it was discovered - remains, for now at least, good law.
Ground 2
The question here was whether s135 of the BSA could apply to claims which, although not claims under the DPA, were dependent on the time limits under the DPA e.g., claims by homeowners against a developer, designer or contractor.
In grappling with that question, the Court firstly set out that a key objective of the BSA was “to identify and remediate historic building safety defects as quickly as possible, to protect leaseholders from physical and financial risk and to ensure that those responsible are held to account.” S135 of the BSA, which created a “backward-looking” 30-year limitation period for claims under s1 of the DPA, was written with that objective in mind.
Against that background, the Court found that s135 applied to cases such as the present one. A finding to the contrary would seriously undermine the scheme of s135 of the BSA, and effectively create two contradictory “parallel universes” – one for claims by homeowners against developers, and another for onward claims by developers against the designers or contractors responsible for the defects, each of which would bear different limitation periods. Plainly, the Supreme Court found, that would be an incoherent outcome.
Ground 3
S1 of the DPA imposes a duty on those who “take on work” for in connection with the provision of a dwelling to ensure that the work is done in a professional manner, and that the dwelling is fit for habitation when completed. The duty is owed to the person who commissioned the dwelling, ie., “to the order of any person”, and any person who acquires a legal or equitable interest in the dwelling.
It was common ground that BDW owed the s1 duty on the basis that it took on work. The question raised by Ground 3 was whether BDW could also be owed the s1 duty, because URS took on work to BDW’s order.
Unsurprisingly, the Court held that BDW was owed the s1 duty. As a matter of normal meaning, the words “to the order of any person” did not confine the recipients of the duty to lay purchasers, but were capable of embracing the “first owners” who order work ie., developers. Accordingly, the Court found, “there is no good reason why a person, for example, a developer, cannot be both a provider and person to whom the duty is owed …”.
Ground 4
S1 of the CL(C)A 1978 establishes a right of a person who is liable for damage to seek a contribution from others who are also liable for the same damage. There is a two-year limitation period that applies to such claims, running from the date that the right accrues.
URS asserted that BDW was not entitled to bring a claim for a contribution. That was because, it said, there had been no judgment against BDW, a settlement, or an admission of liability on BDW’s part. BDW, by contrast, contended that the right to claim a contribution under the CL(C)A arose as soon as the damage was suffered.
The correct answer, the Court found, was somewhere in between: when (1) there is damage suffered for which two defendants are each liable; and (2) the first of the defendants “has paid or been ordered or agreed to pay compensation in respect of the damage”. It was at that point, and not before, that the first defendant would be entitled to recover a contribution.
Accordingly, BDW was not prevented from bringing a contribution simply because there was no judgment against it, nor a settlement with any third-party claimants.
Conclusion
Although the Supreme Court stopped short of breaking new ground in some respects (Pirelli, notably, being left for another day), the decision in BDW v URS brings welcome clarification on a number of important issues. Those include, in particular, that claims under s1 of the DPA are not confined to lay purchasers: developers and other construction professionals may be owed precisely the same duties by professionals responsible for design and construction. That the Supreme Court came to that conclusion is unsurprising, and is on all fours with the BSA’s central purpose of holding those responsible for building safety defects accountable.
The corollary is that liabilities under the DPA will be considerably broader in scope. That will inevitably open the floodgates for more claims against construction professionals.
How the insurance market will respond remains to be seen. Watch this space.
Alex Rosenfield is a Partner at Fenchurch Law.
Court pours cold water on insurer’s fraud claims: Malhotra Leisure Ltd v Aviva
Court pours cold water on insurer’s fraud claims: Malhotra Leisure Ltd v Aviva
During the Covid-19 lockdown in July 2020, water escaped from a cold-water storage tank at one of the Claimant’s hotels causing significant damage.
Aviva, the Claimant’s insurer under a property damage and business interruption policy, refused to indemnify the Claimant on the basis that:
1. the escape of water was deliberately and dishonestly induced by the Claimant; and
2. there were associated breaches by the Claimant of a fraud condition in the policy.
The Commercial Court dealt with each of the issues as follows.
Was the escape of water accidental or deliberate?
Aviva bore the burden of proof and had to show that, on a balance of probabilities, the escape of water was the result of an intentional act carried out either by, or at the direction of, the Claimant or its agents.
In considering whether the escape of water was accidental or deliberate, the Deputy Judge, Nigel Cooper KC, held that there was a distinction to be drawn between whether the Claimant’s witnesses were credible, and the question of whether they were sufficiently dishonest that they were prepared to deliberately cause the incident and thereafter lie about their involvement both during the investigation and then throughout the litigation. In reaching that view, he considered the following established principles:
a) if fraud is to be made out, the evidence must exclude any substantial plausible explanation for how the escape of water may have occurred accidentally; and
b) when assessing the evidence, the Court should take into account as probative tools the following factors:
i) whether there is evidence of a plausible financial motive for the Claimant to damage its own property;
ii) the fact that owners of property do not generally destroy their own property and an allegation that they have done so is a serious charge to make;
iii) instances of lesser wrong-doing may not be probative of an allegation that an insured has deliberately destroyed property to defraud insurers; and
iv) in considering where the balance of probabilities lies, it is important to consider the evidence as a whole, putting the available evidence as to the physical cause of the escape of water into the context of the surrounding circumstances and commercial background.
In considering (a) the Judge was satisfied that it was possible, based on the plumbing evidence and the fact that Aviva’s own expert accepted that the escape of water could have been accidental, that the incident was fortuitous.
Evidence of a plausible financial motive
In circumstances where there was no direct evidence as to how the escape of water was caused, the question as to whether there was a financial motive became correspondingly more significant. Aviva submitted that there was a “preponderance of evidence” that the Claimant was struggling financially in the lead up to the incident, and that from March 2020 onwards the Claimant and its wider group had been placed under significant financial pressure as a result of the pandemic. To the contrary, the evidence showed that the Claimant’s group had extensive cash reserves (£7.5 million in cash and £150 million in tangible assets at the time of the incident) with a turnover of £38 million.
The Court held that the cash reserves represented a substantial hurdle to Aviva’s case that the Claimant’s controlling shareholder, Mr Malhotra, had motive to commit fraud to obtain a payment in relation to damage to the hotel. To that end, the Judge pointed out that any payment made would have been diminished in covering the immediate clean-up costs (which had already been incurred by the Claimant) and the costs of repair and refurbishment. There was therefore no evidence of a financial motive sufficient to explain why the Claimant would have caused the incident. In fact, all necessary steps to reinstate the hotel had been taken, without the benefit of an interim payment from Aviva.
The proper approach to the construction of fraud conditions
The Fraud Condition
The policy included a fraud condition, which read:
"If a claim made by You or anyone acting on your behalf is fraudulent or fraudulently exaggerated or supported by a false statement or fraudulent means or fraudulent evidence is provided to support the claim, We may:
(1) refuse to pay the claim”
(the “Fraud Condition”).
In addition to the allegation that the escape of water was deliberately induced by the Claimant, Aviva made various submissions in respect of statements made by the Claimant’s employees and associates to Aviva’s loss adjusters. Those allegations included:
1. That the Claimant’s Estates Manager, Mr. Vadhera, who discovered the escape of water, was not an honest witness and had good reasons to be willing to lie in order to support the Claimant's insurance claim, including that:
a) he had been the Claimant’s Estates Manager since 2019, overseeing 20 members of staff, and was responsible for 20 - 30 properties;
b) there was a close personal relationship between Mr Malhotra and Mr. Vadhera dating back nearly three decades;
c) Mr Vadhera was personally and financially indebted to the Claimant, due to various substantial loans;
d) Mr Vadhera was the sole director of a construction company owned by Mr Malhotra;
e) his testimony was that, upon discovery of the escape of water, he saw the cold water tank overspill, which on Aviva’s case, would not have occurred without the connected tanks also overspilling (when in fact, the Judge found that the tank in question did overspill); and
f) he told loss adjusters that he had apologised to Mr Malhotra for disturbing his birthday on the day of the incident, when in fact it was not Mr Malhotra’s actual birthday (incidentally, it was found that Mr Malhotra was indeed celebrating his 60th birthday on that day).
2. That Atul Malhotra, Mr Malhotra’s son and the sole director of the Claimant, had lied about the whereabouts of the valve that had caused the escape of water (when in fact, he had simply not appreciated what the plumbers had handed him during the cleaning works, it being in a dissembled state and in a plastic bag).
3. That Mr Malhotra lied to loss adjusters about Mr Vadhera finding insulation in the overflow of the cold-water tank (when in fact, the evidence supported that there was indeed insulation in the overflow, there was no benefit to the Claimant in it being Mr Vadhera who discovered it, and in any event who discovered it was immaterial to the claim).
4. That Mr Malhotra told loss adjusters that Mr Vadhera told him of what he had discovered on 12 July 2020, when it must have been 11 July 2020 (which was immaterial to the claim and provided no benefit to the Claimant).
Regardless, Aviva’s position was that the Fraud Condition had been breached such that it was entitled to refuse the claim.
An extension of the common law position
The common law has long prohibited recovery from an insurer where the insured’s claim has been fabricated or dishonestly exaggerated, a principle known as the fraudulent claims rule. In The Aegeon [2002] EWHC 1558 (Comm) Mance LJ extended that rule to apply to ‘collateral lies’ (i.e. fraudulent statements made in support of claims which are otherwise valid) which are material in that they:
a) directly relate to the claim;
b) are intended to improve the assured’s prospects of obtaining a settlement or winning the case; and
c) if believed, are objectively capable of yielding a not insignificant improvement in the insured’s prospects of obtaining a settlement or better settlement.
However, Versloot Dredging BV v HDI Gerling [2017] 1 AC 1 abolished that doctrine, establishing that the fraudulent claims rule does not apply to collateral lies. Giving a dissenting judgment, Lord Mance indicated that he would have upheld the test in The Aegeon, subject to potentially raising the threshold of materiality from a requirement for 'a not insignificant improvement' to the insured's prospects, requiring instead ‘a significant improvement’.
After Versloot, policy provisions purportedly allowing an insurer to reject a claim pursuant to collateral lies go further than the common law position. In Malhotra Leisure, the Judge accepted the Claimant’s submission that - in the absence of very clear words to the contrary - fraud conditions which seek to write in a power to decline claims on the basis of collateral lies should be read as taking effect subject to the limitations of the old common law doctrine, as set out in The Aegeon and modified in Versloot.
The specific wording of the Fraud Condition
The Judge further considered whether, by referring to a 'false' as opposed to 'fraudulent' or 'dishonest' statement in the Fraud Condition, the parties were intending that any false statement, including a statement made carelessly or without knowing it to be untrue, should be enough to entitle Aviva to reject a claim.
In finding that this was not the intention, he referred to the language of the Fraud Condition, which makes clear that it is dealing with fraudulent claims and collateral lies. In other words, the Court held that the Fraud Condition intended to address a situation where there was dishonesty, and did not apply to false statements made carelessly or innocently. Further, the wording of the Fraud Condition required that any false statement support the Claimant’s claim. In other words, it only applied to false statements made to assist in persuading Aviva to pay the claim, consistent with the common law position (both before and after Versloot).
Since there was no evidence of dishonesty on behalf of Mr Malhotra or any of the Claimant’s employees and/or associates, the Judge held that the Fraud Condition had not been breached and the Claimant was entitled to an indemnity in respect of the claim.
Key takeaways for policyholders
The obiter guidance in Malhotra Leisure on the interpretation of fraud conditions in insurance policies provides welcome protection for policyholders and reads as a cautionary tale for insurers. Allegations of dishonesty and fraud cannot be pleaded lightly, and there are professional obligations on insurers to first ensure that reasonably credible evidence exists establishing a prima facie case of fraud.
Following Malhotra Leisure, it is clear that courts will interpret conditions seeking to provide an insurer with the power to decline claims on the basis of collateral lies, subject to limitations of the old common law doctrine. In short, any collateral lie covered by a fraud condition must directly relate to the claim, be intended to improve the insured’s prospects and be capable of yielding a significant improvement in the insured’s prospects of obtaining a settlement or better settlement. Many of the allegations made in this case, including immaterial points such as whether Mr Malhotra was celebrating his birthday, and whether he was told certain facts on one day or the next, were never going to pass that test, and only served to distract from what was an otherwise covered claim.
Citation: Malhotra Leisure Ltd v Aviva Insurance Limited [2025] EWHC 1090 (Comm)
Abiigail Smith is an Associate at Fenchurch Law
