Developments for Developers: Court of Appeal Guidance on Building Safety Act Claims

In a landmark decision providing guidance on limitation issues and application of the Building Safety Act 2022 (“BSA”), the Court of Appeal has held that:

• Developers can recover economic loss from professional consultants responsible for negligent design, despite having sold the buildings prior to discovery of defects;
• Developers that commission construction works may be owed duties under s.1(1)(a) of the Defective Premises Act 1972 (“DPA”), whilst simultaneously owing duties to owners or occupants under s.1(1)(b);
• Extended limitation periods introduced by the BSA apply to ongoing proceedings, as if they had always been in force; and
• Developers can establish contribution claims against professional consultants based on notional liability to property owners for the ‘same damage’, without any formal claims having been commenced against the developers by the owners.

Background

BDW Trading Ltd (“BDW”) as developers engaged URS Corporation Ltd (“URS”) as consulting engineers in relation to various blocks of flats across the UK.  Cracking reported in 2019 in the structural slab of a building designed by URS led to BDW undertaking a review of all related projects, and discovering that Capital East, on the Isle of Dogs, and Freemens Meadow, in Leicester, had been negligently designed.  Whilst no cracking or other physical damage was identified at these developments, the existing structures were found to be dangerously inadequate and residents in part of Capital East were evacuated.

Freemens Meadow had achieved practical completion in 2012 and Capital East in 2008.  By the time that defects came to light, BDW no longer had any proprietary interest in the buildings but decided, as responsible developers, they could not ignore the problem and incurred millions of pounds in costs to carry out investigations, temporary works, evacuation of residents and permanent remedial works.

Proceedings

BDW commenced proceedings against URS in 2020 based on claims in negligence.  Contract claims were outside the standard 6 years limitation period at that time, whilst section 14A Limitation Act 1980 (“LA”) allows the time period for claims in tort to be extended if the claimant only had the necessary knowledge to bring the claim within the last three years (subject to a longstop of 15 years from the date of breach).

URS applied unsuccessfully to strike out BDW’s claims.  This was followed by two related appeals on behalf of URS, against: (1) an Order answering various Preliminary Issues in favour of BDW; and (2) permission granted to BDW in 2022 to amend its pleadings, to rely upon longer limitation periods for DPA claims introduced by s.135 of the BSA.

Substantive Appeal

URS maintained that BDW suffered no actionable damage having sold at full value, and were not liable to carry out remedial works given the limitation defence available to potential claims by purchasers, so the loss fell outside the scope of URS’s duty of care.

Lord Justice Coulson observed that this was a kind of legal ‘black hole’ submission similar to the defendant’s argument in St Martin’s v McAlpine [1994], where the original employer sold its interest even before any breach of contract.  The consequential “formidable, if unmeritorious” argument that the original employer had suffered no loss was ultimately rejected by the House of Lords, confirming that a defects claim does not always require an ownership interest in order for the cost of remedial works to be recoverable.

The Court of Appeal concluded that URS were under a clear duty to protect BDW from the risk of economic loss caused by structural deficiencies, and BDW’s liability to purchasers at the point of sale was not extinguished by any limitation defence – which operates as a procedural bar only (Kajima v Children’s Ark [2023]).  URS’ argument that its duties to BDW were limited by the agreement to provide collateral warranties to individual purchasers was also misconceived, given the advantages of a consolidated claim:

“…there are many practical reasons why the existence of a claim on behalf of the individual purchasers by a major corporate entity like BDW which would cover the whole building and not just individual parts is an important benefit to those purchasers, regardless of the terms of any individual warranties in their favour.  The difficulties that defendants can place in the way of individual claimants in large residential blocks can be seen in Manchikalapati v Zurich [2019]” (paragraph 61).

BDW’s motivation in carrying out the work was irrelevant and URS’ attempt to portray the losses as ‘reputational’ was rejected: “to adopt such a characterisation in relation to damages of this type would be dangerous in the extreme.  It would be contrary to public policy because it might dissuade a builder from rectifying defective work” (paragraph 223).

On the question of when damage was suffered by BDW, in the sense of being worse off as a result of URS’ breach of duty,  the Court of Appeal held that in cases of economic loss arising from inherent design defects that do not cause physical damage, the cause of action accrues at the latest when a building is practically completed (Tozer Kemsley v Jarvis (1983); New Islington v Pollard Thomas & Edwards [2001]), consistent with the House of Lords decision in Murphy v Brentwood [1991] and the limitation period for statutory claims under s.1(5) of the DPA.  URS’ argument that BDW’s claim in negligence did not arise until the defects were discovered was dismissed.

Lord Justice Coulson’s judgment also summarises relevant authorities in relation to defects giving rise to physical damage, in which case the cause of action in tort arises when damage occurs, regardless of the claimant’s knowledge of it (Pirelli v Oscar Faber [1983]).  The Courts of New Zealand and Australia have adopted a different approach, based on accrual of the cause of action when defects become discoverable (Sutherland v Heyman (1985), Invercargill v Hamlin [1996]); whereas English law developed an alternative solution to potential injustice arising from strict application of the primary limitation period, pursuant to section 14A LA (implemented by the Latent Damage Act 1986).

Amendments Appeal

URS claimed that the wrong test had been applied by the Judge at first instance in allowing BDW to amend its pleadings, to include claims under the DPA and Civil Liability (Contribution) Act 1978 (“CLCA”), without determining the disputed points of law as to when BDW’s cause of action accrued.  This was rejected by the Court of Appeal: the arguments raised could not be described as short points of law of the type identified in Easyair v Opal [2009] and there was no question of a relevant limitation period having expired.  The test had correctly been described as one of reasonable arguability, as to whether the amendments had some prospect of success, and the Judge was permitted to exercise discretion in leaving the substantive issues to be decided at trial.

For completeness given the wider implications, Lord Justice Coulson went on to consider the arguments raised in relation to the DPA and CLCA claims.  In particular, URS argued that: (i) the longer limitation periods permitted by the BSA do not apply to parties to ongoing litigation; (ii) developers are not owed duties under the DPA; and (iii) BDW had no legal right to make a claim for contribution when no claim had been made or intimated by any third parties against BDW.  All of these arguments were unsuccessful.

The Court of Appeal confirmed that the BSA, including retrospective limitation periods under section 135, applies equally to parties involved in ongoing litigation, subject to the carve out for any claims settled by agreement or finally determined prior to the new legislation coming into force.  There is no reason why a party who started an action promptly, before the BSA came into force, should be disadvantaged, and ‘Convention rights’ are preserved: “So if, for example, URS could show that, in 2016, they had destroyed some critical documents which might have provided a defence to the claim under the DPA, because they assumed that under the existing law any relevant claims were statute-barred, then they may be able to deploy that fact at trial” (paragraph 170).

As to the scope of duties under the DPA, the relevant provisions are set out in section 1:

“1. Duty to build dwellings properly

(1) A person taking on work for or in connection with the provision of a dwelling (whether the dwelling is provided by the erection or by the conversion or enlargement of a building) owes a duty –

(a) if the dwelling is provided to the order of any person, to that person; and

(b) without prejudice to paragraph (a) above, to every person who acquires an interest (whether legal or equitable) in the dwelling;

to see that the work which he takes on is done in a workmanlike or, as the case may be, professional manner, with proper materials and so that as regards that work the dwelling will be fit for habitation when completed.”

The Court of Appeal held that URS did owe a duty to BDW under s.1(1)(a) of the DPA, based on the ordinary meaning of the language used.  The category of persons to whom a duty is owed under this section must be different to s.1(1)(b), otherwise the sub-section would be otiose, and the Law Commission Report which gave rise to the DPA did not limit those requiring protection to individual purchasers (as opposed to commercial organisations, including developers).  Application of the DPA is not binary: as with a contractual chain, where the main contractor owes duties to his employer, whilst being owed duties by sub-contractors; so a developer owing duties to purchasers can at the same time be owed duties by professional consultants.

A further submission that no duty was owed to BDW under the DPA because URS were providing an entire development was also rejected.  Rendlesham v Barr [2014] establishes that work “in connection with the provision of a dwelling” includes the structure and common parts; and the absence of previous claims by developers under the DPA did not mean that such claims were inherently unlikely (as with statutory inspectors in Herons Court v Heronslea [2019]), given that the DPA “has been significantly under-used in its lifetime so far” and has a higher threshold than claims in contract or tort.  Recoverability of damages under the DPA is not limited by property ownership and BDW’s sale of the buildings was irrelevant.

In relation to the CLCA claim amendment, the Court of Appeal held it was irrelevant that individual property owners had not commenced any formal claims against BDW.  A  crystallised claim from a third party ‘A’ is not required before a party ‘B’ has the right to claim a contribution from another party ‘C’ in respect of the same damage.  B’s right to claim can anticipate the making of a claim by A against B and in circumstances where B’s liability has already been discharged, a notional liability is all that is required.  For purposes of the LA, which provides a 2 year period for CLCA claims to be brought from when the right to claim accrued, the reference to ‘payment’ in section 10(4) could encompass the situation where remedial works were carried out instead.

Conclusion

The outcome is policy driven, encouraging builders and developers to act responsibly in remediating residential property defects.

Parties to existing disputes will be reviewing their pleadings and applying to amend in many cases, to incorporate retrospective DPA claims against parties responsible for sub-standard work.  The trend for greater reliance on the DPA looks set to continue, where claimants can demonstrate substantial inconvenience, discomfort or risks to health & safety of occupants, which could include defective shower trays in some instances given the impact on ability to wash (an example given by the Court of Appeal).

Latent defects policies for new build homes often exclude losses recoverable from third parties and policyholders should consider potential claims against all relevant members of the construction project team.  Similarly, landlords are required under section 133 BSA to take all reasonable steps to obtain monies available through insurance, third party claims or other means, such as Building Safety Fund grants, prior to seeking recovery of remedial costs through service charges.

It remains to be seen if permission will be requested for a further appeal on preliminary issues and whether the case will proceed to final determination on the substantive claims.

URS Corporation Ltd v BDW Trading Ltd [2023] EWCA Civ 

Amy Lacey is a Partner at Fenchurch Law