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Building a safer future: the courts’ approach to fire safety cases

The Grenfell tragedy in 2017 has prompted safety investigations in myriad buildings across the UK, with owners and occupiers questioning whether other settings are similarly defective.  Many disputes have arisen, with a handful of cases now determined following trials in the Technology & Construction Court.  Overall the courts have adopted a robust approach to responsibility for cladding defects, rejecting typical defence arguments around scope of duty, causation and assessment of loss.

Recent Judgments

Martlet Homes Ltd v Mulalley & Co. Ltd

In July 2022, the claimant was awarded £8 million in damages to remediate high rise residential blocks in Gosport where a “StoTherm Classic” cladding system, including combustible expanded polystyrene insulation, had been applied to external walls during refurbishment in 2005 - 2008.  This was held to contravene fire safety standards (the specification breach case), and the system had been defectively installed with inadequate fire breaks (the installation breach case).  Costs incurred in removal and replacement of the cladding with a non-combustible alternative could be recovered, together with expenses of a waking watch fire patrol interim measure.

St James’s Oncology SPC Ltd v Lendlease Construction (Europe) Ltd & another

In October 2022, a company set up by Leeds Teaching Hospitals NHS Trust to deliver a new oncology centre was successful in its £5 million claim against Lendlease, based on fire safety and electrical engineering defects to an internal plant room.  The defendants’ argument that derogation from applicable standards had been approved by all parties in a revised fire strategy document was rejected, given the overriding contract obligations: “Lendlease was at all times responsible for the design of the Works and for achieving compliance with the requirements of the D&B Contract, irrespective of any review, approval or comments made by Project Co and/or the Trust.  This seems … to render the question of approval otiose”.

LDC (Portfolio One) Ltd v George Downing Construction Ltd & European Sheeting Ltd

In December 2022, the owner of student accommodation blocks in Manchester secured judgment in excess of £21 million for remedial works and lost rental income, against a specialist sub-contractor responsible for inadequate fire stopping/barriers, and composite cladding defects which led to substantial water ingress.  The claimant and first defendant agreed to settle the claims between them for c. £17 million shortly before trial; the second defendant was insolvent and unrepresented at the hearing, which proceeded in any event as the liquidator could not consent to judgment being entered.

Performance Standards

The defendant contractors were in each case appointed pursuant to JCT Design and Build Contracts, with terms including an unqualified design and specification duty, obligation to comply with statutory requirements, and duty to exercise reasonable skill and care.

The judgments include discussion on performance standards and reaffirm the MT Hojgaard [2017] UKSC 59 principle, that - if there are two clauses imposing different or inconsistent design requirements, the courts are likely to interpret the less demanding clause as a minimum obligation, since treating it as qualifying the other clause gives a meaning which effectively renders the more demanding provision redundant.  

The St James’s Oncology and LDC (Portfolio One) cases illustrate how bespoke amendments to standard form contracts may be used to improve prospects for recovery down the contractual chain, through “back to back” requirements for sub-contractors to indemnify the employer against liability arising under the main contract as a result of sub-contract breaches, and acknowledging that associated losses are within the parties' contemplation.

Building Regulations

The analysis of statutory requirements is particularly illuminating, in view of ubiquitous disputes over interpretation of relevant provisions now acknowledged by the government to have been “faulty and ambiguous”.

In Martlet v Mulalley, the judge concluded that Approved Document B (“ADB”), Fire Safety, 2000 edition (with 2002 amendments) does not mean that whatever was not expressly prohibited was permitted and acceptable; and ADB, 2006 edition, marked a significant change in guidance from the earlier regime, with only materials of limited combustibility to be used as external wall insulation in buildings over 18 metres.

Further, the Building Regulations 2000, Schedule 1, B(4)1 requirement for external walls to “adequately” resist the spread of fire, having regard to a building’s height, use and position, turned on whether the contractor had followed guidance in BRE 135 (2003), which recommended that combustible cladding should not be used on high rise residential blocks unless it met the Annex A performance standard in accordance with the test method set by British Standard 8414-1.  It was not sufficient to “blindly” rely on a British Board of Agrement (BBA) certificate for the cladding system.

Negligence

The selection and use of a cladding system with combustible EPS insulation in Martlet v Mulalley was in breach of the contractor’s obligation to exercise the degree of skill and care in its design of the work as would an architect or other professional designer.

In reaching this decision, the judge rejected defence arguments to the effect that they cannot have been negligent because everyone else was making the same mistakes.  On a proper application of the Bolam principle, there must be “evidence of a responsible body of opinion that has identified and considered the relevant risks or events and which can demonstrate a logical and rational basis for the course of conduct or advice that is under scrutiny”.  A defendant is not exonerated simply by proving that others were equally negligent (199 Knightsbridge Development Ltd v WSP UK Ltd [2014]).

Negligent design in relation to cladding works means that professional indemnity policies are likely to be triggered, and exclusions for contractual liabilities won’t usually apply.

Failure to comply with building regulations may be strong evidence of breach of a designer’s duty to exercise reasonable skill and care, in the absence of an express clause requiring adherence to statutory requirements, as discussed in LDC (Portfolio One).

Causation

Another defence commonly raised in cladding disputes is that enhanced fire safety standards implemented after completion of the contract works, and/or the changed regulatory perspective post-Grenfell, are the true cause of remedial action undertaken or proposed.  This was rejected in Martlet v Mulalley, with the judge suggesting that an “effective cause” test would be more appropriate to a “but for” standard in this case, to avoid the claimant being left without a remedy.

Had the building owner succeeded only on the installation breach, it could have recovered the cost of repairing defects but not those of replacing the cladding.  Both the installation and specification breach cases were upheld on the facts, so the owner was entitled to recover replacement costs.

Remedial Costs

In St James’s Oncology, the defendants’ argument that there was no intention to carry out remedial works was dismissed.  The court is not normally concerned with how the claimant will use any damages awarded, providing the loss can be established, although intention may be relevant to the reasonableness of reinstatement and thereby the extent of loss.  It was legitimate (and prudent) for the claimant to take account of commercial considerations and await conclusion of the proceedings before commencing planned remediation, given the defendants’ complete denial of liability until shortly before trial.

Remedial works to the Gosport towers were already complete when Martlet v Mulalley reached trial.  Costs incurred are the starting point for what is reasonable in such cases, especially if works are carried out based on expert advice.  The claimant has a duty to mitigate loss, “but the court will not be too critical of choices made as a matter of urgency or on incomplete information”.  It is not sufficient that defects could have been rectified more cheaply; the defendant must prove the remedial scheme was unreasonable.

Further, the costs of temporary measures such as waking watch patrols are likely to be recoverable.  The judge in Martlet v Mulalley dismissed the suggestion that this aspect of the claim was too remote, saying that any lack of awareness of the potential need for such interim protections in the context of combustible cladding was more reflective of a “culture of endemic complacency” than any reasoned assessment.

Where works of repair or reinstatement result in the claimant having a better or newer building than it would otherwise have had, a deduction for "betterment" will not usually be made if the claimant has no reasonable choice (Harbutt’s Plasticine v Wayne Tank [1970]).  This includes betterment resulting from compliance with legislation introduced since the original works were carried out, imposing additional or enhanced standards.

Looking Ahead

The emerging direction of travel underlines the difficulty for designers (and insurers) in defending these types of claims.

The Building Safety Act 2022 provides further impetus on cladding disputes, introducing new causes of action for defective works and construction products, subject to a maximum 30 years’ retrospective limitation period.  The Grenfell Inquiry phase 2 report is due for publication later this year, with Sir Martin Moore Bick’s findings expected to significantly impact upon the liability landscape, and potential manufacturer claims in particular.

Owners will look to progress claims swiftly in light of insolvency risks, with expert technical and quantum evidence crucial in justifying schemes of remedial work.  Construction professionals with cladding exposures will be keen to extricate themselves through commercial settlements, whilst pursuing possible recoveries.  Moving forward, contractors should endeavour to agree supply chains on back to back terms with their main contract, to limit exposures and improve prospects in the event of breach.

The courts’ focus on ensuring that buildings are made safe and compliant with current statutory requirements is closely aligned with public policy.  Further developments in this area, including jurisprudence around Building Liability Orders and s.38 of the Building Act 1984, for example, are eagerly anticipated.

Authors:

Amy Lacey is a Partner at Fenchurch Law

Grace Williams is an Associate at Fenchurch Law

by Fenchurch Law

(New Home) Buyer Beware

Recent case law highlights the importance of adequate insurance cover for buyers of new homes, to remediate any latent defects identified post-completion, whilst the Building Safety Act 2022 implements significant changes to the new build warranty landscape.

In Griffiths and another v Gilbert [2022] EWHC 3122 (TCC) (6 December 2022), HHJ Sarah Watson (Principal Judge of the Technology and Construction Court in Birmingham) dismissed allegations that a director of the building contractor responsible for construction of the claimants’ property had fraudulently misrepresented that £2 million worth of NHBC cover would be obtained, covering the full build cost, rather than the standard £1 million limit for defects claims under the NHBC Buildmark policy.

After practical completion, a dispute arose concerning building defects and contamination of surrounding land.  The claimants referred matters to the NHBC's dispute resolution service but subsequently withdrew from the process, unhappy with the initial response.  Court proceedings alleging personal liability for fraudulent misrepresentation were commenced in 2014 and then stayed, pending the outcome of an arbitration pursued by the claimants against the contractor.  In 2018 the arbitrator awarded substantial damages and costs to the claimants, which the contractor was unable to meet, and it went into insolvent liquidation.  The claimants successfully recovered £1 million under the NHBC warranty, and court proceedings against the director were revived seeking recovery of outstanding losses.

The Judge held that elements of the tort of deceit were not made out in this case and the fraudulent misrepresentation claim failed.  The director had confirmed the property would be built to NHBC standards and a Buildmark warranty would be obtained, but premium figures in the contract costings were estimates not representations.  It was inherently unlikely the contractor would fraudulently represent the situation to save a small fee on a £2 million contract, knowing this would come to light when the NHBC certificate was provided.  Further, NHBC was advised of the sale price at the outset with no question of “underinsurance”, analogous to standard property policies, where claims might be reduced if a building was insured for less than full reinstatement costs.

The judgment illustrates the limitations of new home warranties and how parties can extend the scope of cover for a price.  In 2011, NHBC had offered to increase the cover to £2 million for an additional fee of approximately £4,500 but that proposal was not accepted by the claimants.

The importance of sufficient protection for buyers of new homes is also reflected in legislative changes under section 144 of the Building Safety Act.  These provisions impose legal requirements on developers to provide new build warranties with a term of at least 15 years (increased from the usual 10 years period applicable previously), in line with the new prospective limitation period for claims under the Defective Premises Act 1972.  Regulations are anticipated in 2023 imposing additional requirements on the kinds of defects covered, minimum policy limits, period during which the developer remains responsible, and financial penalties for non-compliance, following further industry consultation.  Mandatory parameters of coverage should increase transparency for all concerned, helping to minimise the prospect of disputes.

Amy Lacey is a Partner at Fenchurch Law

by Amy Lacey

Co-Insurance, it’s a bit of a scrum

The Rugby Football Union v Clark Smith Partnership Limited & FM Conway Limited [2022] EWHC 956 (TCC)

This recent High Court decision once again shines a light on the tricky issue of co-insurance under project CAR policies, in particular the difficulties faced by contractors of all levels when trying to demonstrate the extent of cover in the face of a subrogated claim from project insurers.

It’s the most noteworthy judgment on the issues since Haberdashers’ Aske’s Federation Trust in 2018 (which, as we’ve stated previously, is a bad decision for policyholders), and is a helpful refresh of the issues, if only to remind parties to construction projects to ensure that the contractual arrangements for any project accurately reflect the intention and authority of the party obtaining insurance cover for others.

Background

The Rugby Football Union (“RFU”) was undertaking significant works at Twickenham in 2012 in order to prepare for the 2015 Rugby World Cup. It engaged Clark Smith Partnership Limited (“Clark Smith”) to design buried ductwork which was to contain power cables, and FM Conway Limited (“Conway”) to install it. RFU and Conway contracted on the basis of a JCT Standard Building Contract without Quantities 2011 (“the JCT”), some of which (but importantly not all) was the subject of agreed amendments.

RFU asserted that the ductwork was defective which caused damage to the cables as they were pulled through (by a third party), which resulted in replacement costs of £3,334,405.26, for which it was indemnified by the project insurers, Royal & Sun Alliance Plc (“RSA”).

The project policy contained a DE3 standard form defects exclusion, which meant that the cost of addressing the defective ductwork was excluded, but the remedial cost of the consequential damage to the cables was covered.

RSA sought to recover those sums from Conway (and Clark Smith) in a subrogated recovery action on the basis that the damage had been caused by its defective workmanship. In response, Conway issued Part 8 proceedings seeking a declaration that it was a co-insured under the project policy and that it had the benefit of cover to the same extent as RFU (as principal insured), which prevented RSA from bringing the subrogated claim against it.

Issues

In relation to the claim brought by RSA (in relation to which it stood in RFU’s shoes), Mr Justice Eyre was asked to consider whether the sums paid by RSA to RFU were irrecoverable because RSA could not exercise subrogation rights and/ or on a proper analysis of the project policy and/ or the contract documents that RFU and/ or RSA were not entitled to claim the insured losses.

The judgment contains a very useful summary of the law regarding co-insurance to date, including the basis on which subrogated claims between parties to an insurance policy can be barred by reason of circuity of action (Co-operative Retail Services Ltd [2002] UKHL 17) and the basis on which one insured may obtain cover for another (Gard Marine & Energy Ltd [2017] UKSC 35).  However, the key aspect here was not the existence of cover in the first place, but the extent of that cover for a co-insured.

The specific consideration here was whether Conway had the benefit of the full cover under the project policy, which provided cover for damage to other property insured caused by Conway’s defective works, or whether its cover was restricted to damage caused by Specified Perils as provided for by the unamended part of the JCT.

Mr Justice Eyre was at pains to stress (guided by the above authorities, but also National Oilwell (UK) Ltd [1993] 2 Lloyd’s Rep 582) that the contract is key when determining the intention and authority of the principal insured when securing cover, stating:

“74. What is important is that the authorities are clear that in order to determine whether the insurance cover which a policy effected by, in my example, the employer or contractor applies to the contractor or sub-contractor and if to what extent (with the latter point determining the extent to which they are co-insured) it is necessary to look to the terms of the contract between those parties. It is those terms which provide the key to the existence and extent of the insurance cover.”

“88. …  when a person becomes a party as a consequence of the actions of another person then the terms of the contract between the insured party and that other govern the extent of the insurance”

In relation to the intention and authority of RFU, Mr Justice Eyre found (despite witness evidence to the contrary relied on by Conway, that the insurance obtained by RFU was intended to be more extensive than envisaged by the JCT), that the contract documents read together (including the JCT) did not demonstrate an intention for the project policy to create a fund which would be the sole remedy for loss suffered by RFU as a consequence of a breach by Conway.

Whilst Conway was an insured under the project policy, the extent of that cover was that as envisaged in the JCT and no wider, such that it was not a co-insured in relation to the damage for which RSA had indemnified RFU. He went on to find (again consistent with National Oilwell) that the waiver of subrogation clause in the policy only related to the matters for which Conway had cover under the policy, and so didn’t prevent a claim by RSA.

Comment

This judgment doesn’t alter the previous state of the law in this area, but is a salutary reminder to make sure that the contractual documents are in line with the expectations of the parties.

Mr Justice Eyre indicated that “compelling evidence to counter the inferences from the natural reading” of the JCT may have altered the result (which is in line with the “other admissible material” referred to in National Oilwell), but that evidence was not present here. Rather, the judge found it “surprising” that the JCT was subject to amendment elsewhere, but not in relation to the insurance for the works. If the parties had intended the extent of cover to be different from that envisaged by the unamended JCT, then presumably it would have been simple enough to reflect that in an amended version of the JCT. The absence of those amendments seems to have been an important consideration in relation to the parties’ intentions.

If there’s an intention for members of the project team to have a benefit under any project policy, it is vital that the underlying contractual documents accurately reflect the full extent of the principal insured’s intention and authority in that regard.

Rob Goodship is a Senior Associate at Fenchurch Law

by Rob Goodship