Feeling the force: the impact of the BSA on downstream claims
by Lucinda Robinson, Partner
The Government’s post-Grenfell mission to affect root and branch reform of the regulation of buildings, particularly high-risk buildings, has resulted in the Building Safety Act 2022 (“BSA”). The underlying purposes being to ensure that:
- safety is paramount when designing, constructing, and maintaining buildings; and
- those who have developed and worked on the defective buildings foot the bill for their repair, instead of the leaseholders or taxpayers.
Everyone is talking about what the BSA says – the specific words and the mechanics of the new safety regime – but as Lucinda Robinson discusses further, the long arm of this law extends even further than that to achieve these purposes.
One of the best illustrations of the long arm of the law is the Developer Remediation Contract (“DRC”), which has been facilitated by the BSA. The name tells us the DRC is directed at developers, but it also increases the risk of claims against others in the supply chain as explained below. Furthermore, recent cases decided when the BSA was on the horizon, or just in force, reveal that the environment in which those claims will be tried may be harsher than before. The key three cases, and their ramifications for the supply chain in light of the DRC, are considered below.
The Developer Remediation Contract
The Government can now establish “building industry schemes” to secure the safety of people in or about, and deal with risks arising from or improve the standard of buildings (BSA, s.126). Each scheme will be set up by regulations covering membership criteria. Eligible organisations who decide not to join will be blocked from developing land or proceeding with existing developments.
The Responsible Actors Scheme, targeting developers, is the first scheme out of the blocks. Broadly, developers are eligible if they meet profit thresholds and developed or refurbished qualifying residential buildings. Members must sign the DRC, obligingthem to:
- identify any residential buildings 11 metres or higher that they developed or refurbished over the 30 years before the BSA and known to have life-critical fire safety defects;
- remediate any identified defects, fund their remediation, or reimburse the government schemes for taxpayer-funded remediation; and
- keep building owners, residents and the Department for Levelling Up, Housing and Communities updated on progress.
Eligible developers choosing not to participate will be blocked from developing land. In effect, they will be taken out of the market. It is a strong incentive to sign up and many major developers have joined the scheme.
The story will not end there. The DRC’s terms expressly permit the developers to pursue claims against their supply chain to recover the costs of the remediation works. It is likely they will take that opportunity increasing the volume of claims against contractors, subcontractors, and professionals. For ease, the passages below refer to contractors, but the principles apply to all members of the supply chain.
Claims against the supply chain
There is an important difference between the position of developer under the DRC and a contractor in an ensuing claim. Developers must act regardless of whether they had been negligent or breached any contract or duty. The same is not true for contractors who can defend themselves on grounds they did not breach a duty or cause loss, at least to the extent claimed.
Contractors may take some comfort from this. However, the following three cases, decided with the BSA either on the horizon or in force, demonstrate a commitment from the courts to support the purpose behind the BSA and apply its provisions robustly. This means the landscape in which those claims will be tried may be more hostile towards defendants than they may have hoped.
Martlet Homes Ltd v Mullaley & Co Ltd [2022] EWHC 1813 (TCC)
The developer, Martlet, replaced the cladding systems on five tower blocks and claimed the costs from its contractor, Mullaley. Martlet argued replacement was necessary because the cladding contained combustible insulation in breach of specification and because there were defects in the installation of both the insulation and fire breaks. Mullaley denied liability.
In its decision, the court found against Mullaley on a number of arguments commonly deployed in defence of contractors in defect claims.
1. Causation
Contractors also often argue that the breach alleged against them did not cause the loss. Here, for example, Mullaley argued that the real reason Martlet replaced the cladding was the “changed fire-safety landscape” post-Grenfell.
In contractual claims, the alleged cause must be the “effective” cause of the loss; i.e., in practical terms, the most impactful. The court decided that Mullaley’s breaches were an effective cause of the loss. That begs the question: if there is more than one cause, how “effective” must the contractor’s breach be in order to be legally responsible? In the context of fire safety, where the overriding concern is that buildings should be made safe and where the mantra is that polluters should pay, whilst the contractor’s cause needs to be effective, it may not need to be the only or even the most effective one to carry responsibility for the loss.
2. Repair or replacement
When defending quantum, contractors typically argue (as Mullaley did) that the defective works should have been repaired rather than replaced because it would have saved costs. Here, the court upheld Martlet’s decision to replace the cladding system. Whilst the installation defects could have been repaired, the failure to comply with the specification justified full replacement.
3. Assessing loss
Quantum is usually the last line of a defendant contractor’s defence. If it cannot defeat allegations of breach and causation, then all it can do is challenge the numbers.
Mullaley argued the loss claimed was unreasonable, but Martlet was largely given the benefit of the doubt. The court determined that “reasonable” does not equate to adopting the cheapest option. Claimants seeking to do the right thing by remediating buildings to keep people safe, particularly when those works were necessitated by another party’s breach of duty/contract or when the claimant is working with incomplete information and has taken expert advice, will not be criticised. It is becoming harder for defendant contractors to challenge quantum for being unreasonable.
Taking all of this together, in its first opportunity to set the tone for fire safety cases, the court indicated the new environment would be difficult for defendants.
LDC (Portfolio One) Ltd v (1) George Downing Construction Ltd; (2) European Sheeting Ltd (in liquidation) [2022] EWHC 3356 (TCC)
This second case reiterated the same messages.
LDC developed three tall tower blocks of student accommodation. Under the main contract, the contractor, Downing, had committed to comply with “all Statutory Requirements”. ESL, the specialist cladding subcontractor, agreed not to put Downing in breach of the main contract and backed this up with an indemnity.
Later, LDC claimed £21 million of loss from Downing, arising from replacing the cladding and fixing other defects in the external walls. Two weeks before trial, LDC and Downing settled at circa £17.7 million. Downing then sought to rely on the indemnity to recover the settlement sum and its own costs from ESL.
ESL argued that it was only subject to a reasonable skill and care obligation, and that the remedial works were unreasonable and/or constituted betterment to LDC. The court disagreed on all fronts, finding:
- ESL was obliged to comply with the main contract so, like Downing, had a strict obligation to comply with the Building Regulations. Diluting this obligation with a reasonable skill and care qualification would defeat the intention to create back-to-back contracts.
- When assessing reasonableness of remedial works costs, the starting point is the sum actually incurred. If the claimant acted urgently on incomplete information whilst following expert advice, it will not be penalised. The defendant cannot just point to a cheaper scheme; it must show that the claimant’s scheme was unreasonable, considering cost and use.
- A deduction for betterment will not usually be made where the claimant has no choice but to repair or reinstate to a higher standard because regulations have changed.
- When considering if a settlement is reasonable, the court will consider if it “was, in all the circumstances, within the range of settlements which reasonable people in the position of the settling party might have made”. Here, the settlement between LDC and Downing was reasonable and could be passed on to ESL because it reflected the experts’ views on the costs of remedial works, was agreed following legal advice, and avoided costs of a trial.
ESL, being in liquidation, was not represented at the trial, but, even if it was, the judgment may have been the same given how consistent it is with Martlet v Mulalley and the new building safety culture. The overriding impression is that those responsible for building safety defects will be held to account.
URS Corporation Ltd v BDW Trading Ltd [2023] EWCA Civ 772
The first case to grapple with BSA claims has continued the trend.
BDW developed two residential tower block developments: one in London which completed by February 2008 and was sold by December 2008, and one in Leicester which completed by October 2012 and was sold by May 2015.
Post-Grenfell, in 2019, BDW inspected both towers and identified structural defects endangering safety even though there was no physical damage. Despite no longer having any proprietary interest in the towers or facing any legal claims, BDW spent millions of pounds evacuating tenants and remediating the towers. Then, in March 2020, it brought a professional negligence claim against the structural engineer, URS, to recover its loss.
When the BSA came into force in April/June 2022, it extended limitation periods for claims under the Defective Premises Act 1972 (“DPA”). BDW took advantage of this and sought to amend its Particulars of Claim to add in claims under the DPA (previously limitation barred) and the Contribution Act 1978 (“CA”). The Court of Appeal upheld the first instance decision allowing the amendments, making the following points.
1. The BSA did apply.
URS argued that the BSA did not apply to existing claims, so the DPA claim remained time barred, and the amendment should not be permitted. The Court of Appeal disagreed, relying on the wording of s.135(3) of the BSA which says the amendment to the DPA to extend limitation periods should be treated as always having been in force. The only exception, provided for in section 135(6), was for claims already settled or decided before the BSA took effect. The exception did not cover ongoing claims, so the BSA applied and BDW’s amendments were allowed.
2. The tortious duty of care was not time barred.
URS owed BDW a duty of care to protect against structural defects needing remediation. Not, as URS had argued, to protect BDW from claims by purchasers, the risk of which had passed once the towers were sold. Consequently, the risk that materialised was within URS’s duty of care.
The cause of action accrued, at the latest, on practical completion of the building works when the defective design had been built into the structure. Not later when defects were discovered in 2019. URS had argued for the later date when BDW no longer owned the properties, because URS said that, if BDW had no interest in the properties, it could not bring a DPA claim.
3. The duty under the DPA can be owed by and to developers.
Under the DPA, a person taking on work in connection with the provision of a dwelling owes a duty to carry out those works in a workmanlike or professional manner, so that, on completion, the dwelling is fit for purpose. This duty is owed to those with a legal or equitable interest in the dwelling, e.g., individual tenants (s.1(1)(b)) and also to those to whose order the work is carried out (s.1(1)(a)), which must include developers.
4. Contribution claims are not dependent on the third-party claims being made.
URS argued that there could be no contribution claim because no claims had been made by third parties. The Court of Appeal disagreed. The wording in the CA does not make a contribution claim conditional on a claim being established in fact first. The reference in s.1(6) is to “liability which has been or could be established”. Even though none of the leaseholders had initiated a claim against BDW, they could have done and so BDW was entitled to claim a contribution.
In rejecting all URS’s efforts to avoid BDW’s amendments, the court delivered a clear message that the BSA and its repercussions for the DPA and CA will be applied, and those responsible for defects must face the music. The judgment provides better news for developers signed up to the DRC, as it provides reassurance that they can rely on the BSA, DPA and CA to bring claims against their supply chains.
Conclusion
Faced with developers looking to recoup their losses for remediating buildings, legislation that gives them huge scope to do so and courts ready to enforce the legislation and the purpose behind it, what can defendants do?
1. Understand their exposure by conducting an audit of their projects dating back over the last 30 years to consider where there may be risk, if there is any insurance cover and whether any relevant documents are available and personnel still contactable.
2. Set up processes for managing claims received, so they are funnelled to the right people to respond, insurers are notified, and other potential defendants are identified.
3. Rely on the BSA, DPA and CA themselves to bring contribution claims against their own supply chains, to either pass on or share liability with others. There may be multiple parties whose actions or inactions contributed to fire safety defects, from specialist cladding contractors to architects and fire engineers.
4. Continue to run the usual defendant arguments concerning causation and loss, where the evidence allows, but recognise that the evidential hurdles may be more difficult in practice based on these recent judicial findings.
Fundamentally, those who are responsible for building safety defects will feel the full force of the BSA, whether through the terms of the DRC or through the additional routes to claim over longer periods of time that the BSA affords, and which are becoming increasingly difficult to defend. There is a strong incentive for them to get it right next time.