It has been (and, indeed, still is) common practice for developers to set up “special purpose vehicles” to carry out developments which were subsequently wound up following completion, thereby allowing their parent companies to avoid long-term liability for any defective works in the development. Amongst the changes under the Building Safety Act 2022 (“BSA”) was the introduction of building liability orders[1] (“BLOs”) aimed at restricting the benefits of this common practice. In short, as Huw Wilkins explains. BLOs effectively enable the High Court to “pierce the corporate veil”. However, the High Court can only make such an order if it considers it “just and equitable” to do so, although the BSA does not provide any guidance as to the application of that test.
A company is treated as a separate legal entity which is the sole beneficiary of credit it is owed, and is solely responsible for its liabilities. As a general principle, shareholders, directors and employees cannot be bound by the rights and duties of a company. This has traditionally been referred to as the “corporate veil” separating the legal entity and its shareholders, directors and employees. In common law, the corporate veil can only be “pierced”[2] in very limited circumstances.
The provision of the BSA introducing BLOs came into force in June 2022. Almost two years later, in 2024, we have seen the first two relevant judgments. Willmott Dixon Construction Limited v Prater & Ors[3] addresses when a party can apply for a building liability order. The second judgment, Triathlon Homes LLP v Stratford Village Development Partnership & Ors,[4] whilst not in respect of building liability orders directly, provides some guidance on the “just and equitable” test.
When can a party apply for a BLO?
In Prater, the main contractor (Willmott Dixon Construction Limited, which has settled a claim by the building owner) is claiming over £46 million from a number of defendants.[5] One of those defendants (Aecom) alleged that after the claim against Prater had been intimated, two of its co-defendants (Prater and its parent company, Lindner Exteriors Holding Limited) divested themselves of their assets, transferring them to three other companies within the same group of companies – Aecom’s concern being that if those companies couldn’t satisfy their share of any judgment, then Aecom would have to make up at least some of the shortfall. Aecom, therefore, made an additional claim for a BLO against those companies (the “BLO Claim”).[6]
The Lindner Companies applied for a stay of the BLO Claim, on the basis that it is wholly contingent on findings of liability in the main proceedings, and that if Prater or Lindner were to pay the amount of any relevant judgment against them, the need for a BLO would never arise. They argued that the BLO Claim should be heard separately, if it ever needed to be heard, after judgment in the main claim (which we expect to be sometime in 2025).
The Court held that the BLO claim should be heard at the same time as the main claim.
- The Court stated that, as a matter of principle, the legislation did not require a party against whom a BLO is sought to be made a party to or to participate in the main proceedings. But, where a BLO is contemplated, it would be sensible and efficient for the company against whom the BLO is being sought to be made a party to the main proceedings and for that application to be heard together with the main claim. Any difficulties with ensuring that the additional defendants to the BLO Claim were afforded a proper and cost-effective chance to deal with it could normally be dealt with by sensible trial management (although the judgment doesn’t say what that might entail).
- The judge would not need to determine the application for a BLO as part of the main proceedings; a further hearing could be directed to deal with that application.
- The legalisation assumes that the associated company will not be able to challenge a finding establishing liability of the original entity. But, by having the associated company as a party to proceedings avoids it subsequently arguing that the circumstances in which the liability of the original company was established mean that it is not “just and equitable” to make a BLO.
The Prater decision addressed the logistics of when an application for a BLO could be made – that is all that was asked of the Court at the time. The judgment does not deal with the question of what is “just and equitable”.
The “just and equitable” test
The only case to date that has considered the “just and equitable” test under the BSA is Triathlon Homes. Although it deals with the test in the context of an application for a remediation contribution order (“RCO”), under s.124 of the BSA, it does cast some light on how the materially identical test in respect of BLOs might be applied.
Triathlon Homes concerned five residential buildings in Stratford, East London. The Applicant sought reimbursement of costs incurred remediating the five blocks of flats. It was heard by the First Tier Tribunal (“FTT”).
In deciding what was “just and equitable”, the FTT identified that it was necessary to “distinguish the relevant from the irrelevant” and that whether it is just and equitable to make a Remediation Contribution Order must be considered having regard to the purpose of the relevant sections of the BSA. It then identified certain factors which it took into account as well as others that it disregarded or gave little weight to.[7]
Relevant factors in deciding whether to award a Remediation Contribution Order
- Remediation Contribution Orders are a new and independent remedy which is, essentially, non-fault based.
- The policy of the BSA is that primary responsibility for the cost of remediation should fall on the original developer, and that others who have a liability to contribute may pass on the costs they incur to the developer.
- In circumstances where the developer would be unable to comply with a Remediation Contribution Order in any significant sum without the financial support of a parent company, it would be just and equitable to make an order against the parent too.
Factors to be disregarded (or to which little weight was given) in deciding whether to award a Remediation Contribution Order
- The applicant’s motivation in bringing an application, their identity or the basis of their eligibility to make the application were not relevant considerations.
- The availability to the applicant of other claims, or potential claims, should not disqualify it from making a claim for a remediation contribution order.
- No weight should be given to the changing identity of the ultimate beneficial owners. That the current owners of the freehold interest had no role in its initial development, and acquired their interest only following completion, was irrelevant because they each “willingly assumed the risks associated with their investment”.
- It would be an unusual case in which the source or extent of a respondent’s assets or liabilities would carry much weight.
- The ability (or not) of a party to pass on liability to some other party who may be responsible (e.g. its supply chain) is not a matter to which much weight should be given.
Where do these cases leave us?
Prater has clarified certain procedural questions regarding BLOs. They are not a remedy available only to claimants – a defendant can also make an application for a BLO against a co-defendant. Furthermore, a party wishing to apply for a BLO need not wait until the conclusion of the “main claim”. However, it did not deal with the substantive issue of whether it was “just and equitable” to award a BLO in that case. We will need to wait until 2025 before that issue is heard (on the assumption that this matter doesn’t settle before trial).
The only guidance we have on that issue at present comes from Triathlon Homes – a case dealing with Remediation Contribution Orders, rather than BLOs – and a judgment (from the FTT) that is not binding. Nevertheless, the guidance will give encouragement to those considering an application for a BLO – particularly for a party considering an application against the parent (or other group company) associated with the original developer, because of the emphasis the FTT placed on attaching liability to the original developer and any parent of that developer.
In terms of guidance as to the application of BLOs against main contractors, or members of their supply chain, the application of the guidance from Triathlon Homes is less clear and we await the first judgment from the Court.
[1] See section 130 of the Building Safety Act 2022.
[2] i.e. setting aside the company’s limited liability to hold its shareholders or directors personally liable for the company’s actions or debts.
[3] [2024] EWHC 1190 (TCC)
[4] [2024] UKFTT 26 (PC)
[5] We understand the case is listed for trial in the first quarter of 2025, in what will be one of the most eagerly anticipated judgments of 2025.
[6] The expectation was that BLOs were introduced to assist claimants (especially leaseholders) pursuing claims against developers. However, Aecom was the building services engineer, whilst Prater was the specialist D&B envelope subcontractor. They were co-defendants.
[7] See in particular paragraphs 236-291.
