Collateral warranty claim in the latest cladding decision from the Technology and Construction Court

The judgment in LDC (Portfolio One) Ltd V (1) George Downing Construction Ltd and (2) European Sheeting Ltd (In Liquidation) [2022] joins Martlet v Mulalley [2022] in the line of recent key Technology and Construction Court (TCC) judgments dealing with post-Grenfell fire-safety related claims.

Whilst the judgment initially focused on the approach to trial in the absence of the Second Defendant (who had entered into voluntary liquidation), much of the decision by Ms Veronique Buehrlen KC relating to recoverability of remedial works costs and associated consequential losses will also be of interest to construction professionals and main contractors, as well as their insurers, and as such is the focus of this update.

Background

The proceedings concerned claims brought by the Claimant and freehold owner of the Property (LDC) in relation to re-cladding remedial works to address fire safety and water ingress issues with the external wall construction of three high rise tower blocks, constructed in 2008 and operated by LDC as university halls of residence at Parkway Gate, Manchester. Each block is over 18m in height, and each has a different configuration of external wall cladding, with composite cladding featuring within all three configurations.

The First Defendant (Downing) was the main contractor, and the Second Defendant (ESL) was the specialist external wall subcontractor whose sub-contract scope included cladding and rainscreen works. Downing and ESL were each appointed under a deed using JCT standard form wordings with bespoke amendments. Both contractors had design and build obligations and provided collateral warranties to the employer who subsequently assigned the warranties to LDC.

LDC claimed the cost of temporary remedial works carried out in 2018, plus permanent remedial works and the loss of student rental income during the permanent works. Downing and ESL each commenced contribution proceedings against the other as part of this action.

The position pre-trial

By May 2022, ESL was in Creditor’s Voluntary Liquidation and neither ESL nor the liquidator took part in the proceedings after that time.

In October 2022, a settlement was agreed between LDC and Downing with a payment of £17,650,000 from Downing to LDC. Since ESL would not subsequently consent to judgment being entered against it by both LDC and Downing, a trial was required which took place in November 2022. LDC as claimant and Downing as claimant in the contribution proceedings both had to prove their case and the court had to address ESL’s case in so far as it purported to raise a defence.

The fire safety elements of the design

LDC contended that following investigations into the water ingress issues, it was discovered that there were also fire barrier and fire stopping issues on all elevations.

LDC alleged that ESL was obliged to comply with the requirements of Downing’s contract in relation to its own scope of work, including the terms of the Architectural Specification which expressly included the design of the fire stopping cavity barriers.

In the alternative, LDC argued that that if there was no strict obligation to comply with the Building Regulations, then a contravention of those Regulations was evidence of ESL’s breach of the remaining provisions of the sub-contract as to reasonable skill and care in the design.

Following a detailed review of the contractual provisions, the TCC held that on a proper construction of the sub-contract, ESL was subject to a strict obligation to comply with all Statutory Requirements (as was Downing).  Ms Veronique Buehrlen KC accepted LDC’s case that ESL was in breach of the subcontract conditions, having failed to comply with the terms of the main contract, and more particularly, having failed when designing and/or installing the external walls to comply with ADB[1] and/or the Building Regulations[2].

Assessment and recoverability of remedial works costs

With respect to the costs of the remedial works, Ms Veronique Buehrlen KC cited the principle in Hall v Van Der Heiden [2010]: “the costs actually incurred will always be the starting point for an analysis of what is reasonable (particularly if, as here, they are the costs of work which the claimants carried out on advice) and, if there is no reason to justify a departure from the actual costs incurred, then they will be regarded as reasonable costs to be recovered as damages”.

She followed by addressing how the Court will determine whether a remedial scheme was reasonable and whether the claimant relied on expert advice in deciding to carry out the works. It is clearly pivotal to demonstrate that there is some causal link between incurring expenditure on the advice of the expert and the breach of contract. Reliance on expert evidence will be significant but it will not be enough on its own, in every case, to prove the claimant has acted reasonably[3].

Both the temporary and permanent works were carried out by Downing in reliance upon expert advice and both schemes were challenged by ESL, but ESL failed to (or was not in a position to) put forward alternative schemes that could have been implemented.

The TCC re-emphasised the position with respect to mitigation, referring to Martlet v Mulalley [2022] (reviewed in our Insight here) in that whilst a claimant has a duty to mitigate its loss, “…the Court will not be too critical of his choices if made as a matter of urgency or on incomplete information”.  Based on these facts, the TCC held that the upgrade of part of the cladding system to comply with revised Building Regulations was not betterment as the claimant had “no reasonable choice”.

Each decision will be fact-based. In Sartex Quilts & Textiles Ltd v Endurance Corporate Capital Ltd [2020][4], the Court of Appeal confirmed where a party derives a monetary benefit[5] “as an incidental consequence of adopting a reasonable reinstatement scheme”, a deduction should be made to reflect that benefit. Even so, the burden of proving that damages should be reduced on that basis, and the extent to which they should be reduced, lies with the contract-breaker. In Sartex for example, whilst it was accepted in principle that a deduction could be made for betterment where there had been optional improvements by the claimant, the Court of Appeal held that, in fact, the defendant’s failure to quantify any relevant sum meant that no deduction for betterment could properly be made.  

In relation to ESL’s contention that Downing had failed adequately to mitigate its loss, ESL failed to prove that the remedial scheme undertaken was “unreasonable”, a principle reiterated in the recent TCC decision in St James's Oncology SPC Ltd v Lendlease Construction (Europe) Ltd and another [2022], reviewed in our Insight here.

Another aspect of mitigation/recoverability is that (in this context) the claimant must proceed diligently with remedial works. Here, the TCC accepted that there was a possible delay by LDC in this regard from May 2017 to June 2018. However, significantly, any such delay was not causative in terms of the scope of the remedial works that were required.

The loss of rental income

LDC claimed loss of profit on rental income from student lettings during the permanent remedial works, an amount totalling £4,694,373.

LDC submitted that, given the need to remove the SIPs, students could not remain living in the blocks during the works.  Carrying out the works one block at a time had been considered but discounted for various reasons, which included that the logistics would have been unduly complex and the fact that this would have necessitated disruption payments to students living in the other blocks. Ms Veronique Buehrlen KC accepted LDC’s expert evidence that this option would have had “a bigger impact on rents and reputation”.

TCC Decision

In short, both LDC and Downing succeeded in their claims against ESL. The TCC held that LDC’s total recoverable loss was just over £21 million.  This included the cost of remedial works and loss of income, reflecting virtually the sums claimed; interest and costs were in addition. In turn, Downing was entitled to a full indemnity of the settlement payment plus costs.

As part of its pleaded case, Downing had also made a claim against ESL under the Civil Liability (Contribution) Act 1978. The TCC held that there was no need for Downing to prove this claim, as it had a contractual right to an indemnity from ESL.  Nonetheless, the TCC’s view (obiter) was that in any event, the settlement plainly comprised claims for the same damage as ESL is liable for to LDC[6] - in particular, due to the back-to-back obligations under the sub-contract and the main contract.

Commentary

From the perspective of design and build contractors and construction professionals and their insurers, the risk of further building safety claims is significant, particularly in view of the extended retrospective 30-year limitation period for claims under s1 of the Defective Premises Act 1972 now in place[7].

It is notable in this case that the details of the temporary and permanent remedial works were not challenged substantively (no witness statements or expert reports were submitted by ESL), but sub-contractor insolvency is not an unusual scenario in cladding disputes following the Grenfell tragedy and subsequent enquiries. Whilst this judgment does not comprise new law, it is a clear and instructive application of the relevant principles to a cladding dispute, which will certainly be relied on going forward.