In December 2022, the Technology and Construction Court handed down its decision in LDC (Portfolio One) Limited v (1) George Downing Construction Ltd and (2) European Sheeting Ltd [2022] EWHC 3356 (TCC), which is only the second substantive decision of the Court concerning cladding defects post-Grenfell after Mulalley & Co Ltd v Martlet Homes Ltd [2022] EWCA 1813 (TCC).

The facts

The claimant was LDC (Portfolio One) Limited (“LDC”). LDC is the freehold owner of three high rise blocks, constructed between 2007 and 2009 and over 18 metres high, with a mixture of types of cladding:

• Tower 1: mixture of Cor-ten steel cladding and a composite cladding material. 
• Tower 2: mixture of composite cladding and glazed panels.
• Tower 3: composite cladding on all elevations. 

The first defendant was George Downing Construction Limited (“Downing”), which was the main contractor. The second defendant was European Sheeting Limited (“ESL”), which was in liquidation, and was the specialist external wall sub-contractor with responsibility for the installation of the cladding. 

Due to various fire safety defects in the cladding, in contravention of the guidance in Approved Document B, and water ingress issues, LDC brought a claim in respect of the re-cladding of the towers and associated remedial works required to address fire safety, water ingress and cavity barrier adequacy issues. LDC’s total claim was valued at £21,152,198, broken down as follows:

• Cost of remedial works £16,457,825. 
• Loss of income £4,694,373.

Two weeks prior to trial, Downing agreed a settlement with LDC for £17,650,000. Therefore, Downing was able to adopt LDC’s position without any adverse consequences. In summary, LDC and Downing both agreed that the blocks did not comply with Building Regulations as a result of numerous defects in its design and installation.

In the proceedings, Downing sought an indemnity and/or contribution from ESL in the amount of the settlement sum, plus its reasonable costs of defending the claim brought against it by LDC. The liquidator for ESL stated that she did not object to judgment being entered. ESL also submitted a defence which was, therefore, considered by the Court.

Relevant Contract Provisions

The ESL Sub-Contract – JCT standard form with amends 

• The Sub-Contract Works included the carrying out of the external envelope works including the external cladding and rainscreen cladding.
• The Articles of Agreement confirmed ESL had knowledge of the terms of the Main Contract.
• ESL was required to execute the Sub-Contract Works so as not to put Downing in breach of the terms of the Main Contract.
• ESL also had an obligation to carry out the Sub-Contract Works with reasonable skill and care and an obligation to use sound materials.
• The Specification, which formed part of the Sub-Contract, provided that the cavity barriers were to be installed in accordance with Approved Document B.

The Downing Main Contract – JCT Standard Form of Building Contract with Contractor’s Design and bespoke amendments 

• The Main Contract provided that the Works will be carried out and completed in accordance with and, when completed, will comply with, all Statutory Requirements. The definition of “Statutory Requirements” included the Building Regulations.

ESL’s position

ESL raised a number of arguments denying liability. However, perhaps the most interesting and relevant arguments raised by ESL relate to points which crop up time and again in defects disputes:

• In respect of ESL’s obligations to perform the Sub-Contract, ESL argued that it was only subject to a duty to exercise reasonable skill and care and was not subject to any strict obligation to comply with the Building Regulations. In other words, ESL argued that it was not required to comply with the Main Contract to the extent that it imposed more onerous obligations than the Sub-Contract.
• The remedial works were unreasonable and/or constituted an enhancement or betterment to LDC.

LDC’s and Downing’s position

LDC / Downing’s position in response to ESL’s defence was clearly articulated, as follows:

1. ESL had notice of the relevant provisions of the Main Contract.
2. The Main Contract contained a strict obligation requiring the works to be carried out and completed in accordance with the Building Regulations.
3. The Sub-Contact made clear that ESL was to execute its works so as not to cause a breach of the Main Contract.
4. The commercial intent behind this provision was to make the contracts back to back.
5. The requirement to exercise reasonable skill and care is a general provision relating to the standard of care that must be exercised when carrying out design work. It does not water down the separate requirement that the works must be completed in accordance with the Building Regulations.

The Court’s findings:

The Court found that ESL was obliged to comply with provisions of the Main Contract and, therefore, had a strict obligation to comply with the Building Regulations (citing Martlet Homes Ltd v Mulalley & Co Ltd). In this respect, the Court commented that treating the more onerous strict obligation as qualified by the duty of reasonable skill and care would render the more onerous strict obligation redundant (following the reasoning in MT Hojgaard A/S). Additionally, the Court also commented that ESL’s interpretation would defeat the commercial intent to create back-to-back contracts.

The Court also found, with respect to the water ingress issues and fire safety defects, that where there is a failure to comply with Building Regulations, it is also a failure to act with reasonable skill and care. Significantly, and while not an automatic presumption, this appears to indicate that, if guidance in Approved Document B and the Building Regulations have not been complied with, the starting assumption may well be that a party is negligent (subject to the Bolam defence).

In respect of ESL’s position that the remedial costs were unreasonable, the Court commented: 

• That the remedial costs actually incurred will always be the starting point as to what is reasonable, particularly where those costs are incurred following advice (following Hall v Van Der Heiden [2010] EWHC 586 (TCC)).
• That where a party had followed the advice of an expert, this could convert expenditure into reasonable expenditure following the principles in AXA v Cunningham Lindsey [2007] EWHC 3023 (TCC). In the present case, LDC had engaged various experts to advise on the remedial works.
• When considering the reasonableness of alternate remedial schemes, it is necessary to consider their cost, efficacy and any guarantees or bonds issued by the relevant manufacturer or contractor. 
• Following Martlett v Mullalley, the Court will not be too critical of a Claimant’s actions where it is acting as a matter of urgency, or on the basis of incomplete information. 
• It is not an answer for the Defendant to point to an alternative, cheaper means of carrying out the works; it must show that the Claimant’s scheme was unreasonable. 

With regards to ESL’s argument that the remedial works constituted a betterment to LDC, the Court stated that a deduction for betterment will not usually be made where the Claimant has no choice but to carry out the repair or reinstatement work even where that results in the Claimant having a newer or better building. The Court also noted that this is still the case where, by virtue of passage of time, the Claimant is obliged to comply with new or more onerous Building Regulations. This seems particularly relevant given the recent changes to the Building Regulations requiring non-combustible products to be used in the external wall of residential buildings over 18 metres high.

Comment

• This judgment reaffirms the position that it is difficult to defend claims in respect of fire safety and cladding defects at trial and offers no substantive relief for those, in the construction or insurance industries, who may find themselves dealing with such cases.
• It appears that the Court will have very little sympathy with parties where property has not been constructed in compliance with the Building Regulations at the time of construction. 
• When defending claims of this type, you should consider if you have a solid defence backed up with strong factual and expert evidence. If not, or where there are onerous strict contractual obligations, then perhaps the best course of action is to settle upstream to cap costs/losses and then try and share pain downstream.