Following the important decision in Martlet Homes Ltd v Mulalley & Co Ltd  (see our summary here), LDC (Portfolio One) Ltd v George Downing Construction Ltd and European Sheeting Ltd  EWHC 3356 (TCC) is a further decision from the TCC giving guidance on how the Court will interpret an absolute duty to comply with Building Regulations as against a duty to exercise reasonable skill and care when carrying out design.
LDC is the freehold owner of three high-rise tower blocks operated as university halls of residence in Manchester constructed in 2007 and 2008. LDC identified fire safety and water ingress issues which required remedial works.
The contractor for the original project was George Downing Construction Ltd (“Downing”) under a JCT Standard Form of Building Contract with Contractor’s Design 1998 Edition incorporating JCT Amendments 1 to 5 and further bespoke amendments (“the Main Contract”). Downing’s design obligations included the design of the cladding, rainscreen and the fire stopping cavity barriers.
The specialist subcontractor for the external wall construction was European Sheeting Ltd (“ESL”) who had been engaged by Downing on a JCT Standard Form of Sub-contract for Domestic Sub-contractors (DOM/2, 1981 Edition, incorporating JCT Amendments with further bespoke amendments (“the Sub Contract”). Again, ESL’s design obligations included the design of the cladding, rainscreen and the fire stopping cavity barriers.
LDC had the benefit of collateral warranties from both Downing and ESL which had been assigned to LDC by the original employer, Unite Students. Both collateral warranties contained provisions whereby Downing/ESL warranted they had complied with their respective contractual obligations under the Main Contract/Sub-Contract and contained additional provisions that the works be carried out in a good and workmanlike manner and the design with reasonable skill care and diligence.
LDC issued proceedings against Downing and ESL claiming breach of the terms of the collateral warranties and the costs of the remedial scheme. LDC and Downing settled their disputes resulting in Downing paying LDC £17,650,000 in full and final settlement.
LDC and Downing then each sought judgment against ESL, with LDC seeking £21,152,198.87 (in respect of a claim for breach of the terms of the collateral warranty) and Downing a contribution to the settlement sum of £17,650,000 plus their reasonable costs.
ESL entered Creditor’s Voluntary Liquidation after pleadings had been exchanged. Given ESL’s liquidation, the proceedings went ahead without ESL’s involvement.
The fire engineering experts for LDC and Downing produced a joint statement in which they agreed that the matters complained of by LDC constituted breaches of the relevant Building Regulations. They also agreed that these were matters that needed to be remedied. No evidence had been produced by ESL to the contrary.
Key contractual provisions
The Main Contract contained provisions which required compliance with the applicable Building Regulations.
Article 1.5 of the Sub-Contract stated: “Save where the provisions of this Sub-contract otherwise require, the Subcontractor shall execute and complete the Sub-contract Works so that no act or omission or default of the Sub-contractor in relation to the Sub-contract Works shall constitute cause or contribute to any breach by the Contractor of any of his obligations under the Main Contract or any other contracts made by him in connection with the Main Contract.”
Clause 5.3.1 of the Sub-Contract stated: “To the extent that the Sub-contractor is required to carry out any design in relation to the Sub-contract Works, the Sub-contractor has exercised and shall continue to exercise all of the skill, care and diligence in the design of the Sub-contract Works to be expected of a professionally qualified and competent designer or specialist Sub-contractor, as appropriate, experienced in carrying out work of similar size, scope and complexity to the Sub- contract.”
What was the scope of ESL’s obligation to comply with the Building Regulations?
ESL’s main argument was that it was not obliged to comply with the Main Contract if it contained greater obligations than the Sub-Contract (due to the “Save where the provisions of this Sub-contract otherwise require,” wording in Article 1.5. ESL argued that due to clause 5.3.1 of the Sub-Contract, its design obligations were governed by an obligation to exercise reasonable skill and care only as opposed to a strict obligation to comply with the Building Regulations set out in the Main Contract.
LDC rejected this and argued that ESL was required to complete the Sub-Contract works in a manner that did not put Downing in breach of its Main Contract obligations. It also referred to MT Hojgaard AS v E.ON Climate and Renewables UK  UKSC 59 and Martlet which confirmed that if there are two clauses imposing different standards or requirements, treating the clause imposing the lesser standard as a minimum requirement is the right approach. This because treating it as qualifying a more onerous obligation effectively renders the more onerous obligation redundant.
The Court agreed with LDC and held that ESL’s obligation to comply with the Building Regulations in respect of its scope of work applied regardless of the otherwise applicable standard for its design. Clause 5.3.1 of Sub -Contract did not water down the separate requirement in the Main Contract that the works be completed in accordance with the Building Regulations. There was no provision in the Sub-Contract that allowed ESL to execute works in a manner that would entail a breach of the Main Contract.
Given the evidence of the experts, the Court concluded there was a breach by ESL of the terms of the Sub-Contract and it followed that ESL were in breach of the Collateral Warranty.
Remedial scheme – was it reasonable?
One of the other issues considered by the Court was the quantum of the remedial scheme. In determining whether a remedial scheme was reasonable (the claimant relied on expert advice in deciding to carry out the remedial works). The Court made reference to various principles, reiterating that the question of whether advice of an expert means that expenditure was reasonable involves consideration of the facts.
There must be some causal link between the incurrence of the expenditure upon the advice of the expert and the breach of contract and reliance on an expert will always be a highly significant factor in any assessment of loss and damage. However, it will not on its own be enough, in every case, to prove that the claimant has acted reasonably. It is also necessary to consider the remedial scheme’s cost, efficacy, and any guarantees or bonds offered by the relevant manufacturer or contractor.
Importantly, demonstrating that the defects could have been rectified through an alternative scheme for a lower cost will not mean the remedial scheme was unreasonable. It must be demonstrated that the remedial scheme itself was unreasonable (see St James’s Oncology SPC Ltd v Lendlease Construction (Europe) Ltd and another  EWHC 2504 (TCC)).
This is a further significant decision which will be helpful to those pursuing claims for breaches of the Building Regulations. For defendants, given the Court’s approach so far, it perhaps warns against making costly arguments that the requirement to comply with Building Regulations is subject to reasonable skill and care.
While LDC’s claim against ESL was under a collateral warranty, this still required a detailed examination of the underlying contracts. Claimants with the benefit of a collateral warranty may not always have detailed knowledge of what happened during the project and if so the recent court decisions should be helpful to them as the focus is on black and white compliance ascertained with the assistance of experts (rather than a detailed knowledge of decisions made on the project which may only come out at the disclosure stage of any proceedings, if at all).
However, on the facts, the level of agreement between the experts and that ESL did not adduce expert evidence of its own, made the position less complex than could have been the case.