The second post-Grenfell major cladding claim to go to a full trial, the Court in LDC Limited ("LDC") v (1) George Downing Construction Limited ("Downing") and (2) European Sheeting Limited (in liquidation) ("ESL")  EWHC 3356 (TCC) found in favour of the claimant.
Three high rise residential tower blocks were built in Manchester between 2007 and 2008 (the "Property"). LDC, part of the "Unite Students" group of companies, acquired the freehold to the Property in 2015. The Property is used as student accommodation.
Downing was appointed as the main contractor on 11 June 2007 (the "Main Contract") and ESL was appointed as the specialist cladding sub-contractor on 8 September 2008 (the "Sub-Contract"). Both were appointed on a design and build basis and provided collateral warranties to the original Employer, which were assigned to LDC.
It became apparent the Property had numerous water ingress and fire safety issues. Remedial works were carried out from 2018 to 2022, at a cost of £16,457,825.87. No students were housed between 2021-2022, which LDC alleged caused them a loss of £4,694,373.00 in rental income.
LDC brought claims against Downing and ESL and the trial took place 1-2 November 2022. On 17 October 2022 the proceedings between LDC and Downing were stayed pursuant to settlement between the two parties, which resulted in a payment of £17,650,000.00 to LDC. Downing sought to recover that settlement sum from ESL. Furthermore, LDC and Downing were informed in May 2022 that ESL were in liquidation.
Issue 1: ESL's obligations
LDC alleged that ESL were obliged to comply with applicable building regulations when carrying out its works. ESL alleged that it was only liable for design matters if it failed to exercise the reasonable skill and care to be expected of a professional designer. In other words, the Court noted that it appeared to have been ESL’s case that 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. The Court did not agree and considered that ESL were obliged to comply with the Building Regulations.
Issue 2: the breaches
LDC and Downing’s experts agreed that the design and installation of the cladding at the Property did not comply with the Building Regulations. The Court agreed and also noted that ESL did not present any evidence to support its case that what had been installed at the Property was adequate in relation to water ingress or the inhibition of fire spreading.
Issue 3: causation and loss
LDC pursued three losses in relation to the remedial works:
- Temporary remedial works to negate immediate health and safety risks;
- Permanent remedial works to ensure compliance with Building Regulations;
- Loss of student rental income during the permanent remedial works.
Temporary Remedial Works
LDC's surveyors discovered water ingress issues had damaged parts of the cladding and that, as a result, the fixings which secured the composite cladding to the Property could fail. The surveyors recommended urgent works to be carried out to mitigate this risk. ESL argued the temporary remedial works were unreasonable as the methodology of the works caused permanent damage to the cladding panels, which meant certain parts could not be reused and, ultimately, resulted in LDC incurring more costs than were necessary for the remedial works at the Property.
The Court did not accept the temporary remedial works were unreasonable, there was an obvious risk and it was clearly right for LDC to take immediate steps to undertake emergency repairs to prevent a failure that would have seen panels falling off the Property and which on any view would have been a significant hazard. Applying the same principles adopted in Martlet v Mullaley (see my previous discussion of the Martlet case here) the Court considered that it should not be too critical of remedial methodology decisions which may prove to be more expensive than other options where there was an imminent risk.
Permanent Remedial Works
ESL argued that LDC's permanent remedial scheme was a significant enhancement to what was reasonably necessary and put LDC to proof as to its alleged losses – i.e. it claimed that it should not be able to recover all of its loss for the permanent remedial works under the principles of betterment. The Court did not agree, holding that any upgrade required to comply with the revised Building Regulations is not betterment.
The Court found in favour of LDC in respect of the rental income loss. The Property was empty for one year and the income losses were based on projected figures from the previous year, calculated by a witness with expertise in finance and accounting, which the court accepted.
Downing claimed for an indemnity from ESL in respect of Downing's liability to LDC. The Court considered that Downing was entitled to an indemnity from ESL, arising out of ESL’s breaches of the terms of the Sub-Contract and non-observance of the terms of the Main Contract. The Court considered that the amount Downing settled with LDC was reasonable and that Downing were entitled to a full indemnity from ESL in respect of the settlement sum.
Of note to legal and construction industry practitioners:
- Martlet v Mullaley was considered by the Court in this judgment in relation to reasonableness of remedial works costs. The Court should refrain from being too critical when considering a costly remedial plan carried out on an urgent basis, particularly when acting on expert advice. This will be welcomed by developers who seek to recover the cost of urgent remedial works whilst acting on the advice of experts.
- A cautionary tale for contractors. Contractors should ensure they are aware of the terms they agree to and the potential implications.
- ESL is in liquidation. They are unlikely to be the first cladding contractor to go into liquidation this year, which prudent developers (or other claimants) will be wary of.
This blog is part of a series published by Howard Kennedy LLP on the Building Safety Act. For more information please contact Jim Fairlie, Sharon Stark or Stuart Duffy. For other blogs, please click here.