Not appreciating the fine print was their downfall

The court in LDC (Portfolio One) Ltd v George Downing Construction Ltd and European Sheeting Ltd [2022] EWHC 3356 (TCC) was asked to consider whether a sub-contractor was under an obligation to comply with the terms contained within the main contract.

In doing so, the court rejected the argument that the nature of duty owed under the sub-contract was merely to exercise reasonable care and skill, but that because of a clause within the sub-contract not to put main contractor in breach of the obligations within the main contract, the sub-contractor was in turn obliged to comply with those duties within the main contract, including strict compliance with building regulations.

The decision affirms the approach taken in Martlet Homes Ltd v Mulalley & Co Ltd [2022] EWHC 1813 (TCC).

The facts

LDC (Portfolio One) Ltd (“the claimant”), the Freeholder of University Halls of residence in Manchester, consisting of three high rise tower blocks, constructed during 2007/8 by George Downing Construction Ltd (“the first defendant”).

The first defendant had sub-contracted the design and build responsibility for the external wall construction to European Sheeting Ltd (“the second defendant”). Both the first and second defendants issued collateral warranties for their works to the then Freeholder, Willmott Street Limited (“WSL”), which in 2015, were transferred to the claimant. The claimant commenced proceedings under the terms of these warranties.

The claims arose from the discovery of defects relating to the external wall cladding, which was causing water ingress into the property, the deterioration of the Structural insulated Panels (“SIPs”), and inadequacies with the fire barriers and fire stopping on all elevations.

Pre-trial, a settlement was reached between the claimant and the first defendant for the sum of £17,650,000 in full and final settlement of the claims against the first defendant (“the settlement sum”). The second defendant was in creditors voluntary liquidation and was not represented throughout the course of the proceedings.

Both the claimant and first defendant at the trial sought judgment against the second defendant in respect of the following:

• the claimant sought judgment against the second defendant for the cost of remedial works and loss of income totalling £21,152,198.87; and
• the first defendant sought judgment against the second defendant in respect of the settlement sum, and their reasonable legal claim.

The second defendant defended the claims. They claimed the following:

• That they had not breached the sub-contract/main contract, and were not in breach of the collateral warranty; and
• The claimant had failed to mitigate its losses and designed a remedial scheme that was an enhancement on the works required.

The TCC decision

Breach of contract

It was held that the second defendant was under a strict obligation to comply with all statutory requirements including the building regulations, rather than merely to exercise reasonable care and skill (which was breached as a result).

The second defendant had sight of the main contract between GMD and the claimant, therefore was aware of the “commercial intention to make the contracts back-to-back [sic]”. Within the sub-contract, the second defendant agreed not to place the first defendant in breach of the main contract due to their acts or omissions. A breach of the terms of the sub-contract, did indeed place the first defendant in breach of its terms under the main contract to comply with all statutory requirements, and the obligation to ensure they exercised reasonable care and skill did not supersede this requirement.

The second defendant was found to have breached its contract, and the terms of the collateral warranty. Further, the second defendant was found to have breached its contract and the terms of the collateral warranty due to the failure of the design of the sealed composite cladding system and the materials used which resulted in water ingress, as well as the design, installation and materials chosen for the cladding and fire stopping resulting in fire safety defects.

Remedial works

Defending the claimant’s claim for the cost of the remedial works, the second defendant argued that the claimant had failed to mitigate its loss by delaying carrying out the remedial works leading to the deterioration of the SIPs. It was held that any delay by the claimant was limited and was not causative to the extent of the remedial works required.

It was held that the remedial works undertaken were reasonable and that there was no basis for the second defendant to argue otherwise. Neither the second nor first defendant submitted an alternative remedial scheme specifically in relation to the SIPs, and the second defendant did not make any case in relation to the value of the remedial works

Contribution claim

It was held that the settlement between the claimant and the first defendant was reasonable, and due to the breaches of contract detailed above, the first defendant was entitled to a full indemnity from the second defendant in respect of the same and their reasonable costs.

Key takeaways

Whilst it is not a surprising judgment in respect of the issues we are seeing recently and the more robust approach the court is taking against those responsible for fire safety defects in high-rise building, it is important to highlight that parties must be aware of the contracts and obligations they are entering, as shown by the sub-contractor being held to the higher standards under the main contract.

Potential defendants to cladding claims should look to map the contractual historical nexus associated with the design and build procedure, as no stone will be left unturned whilst others look to mitigate their own exposures.