Defective cladding – A landmark decision
26 January 2023
The Technology and Construction Court makes another [landmark] decision in the case against defective cladding.
The judgment in the case of LDC (Portfolio One) Ltd v George Downing Construction Ltd and another  EWHC 3356 (TCC) is the second in cladding related claims. This case concerns fire safety (and water ingress) issues affecting the external walls of three high rise tower blocks occupied as halls of residence in Manchester.
George Downing Construction Ltd (‘GDC’) was appointed by GMD Developments Limited (“GMD”) under a JCT Standard Form Contract with Contractor’s design on 11 June 2007 (“the Main Contract”). The Main Contract required GDC to design and construct three individual blocks of student accommodation in Manchester, each over 18 metres in height. The blocks were clad using a mix of cor-ten steel and composite cladding over the various elevations.
European Sheeting Ltd (‘ESL’) was subsequently appointed by GDC as specialist design contractor pursuant to the DOM2 form of contract (“the Sub-Contract”), and was responsible for the external wall construction, including design and construction of the cladding and rainwater works.
The sub-contract was effectively ‘back to back’ with the terms of the Main Contract and included express obligations on ESL to:
- comply with the terms of the Main Contract in performing the Sub-Contract Works so as to not put GDC in breach of the terms of the Main Contract and to indemnify GDC against any liability which GDC may incur as a result of any failure by ESL to do so; and
- to ensure that the Sub-Contract Works complied with the Statutory Requirements.
Following completion of the works, LDC (Portfolio One) Limited (“LDC”) acquired the freehold of the property in September 2015, together with the benefit of collateral warranties from both GDC and ESL.
LDC subsequently identified various issues in the design and construction of the blocks including:
- defective construction of the composite cladding, which had led to water ingress and deterioration of the SIPs; and
- fire barrier and fire stopping issues on all elevations of the blocks.
LDC issued proceedings against both GDC and ESL for damages for breach of the collateral warranties and loss of rental income from students whilst remedial works were undertaken.
Prior to trial, LDC and GDC reached a settlement in the sum of £17,650,000. However, LDC sought judgement against ESL for the cost of the remedial works, and the lost rental income in the sum of £21,152,198.87.
GDC claimed the sum of £17,650 back from ESL by way of indemnity, together with the reasonable costs incurred by GDC in defending LDCs claim.
Whilst ESL had entered into a Creditor’s Voluntary Liquidation, the liquidator appointed confirmed that she did not object to judgment against ESL being entered, and so the trial proceeded in accordance with CPR rule 39.3(1). This states that “the court may proceed with a trial in the absence of a party” and that “if a defendant does not attend” the Court “may strike out his defence or counterclaim”.
In considering the evidence presented by both LDC and GDC at trial, and in documents prepared by ESL in advance of trial, Buerhlen KC concluded that:
- ESL had a strict obligation to ensure that the Sub-Contract Works complied with Statutory Requirements, and that this was not in effect watered down, or made subject to the lesser obligation to exercise reasonable skill and care in designing the Sub-Contract Works. In fact, minutes taken from a meeting held 16 months before the Sub-Contract was entered included an acknowledgement from ESL that the cladding was required to comply with Building Regulations requirements;
- the Sub-Contract conditions further stated that ESL “shall observe, perform and comply with all the provisions of the Main Contract” which included an express obligation to ensure that the completed Works complied with Statutory Requirements. ESL had contracted to carry out and complete its obligations in the Sub-Contract so as not to put GDC in breach of the Main Contract, and to indemnify GDC against any liability which may be incurred following any failure by ESL to do so;
- even in circumstances where there was no express contractual obligation to comply with Statutory Requirements, a failure to do so would constitute a breach of other contractual obligations – such as a failure to carry out the Sub-Contract Works in a good and workmanlike manner; and
- the collateral warranties included express warranties and undertakings on the part of both GDC and ESL to carry out and complete their works in a good and workmanlike manner and to exercise reasonable skill, care and diligence in the design of those works.
ESL had failed to exercise reasonable skill and care in design of the cladding, but most importantly, the cladding failed to satisfy Building Regulation requirements which applied to the Works, nor did they meet the requirements of the Architects Specification. ESL was therefore liable for the defective cladding.
Measure of damages
In considering whether the sums claimed by LDC were reasonable, and unlike the case of St James Oncology SPC Ltd v. Lendlease Construction Europe Ltd and another  which we discuss here where remedial costs had not been incurred at the time of the trial, Buerhlen KC relied on Coulson J in Hall v. Van Der Heiden . That case makes clear “the costs actually incurred will always be the starting point for an analysis of what is reasonable (particularly if … they are the costs of works which the Claimant has carried out on advice)”
On the question of whether advice was reasonable, Buerhlen KC referred to the principles established by Akenhead J in Axa Insurance Group Plc v. Lindsay ; namely that:
“…. If the advice of the expert is merely tangential or coincidental to the work the cost of which is recoverable as damages, the costs of the work carried out to that extent upon the expert’s advice, will generally not be recoverable …
There must be some effective causal link between the incurrence of the expenditure upon the advice of the expert and the breach of contract …
If two remedial schemes are proposed to rectify a defect which is the result of the defendant’sdefault, and one scheme is put in hand on expert advice, the defendant is liable for the costs of that built scheme, unless it could be said that the expert advice was negligent”
It follows that where a defendant is found to be liable for defects, he will in turn also be liable for the cost of remedying those defects – whether through schemes of remedial works proposed or actually implemented by a claimant – unless the defendant is able to establish that the scheme of works proposed (and implemented) by a claimant is unreasonable. Similarly, any sum awarded will not include a reduction for betterment where a claimant has no choice but to make improvements – where for example betterment arises as a result of having to comply with enhanced statutory requirements.
On the evidence, Buerhlen K held that there was nothing to suggest that the scheme of works implemented by LDC was unreasonable. LDC was therefore entitled to recover the full cost of the remedial works (both permanent and temporary schemes) from ESL, together with loss of profit for the duration of those works, based on unchallenged evidence presented by LDC.
Similarly, it being clear that the defects arose from ESLs breach of the Sub-Contract, which in turn put GDC in breach of its obligations in the Main Contract; GDC was acting reasonably in reaching a settlement with LDC. Furthermore the settlement sum was within the range of what would have been reasonable, given the valuations for the scheme of remedial works determined by both cost experts. In consequence, GDC was entitled to a full indemnity from ESL in respect of the settlement sum together with its reasonable costs in defending the claim.
Many of the issues addressed in this case are similar to those in Martlet Homes Ltd v Mulalley & Co Ltd  EWHC 1813 (TCC), (please read Birketts’ previous article here) which was the first judgement following a full trial post-Grenfell. Both cases demonstrate that the TCC is unsympathetic to those construction professionals who have breached the Building Regulations.
The Birketts View
Whilst the decision to uphold both claims against ESL in circumstances where ESL is insolvent, and so not represented at trial, is perhaps unsurprising, the case does highlight the risk of being able to successfully recover damages for fire safety and other defects where the limitation periods for bringing such claims has increased to a maximum of 30 years. The period in which supply chain insolvency is likely to impact successful recovery is now much longer, at a time when the Construction Enquirer reports ‘a perfect storm’ for contractor insolvencies – with over 6,000 firms in the construction industry expected to go bust this year.
It is therefore important now, more than ever, to ensure prompt action when it comes to addressing defects and, where proceedings are necessary as a means of recovering damages, that these are commenced as soon as practicably possible and not only in order to comply with a duty to mitigate losses.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2023.