The second substantive cladding judgement post the Grenfell Tower tragedy

LDC (Portfolio One) Ltd v George Downing Construction Ltd and European Sheeting Ltd [2022] EWHC 3356 (TCC)

In July 2022, we had the outcome of the first cladding case post the Grenfell Tower tragedy (Martlet Homes Ltd v Mulalley & Co Ltd[1]). 

On 23 December 2022, the decision in LDC (Portfolio One) Limited (LDC) v (1) George Downing Construction Limited (GDC); and (2) European Sheeting Limited (ESL) (in liquidation) was handed down by Veronique Buehrlen KC (the Judge) in the Technology and Construction Court with some common themes also seen in the Martlet case.

Background to the proceedings

• In 2007 / 2008, three Manchester university halls of residence (exceeding 18m) were built.
• GDC was the main contractor and ESL was the specialist cladding sub-contractor, each appointed on a design and build basis.
• In September 2015, LDC, part of the Unite Students group of company, bought the freeholds, with the benefit of collateral warranties from GDC and ESL.
• LDC brought proceedings against GDC and ESL in respect of:
  • defects in the external wall construction of the composite cladding elevations which caused water ingress and the deterioration of the structural insulated panels (SIPs), and
  • fire barrier and fire stopping defects which it claimed were not compliant with the Building Regulations in place at the time of construction.
• Unfortunately, in or around May 2022, ESL went into creditor’s voluntary liquidation and ceased to participate in the proceedings.
• In October 2022, LDC and GDC reached a full and final settlement of £17,650,000.
• Whilst ESL’s liquidator stated that she did not object to judgment being entered against ESL, she did not consent to it and so LDC’s claim against ESL and GDC’s claim for contribution towards the settlement sum agreed with LDC went to trial.
• At the trial:
  • LDC sought judgment against ESL in the sum of £21,152,198.87, for the cost of remedial works and loss of income; and
  • GDC:
    • claimed an indemnity and/or contribution against ESL for the settlement sum together with GDC’s reasonable costs of defending the claim brought against it by LDC, and
    • applied for ESL’s claim against GDC for a contribution and/or indemnity to be struck out.

They were successful in their claims.

As was the case with Martlet, the reasoning for the Court’s decisions was fairly fact dependent, including considering:

• inconsistencies between the architectural specification, which required fire barriers, and ESL’s tender and minutes of pre selection meeting which stated no allowance had been made for any vertical fire barriers but noting that they were of the opinion that they were required; and
• whether ESL was instructed to omit the ethylene propylene diene monomer (EPDM), the absence of which caused or contributed to the water ingress.

However, there were some common themes between the two cases. 

Was the sub-contractor subject to a strict obligation to comply with Building Regulations or to the reasonable skill and care duty?

This question arose in the Martlet case, finding that, where there are two competing standards, the more onerous will be applied, relying upon MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and another[2]. 

In this case, the Court made the same finding.  Notwithstanding the skill and care duty, the sub-contract obliged ESL not to put GDC in breach of its obligations under the main contract, with the clear commercial intention to make the sub-contract back-to-back with the main contract. To that end, ESL’s works were required to strictly comply with Building Regulations.

With both the water ingress and the fire safety defects being held to result from breaches of the Building Regulations, ESL was in breach.

In respect to the remedial works, had LDC failed to discharge its duty to mitigate its loss?

ESL pleaded that LDC had failed to mitigate its loss by failing to take steps to remedy the alleged defects in the period of November 2012 to September 2018, causing the SIPs to deteriorate further due to ongoing water ingress issues.

The Judge agreed with the decision in Martlet which said the Court would not be too critical of the choice of remedial works where that choice was made as a matter of urgency or on incomplete information.

The Court was critical of the fact that, by late 2016, LDC were not receiving the co-operation required from ESL to progress the remedial works and therefore had to turn to external consultants to do so. While LDC could perhaps have done more between late May 2017 and June 2018, ESL had not produced any evidence to suggest that any delays during that period impacted the scope of the remedial works.  It was held that ESL’s failure not to address the issues when they had the opportunity to do so was a significant cause of the deterioration of the SIPs.

ESL also played the enhancement card, arguing that the remedial works went beyond what was reasonably necessary.

Again, ESL’s argument failed.  The Judge set out the key legal principles in deciding whether a remedial scheme is reasonable, including:

• the starting point for an analysis of what is reasonable is the costs incurred;
• the extent the claimant relied on expert evidence in deciding to carry out the remedial works; and
• the costs of any alternative remedial schemes.

Settlement Contribution Claim

And finally, ESL contested the reasonableness of the settlement between LDC and GDC.

Should GDC have settled?  Yes, GDC were right to settle.  The Judge stated that it was obvious, given her conclusions in respect of LDC’s claim against ESL, that LDC’s claim against GDC had substance and would most likely have succeeded. 

Was the settlement sum reasonable?  Yes. Citing Ramsay J’s decision in Siemens Building Technologies FE Limited v Supershield Ltd[3], the Judge dismissed ESL’s argument on the basis that:

• there was strength in LDC’s claim,
• the settlement was entered into as a result of legal advice,
• the sum was supported by the joint quantum expert evidence, and
• the settlement provided a discount of circa £4,000,000 in respect of LDC’s claim against ESL.

Takeaways

The trajectory of cladding claims looks to be becoming clear, as the Court in this case and in the Martlett case have taken a strict view on an external wall system’s compliance with Building Regulations in force at the time of construction.  Arguments to apply the lower standard of skill and care duty are likely to get short shrift. 

Those seeking to recover damages for the cost of remedying defects will be bolstered by the difficulties seen here in challenging the cost of remedial works carried out which resolve the defects.

Keep a close eye on those contract terms!

[1] [2022] EWHC 1813 (TCC)

[2] [2017] UKSC 59

[3] [2009] EWHC 927 (TCC) [80(5)-(6) (upheld by the Court of Appeal at [2010] EWCA Civ 7)