In both cases, the TCC has taken a robust approach in establishing a breach of contractors’ obligations, and has set a high bar for contractors looking to challenge the reasonableness of remedial works carried out by the building owner.
The cases also provide valuable guidance on when liability can be passed from a main contractor to a specialist cladding sub-contractor
Martlet Homes Ltd v Mulalley & Co Ltd
This was the first High Court Judgement on damages for the replacement of cladding and recovering “waking watch” costs since the Grenfell Tower disaster in 2017.
The building Owner (Martlet) claimed against the contractor (Mulalley) both for the cost of replacing combustible cladding, and the costs of waking watch pending that replacement.
Martlet argued that Mulalley's specification of a certain type of cladding was a breach of contract (and the Building Regulations in force at the time), and its installation of that cladding was also defective and in breach of contract.
Defective Cladding
Mulalley argued that the cladding was not defective – any minor defects could have been remedied, and the decision to replace the cladding wasn’t because it was defective, but because it was no longer considered safe post Grenfell.
They also argued that the cladding used was acceptable, as it was not in breach of the Building Regulations in force at the time of installation, and the British Board of Agreement (“BBA”) had issued a certificate for that kind of cladding.
The TCC issued a robust judgment in favour of Martlet, and awarded damages of over £8 million, covering both the waking watch costs and the remedial works.
The TCC was clear that the fact that the BBA had issued a certificate for the cladding in question was not a guarantee of compliance with the Building Regulations – Mulalley had not exercised reasonable care and skill in selecting that cladding, as any reasonably competent contractor would have known that the Building Regulations contained a clear recommendation to avoid the type of cladding system in question for high rise residential buildings unless testing recommended by the Building Regulations had been carried out.
The Court was also clear that widespread use of that type of cladding was no excuse, and said that Mulalley’s argument that “everyone else was doing it” was not a “get out of jail free card”.
Waking Watch costs
Mulalley had argued that Marlet should not be able to recover “waking watch” costs, as they were too remote.
The Court rejected that argument, and awarded Martlet the costs of the waking watch, highlighting that the need for temporary fire-safety measures pending a permanent solution was a reasonably contemplated consequence of the breaches.
LDC (Portfolio One) Ltd v George Downing Construction Ltd and European Sheeting Ltd
In late December 2022, the TCC delivered another robust judgment in the High Court on similar points in LDC (Portfolio One) Ltd v George Downing Construction Ltd and European Sheeting Ltd.
LDC was the owner of three tower blocks – used as university halls of residence – in Manchester. George Downing Construction Ltd (“Downing”), was the contractor when the property was built in 2007/2008, and European Sheeting Ltd (“ESL”) was the specialist cladding contractor under a subcontract.
LDC argued that the external walls of the tower blocks were defective, resulting in water ingress, and that there were fire barrier and stopping issues between the internal panels and the exterior cladding.
LDC had claimed against Downing and ESL, and ESL and Downing had each sought a contribution from the other in respect of any damages payable to LDC. Prior to the judgment, Downing agreed to settle LDC’s claim against it for £17,650,000.
ESL (the cladding sub-contractor) went into liquidation prior to the judgment. LDC and Downing each sought judgment against ESL in its absence. Downing was seeking to recover the full amount of the settlement reached with LDC from ESL.
Duty to comply with statute - Building Regulations
ESL’s sub-contract contained a provision requiring it to comply with “all statutory requirements”, which, the court was clear, meant it was contractually required to comply with the applicable Building Regulations.
ESL argued the Building Regulations required only “adequate” resistance to the spread of fire, or water ingress, and that the works had met the threshold.
The Judge agreed with the other parties’ experts that ESL hadn’t complied with the Building Regulations both in relation to water ingress and fire safety defects, which meant it was in breach of its contractual obligations.
Failure to mitigate
While ESL wasn’t present at the trial, it had previously argued that the costs claimed by LDC were unreasonable, and LDC had failed to mitigate its loss. In particular, it argued that the remedial scheme undertaken by LDC was excessive.
The TCC said the starting point for assessing whether costs are reasonable is the costs which were actually incurred. If the works were carried out following expert advice, and there is no reason to justify departing from those costs, they will be considered reasonable.
While acknowledging the building owner’s duty to mitigate its costs, the TCC (quoting Martlet v Mulalley) was clear that the Court “will not be too critical of his choices if made as a matter of urgency or on incomplete information”.
It was not enough for ESL to argue that an alternative scheme could have been carried out at lower cost – it had to show that the remedial scheme LDC claimed for was, itself, unreasonable.
Betterment
ESL argued that the remedial works resulted in LDC having a better building than it would have had but for ESL’s breach.
The TCC was clear that the Court would not deduct from damages for “betterment” where the claimant has no reasonable choice. This applies where works are required in order to “comply with legislation introduced since the original works were carried out which requires additional or enhanced standards to be met”.
The court rejected ESL’s arguments that alternative schemes could have been carried out at lower cost - especially as they had not put forward a fully designed and costed alternative, and the indications were that there was not a huge cost difference between the two approaches.
The Court put a lot of weight on the fact that LDC had taken decisions on the remedial scheme following expert advice, and agreed it was reasonable for LDC to rely on that advice.
Pass-through of settlement
Having settled LDC’s claim against it, Downing sought to pass all of its liability down to ESL (£17.65 million, plus the reasonable costs of defending the claim).
The Court agreed that the defects resulted from breaches by ESL under the sub-contract, so the claim against Downing could be passed down to ESL, as their obligations were back-to-back under the main and sub-contract.
They also agreed that Dowding was right to settle LDC’s claim, as LDC would have succeeded at trial.
The only question, then, was whether the settlement sum Downing had agreed with LDC was reasonable.
The test for reasonableness was whether “the settlement was, in all the circumstances, with in the range of settlements which reasonable people in the position of the settling party might have made”.
The settlement agreed reflected parties’ experts’ views on the costs of the remedial works and, again, the court placed a lot of weight on the fact that Dowding had settled following legal advice, and that it had avoided the costs involved in a trial by doing so.
On that basis, the court decided that the settlement reached was reasonable, and Dowding, was entitled to recover amount of the settlement plus its reasonable costs in defending the claim from ESL.
What next?
The caselaw in this area is continuing to evolve, but it is clear that the TCC is taking a robust stance on the requirements of the Building Regulations, and rejecting any argument that common use of unsafe cladding renders it reasonable.
These cases also show that, where building owners have acted urgently, and on expert advice, it will be very difficult for contractors to challenge the costs incurred as unreasonable.
Authored by Paul Tonkin, Lucy Redman, and Megan Stewart.
