What is a Building Liability Order?

Building Liability Orders (BLOs) are a new type of order that the High Court has the power to make under s.130 of the Building Safety Act 2022 (BSA), if it considers it “just and equitable” to do so.

Since BLOs are a novel remedy, there is very little guidance about how the courts will apply the “just and equitable” test or, indeed, about how a BLO application should be made in practice. A recent High Court ruling has provided some welcome guidance on a number of practical aspects, such as:

• At what stage in proceedings should a BLO application be made?
• Who may apply for a BLO?
• What factors might the Court consider in deciding whether it is “just and equitable” to make a BLO?

In this update, we examine the background to this case and the key takeaways.

What is a Building Liability Order?

The policy intent behind the introduction of this new type of order is to prevent developers from escaping liability for building safety defects by setting up thinly capitalised special purpose vehicles (SPVs) to carry out developments. It has been common practice for such SPVs to be wound up following completion, thus allowing their well-capitalised parent companies to avoid long-term liability for any defective works.

BLOs will target this scenario, by extending a “relevant liability” of a body corporate (Party A), so that it will also be a liability of an “associated” body corporate (Party B). In the event that a BLO is made, Parties A and B will then be jointly and severally liable for the relevant liability.

A “relevant liability” is a liability incurred either:

• under the Defective Premises Act 1972 (DPA 1972);
• under section 38 of the Building Act 1984 (BA 1984) – if and when this is brought into force; or
• as a result of a “building safety risk”.

A “building safety risk” is defined as “a risk to the safety of people in or about a building arising from the spread of fire or structural failure”. This has broad scope: while claims under the DPA 1972 are limited to dwellings, liability as a result of a “building safety risk” encompasses a wide range of potential liabilities, including in respect of non-residential buildings.

Background to the recent decision

The case of Willmott Dixon v Prater and others concerns alleged fire safety defects in the design and construction of the external wall system (EWS) at a mixed-use commercial and residential property development in London. Willmott Dixon is seeking to recoup the cost of fixing the defective EWS by claiming around £47 million from its supply chain.

This includes claims against the specialist cladding and external envelope contractor Prater Limited (Prater), its guarantor and parent company Lindner Exteriors Holding Limited (Lindner), the architects, the building services engineers and the approved inspectors. They all deny any liability.

One of the co-defendants has applied for BLOs against both English and German-registered companies within the same corporate group as its other co-defendants, Prater and Lindner. Based on publicly available information, the applicant alleged that both Prater and Lindner had largely disposed of their assets, transferring them to other companies within their corporate group in the period after Willmott Dixon’s claim against them was filed.

If ordered, the BLOs will make the additional Lindner Group companies responsible for liability attributed to Prater or Lindner in the main claim.

The issue before Mrs Justice Jefford DBE related to the application by the Lindner Group companies for a stay on the BLO claim until the main claim was resolved. They submitted that it would be unfair for them to have to deal with the BLO claim until the question of whether Prater and Lindner were liable had been resolved, and/or whether they would discharge any resulting liability.

Technology and Construction Court decision

Mrs Justice Jefford DBE rejected the application for a stay. Notably, she found that:

• A party seeking a BLO was not obliged to bring its claim at the same time as the primary claim against a related company, whether or not such a party existed at the time of the project or the time of the proceedings.
• However, if the company did exist at the relevant time and the BLO was claimed before the resolution of a main claim, it would appear that the correct approach would be to have the BLO application heard and dealt with at the same time as the primary claim. Any burdens or difficulties with ensuring that the Defendants to the additional claim were afforded a proper and cost-effective opportunity to deal with it could normally be dealt with by appropriate case management.
• On proper analysis of the legislation, BLO claims would normally raise issues that did not necessarily arise in the main claim – but resolving those issues would typically involve consideration of much of the evidence relevant to the main claim. It would, therefore, seem unnecessary and unsatisfactory to have the court deal with the same/similar issues, which might involve considering evidence already on record more than once and/or require further evidence on much the same issues.
• BLO claims are claims contingent upon the liability of others and these contingent claims (such as claims for a contribution, or claims under guarantees) are the norm, not the exception, in sophisticated litigation – and claims for BLOs are no different.
• A BLO claim does not only arise and/or is made if the company facing the main claim failed to pay – a failure to pay was (and still is) not a pre-condition under the BSA.
• BLOs may be sought by defendants to building safety claims, and not just by claimants.

In light of the above, Mrs Justice Jefford DBE declined to agree to a stay of proceedings and rejected the application, then set directions for the additional claim (including deadlines for remaining Defences and an initial case management conference).

Just and equitable?

A few notable points from the arguments – which it will be interesting to follow when the BLO applications are heard in full – included:

• First, the court noted during argument that it was entirely possible in an appropriate case that it would be “just and equitable” to impose a BLO on related companies where the primary company had disposed of assets – even if such disposal was entirely innocent and not done to “asset strip” that company; and
• Second, one of the companies facing the claim for the BLO expressly relied both in its pleaded Defence and in its submissions to the court upon the fact that Prater and Linder (the Defendants in the main claim) had valid and effective professional indemnity insurance, which would serve to meet, at least in part, the claim made against them.

Key takeaways on the use of Building Liability Orders

There are very limited circumstances in which the courts will look beyond the separate legal personality of a company and ‘pierce the corporate veil’. However, the granting of a BLO (as well as certain other provisions of the BSA, which we examine separately) will do precisely that: it will allow for the corporate veil to be ‘pierced’ by extending liability for defective construction works and/or design services to “associated” entities, such as parent or group companies.

This is thought to be the first judgment considering BLOs and, therefore, provides welcome guidance on some of these points.

How this guidance will be applied in practice will be seen as the case proceeds to full trial and the BLO applications are heard. Applications for BLOs have also been made in a number of other cases and it is expected that several of these will make their way through the courts this year.

Source: Mondaq