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Building Regulations

In certain circumstances, the tort known as breach of statutory duty permits a claimant to recover damages on the basis that the defendant has caused loss or damage as a result of breaching some statutory rule. Whether or not such an action could be based upon a breach of the Building Regulations has never been definitively decided by the courts. It was suggested by Lord Wilberforce in Anns v Merton LBC18 that such an action would be available but, while this suggestion has been applied in at least one subsequent case, judges have usually rejected it.

It may be that the position will be more clearly defined in the future, because section 38 of the Building Act 1984 makes provision for civil liability for any ‘damage’ caused by a breach of regulations made under that Act. For some reason, however, this provision has never been brought into force. Moreover, even if it is implemented, it should be noted that the regulations themselves impose no higher duty than that of securing reasonable standards of health and safety. It follows that a claim could only be brought in respect of those defects in a building that are positively dangerous.

21.3ALTERNATIVE FORMS OF LEGAL PROTECTION

The demise of negligence, as well as turning the spotlight on other existing legal remedies, has had another important effect upon those legal advisers who operate in the fields of construction and property. It has encouraged them to respond proactively to the requirements of purchasers and tenants and to create by way of contract rights similar to those that previously existed in tort.

There have been four main developments in this area. These are:

The creation of a direct contractual link between a subsequent owner and each designer and constructor (by way of a collateral warranty).

The transfer (by way of assignment) to the subsequent owner of whatever contractual rights the original client would have had against each designer and constructor.

A claim for breach of contract against the relevant designer or constructor brought by the original owner, who then hands over the damages to the subsequent owner.

A claim by a subsequent owner for breach of a term in the designer or constructor’s contract with the original client, under the Contracts (Rights of Third Parties) Act 1999.

21.3.1Collateral warranties

An important aspect of construction documentation in recent years has been an enormous increase in the use made of collateral warranties, as attempts are made to bring remote owners into direct contractual relationships with those against whom

18 Anns v Merton LBC [1978] AC 728.

354 Construction contracts

they would once have been able to claim in the tort of negligence. Although the contents of such warranties vary considerably, what they commonly contain is an undertaking by a consultant or a contractor to the effect that he or she has fulfilled all the obligations owed to the client. In effect, therefore, the subsequent owner of the building is given contractual rights similar to those that would have been enjoyed by the client if the building had not changed hands.

Such warranties are routinely sought from all the contractors, sub-contractors and consultants who are engaged on a construction project, and may be drafted in favour of the prospective purchasers or tenants of the completed building and/or the financial institution which is funding the development and whose money is therefore secured upon the property. The sheer number of possible relationships that may thus arise out of a single project means that the task of negotiating and drafting collateral warranties frequently involves a considerable amount of time and effort for the parties and their solicitors.

For a long time, the problem was made worse by the lack of any standard forms of collateral warranty, requiring that each one had to be negotiated on an individual basis. However, the position was improved by the publication of standard forms of warranty for consultants, which are in versions for either funding institutions or for potential purchasers and tenants. JCT have published contractors’ collateral warranties, again for funders and for purchasers and tenants (CWa/F and CWa/P&T) along with a range of sub-contractor and trade contractor collateral warranties.

It is important to note that no contractor or consultant is automatically under an obligation to give a collateral warranty to anyone at all. It follows that the question of whether collateral warranties are to be demanded is one that should be addressed at the commencement of a project. At that stage it is possible to ensure that every consultant’s terms of appointment, and every building contract, contains a term requiring that warranties be given when the client demands it.

As mentioned above, there is considerable variation in the contents of collateral warranties. Nevertheless, some general points may usefully be made. First, at least where designers are concerned, it is important to see that any liability that may arise will be covered by the designer’s professional indemnity insurers. This may involve bringing the insurers into the negotiations for the warranty, which of course is likely to add to the length and complexity of those negotiations. One of the major advantages of the standard forms is that, if they have been accepted by the insurers for the participating professional institutions, they can be used by members of the relevant institutional schemes without the need for further negotiation.

The extent of liability which is undertaken by way of collateral warranty is commonly restricted in various ways. The following limits are typical:

The warrantor’s liability is limited to the cost of remedial works required because of the breach; there is thus no liability for any consequential losses (such as the cost of alternative accommodation while the work is carried out).

In the event that the warrantor is not the only negligent party, the warrantor is liable only for the share of responsibility that a court would place on him or her if all potential defendants were sued.

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Any defence the warrantor could have raised if sued by the client may equally be used when a claim is made on the warranty.

Apart from these restrictions, three further provisions commonly found in collateral warranties are worthy of mention. First, in relation to design work, the warrantor may be under a specific obligation to take out and maintain a specified level of professional indemnity insurance cover. Second, many warranties either contain an outright prohibition on assignment, or specify the number of times that the warranty can be passed on as the building itself changes hands. Third, some warranties are expressed to be retrospective and to come into effect at the time of practical completion. The effect is that the limitation period for a claim on the warranty will be the same as that for a claim under the original contract.19

21.3.2Assignment of rights to the subsequent owner

The second major device used to confer legal protection upon subsequent owners of buildings is that of assignment. What this means is that the original owner, on selling the building, transfers to the purchaser any or all of the rights of action in respect of defects that the original owner has. Such rights may include, not only those arising under the main building contract itself, but also those based on consultants’ terms of engagement, sub-contractors’ warranties and any other relevant contractual relationships. An assignment may also be expressed to include any rights of action in tort that the original owner could establish against any of these parties.

The validity of an assignment in these circumstances was considered by the House of Lords in the case of Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd.20 That case in fact consisted of two appeals (the other being St Martins v McAlpines) involving slightly different factual scenarios, which were heard together by the House of Lords. As a result of what was said in those cases, both in the House of Lords and in the courts below, it is now clear in principle that an assignment can effectively transfer legal rights to an assignee (the purchaser). However, it must be emphasized some important points remain uncertain, notably the nature of the assignee’s rights and (most significantly) the basis on which the assignee’s damages are to be assessed.

The present position on assignment may (albeit somewhat tentatively) be stated as follows:

1.The client is entitled to assign both the right to call for future performance of a building contract and the right to claim damages for past breaches of it. What this means is that an assignment can be effective, irrespective of whether it takes place before or after a relevant breach of contract has occurred.

2.An assignment, to be effective, need not be made at the time when the building itself is transferred. It can be carried out as a separate transaction.21

19See Northern Shell plc v John Laing Construction Ltd (2003) 90 Con LR 26.

20(1993) 63 BLR 1.

21GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SLT 533.

356Construction contracts

3.Many construction contracts either prohibit assignment by the employer altogether or place restrictions on it, for example by requiring the contractor’s written consent. Such restrictions are found in JCT SBC 05 clause 7.1 and ICE 7 clause 3. An assignment in breach of such a provision will be ineffective, in the sense that the assignee will not acquire any enforceable rights.

4.In the Linden Gardens case at first instance,22 it was held that a contract clause which prohibited assignment would not normally prevent the employer from assigning a right of action in tort. However, it should be noted that, unless and until some damage to the property has occurred (whether or not it is visible), the employer will not have acquired a cause of action in tort and there will therefore be nothing to be transferred. It should also be pointed out that at least one judge has expressed serious doubts as to

whether an employer would be entitled to bring a tort claim against a contractor.23

5.Where an assignment is valid, the assignee is entitled to be placed in as good a position as the assignor. However, an assignee is not supposed to be in a better position than the assignor. This principle has led contractors to claim that, since an assignor who sells a building to an assignee at a price which assumes no defects has suffered no loss, the assignee (who of course has suffered a real loss) will be limited to recovering nominal damages! Thankfully, the courts have simply rejected this technical argument which,

if accepted, would mean that the ‘loss’ resulting from the defective building would somehow disappear into a black hole.24

6.Although the courts have thus rejected the ‘no loss’ argument, they have nonetheless stated that an assignee ‘cannot enforce any claims, let alone

under new heads of damage, which would not have been available to his assignor’.25 Precisely how this limitation will operate in practice remains obscure, for there have as yet been no reported cases in which it has been applied. It might mean that, where a subsequent owner suffers far greater business disruption costs during remedial works than would have been suffered by the original owner (for example because the subsequent owner has specialist requirements for which there is no suitable alternative accommodation), those extra losses cannot be recovered as damages.

21.3.3Claims by original owner on subsequent owner’s behalf

As mentioned above, the House of Lords in the Linden Gardens case held that a purported assignment which contravened a contractual prohibition was of no effect. This ruling was uncontroversial, but the House of Lords then astonished both the construction industry and the legal profession by the second part of their

22(1990) 52 BLR 93.

23Nitrigin Eireann Teoranta v Inco Alloys Ltd [1992] 1 All ER 854; see Chapter 10.

24GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SLT 533; Darlington BC v Wiltshier Northern Ltd (1994) 69 BLR 1.

25Dawson v Great Northern & City Railway Co [1905] 1 KB 260.

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decision. This was that the employer could still sue the contractor for breach of contract, notwithstanding that the employer (having sold the building before any defects appeared) had suffered no loss. Their lordships further held that, if an employer took this course of action, the damages recovered (which would be assessed on the basis of the purchaser’s loss) would then have to be handed over by the employer to the purchaser.

In reaching this decision, the House of Lords acknowledged that, as a general principle of contract law, a party who has not suffered loss cannot recover substantial damages, and cannot recover damages on behalf of a third party. However, their lordships pointed out that there were certain exceptions to this principle, and identified one that they said would apply in the present case. This is that where the parties to a building contract would expect the completed building to be transferred to a third party, who could not acquire any rights under the contract itself, the parties might well intend that the original employer should be able to enforce the contract on behalf of the third party. And, if that is what the parties intended, then their contract would contain an implied term permitting such enforcement.

The precise extent of this new legal development is extremely difficult to determine. In Linden Gardens the House of Lords stated that their decision would provide ‘a remedy where no other would be available to a person sustaining loss that under a rational legal system ought to be compensated by the person who has caused it’. This emphasis on the lack of any other remedy has led the House of Lords to conclude that a direct claim by the original employer is not possible where the purchaser has been given an alternative remedy against the contractor, under a duty of care deed or a collateral warranty (irrespective of the extent of this alternative remedy).26 It has been suggested that the decision would only apply where the contract in question prohibits assignment (and thus prevents the purchaser from acquiring a remedy by that route). However, this argument was rejected by the Court of Appeal in Darlington BC v Wiltshier Northern Ltd.27

The Darlington case also offered a solution to another practical problem caused by this ‘third party’ claim, namely, what happens if the employer refuses to sue on the purchaser’s behalf? Construction lawyers have attempted to deal with this possibility by extracting a promise from the employer, as part of the contract for the sale of the building, to join in any future legal action that the purchaser wishes to bring (in return for an indemnity against any costs incurred). However, the Court of Appeal’s decision suggests that this may not be necessary. According to their lordships, the employer in a case of this kind is to be regarded as a constructive trustee of the right to claim damages for the purchaser. And, as a trustee, the employer is bound to enforce those rights and can be liable to the beneficiary (the purchaser) for failure to do so.

It must be said, in conclusion, that the law on both assignment and claims by third party remains very obscure. This is regrettable, since the question of effective remedies for purchasers is one of considerable practical importance, and something moreover which impacts on the marketability of new buildings.

26Alfred McAlpine Construction Ltd v Panatown Ltd [2000] BLR 331.

27(1994) 69 BLR 1.