Michael Wharfe is a partner at Devonshires
A new legal mechanism to deal with the surfacing crisis could signal very significant, long-term exposure for development and construction groups, writes Michel Quai
Among the series of draft amendments released on February 14, 2022, perhaps one of the most groundbreaking was the innocuous proposal for “Building Liability Orders,” or BLOs.
Although the concept of a party being responsible for its defects is natural and well accepted, and the voluntary acceptance of the liability of others, for example through a parent company guarantee or a collateral guarantee , which is also a familiar commodity, the ramifications of a BLO seem to profoundly alter the sedentary landscape of contract and corporate law.
In essence, it is proposed that the High Court may issue a BLO where it deems it fair and just, ordering that a body corporate be liable for defects and loss and/or damage caused, including repair costs and consequential losses (such as monitoring costs, installation of alarm systems, etc.).
Although it is common for parties to a construction contract to litigate and for the court to make determinations of liability, a BLO offers a much more flexible remedy as it is not limited to parties to a construction contract. . In some circumstances, a party seeking a BLO can pierce the corporate veil and sue businesses that were associated with the original entrepreneur.
You might wonder why this profound shift is so deeply relevant.
After Grenfell, many development and construction groups went out of business through the subsidiaries through which they had previously carried out construction work.
The groups sought to draw a line (corporate personality) between what had happened before and the responsibilities that should emerge and attach to these entities, and future construction work (including the resolution of these historical issues) which would be carried out through new or other entities within the group.
In some cases, developers and construction groups have ceased construction activities altogether, focusing instead on developments and the management of existing property portfolios.
The obvious intention was to insulate the group from historical liabilities, moving business operations to other parts of the business.
This approach was based on long-established principles of corporate law regarding the separation of legal persons and the separate liabilities they incur, which generally isolated legal persons from each other (except in the case of guarantees of the parent company or collateral guarantees).
More recently, announcements by Housing Secretary Michael Gove have been repeated that parties who profited from faulty building work before Grenfell have shunned responsibility for those faults and are now profiting more from the correction of those faults. .
Described as ‘polluter pays’, there was another concern that we saw as ‘polluter-paid’. The introduction of BLOs is perhaps the clearest example of the government’s commitment to ensuring that the group companies associated with the original contractor that caused the current problems bear the cost of fixing those problems.
BLOs represent a fundamental shift in contract and commercial law, leading trainer and horses through principles of separate legal personality and piercing the corporate veil.
“Groups that have embarked on a carefully orchestrated strategy of funneling new and corrective work through new or other business entities…seem to have seen those plans shattered”
Essentially, BLOs can amount to the imposition of retrospective guarantees from the parent or group company to cover the costs of repair work.
Groups that have engaged in a carefully orchestrated strategy of channeling new and corrective work through new or other business entities, while allowing liabilities (such as litigation and insurance claims) to accumulate in the historical entities that they have ceased to exercise, seem to have had these plans dotted.
Although we will have to wait to see the final form of the legislation as it has been passed and get some guidance on how the court will decide what is fair and just, these changes, coupled with the proposed extension of the 30-year statute of limitations for defective premises The law’s claims would appear to signal very significant, long-term exposure for development and construction groups.
Michael Wharfe, Partner, Devonshires