Key points
• A recent Technology and Construction Court judgment is a welcome reminder of the fact that bespoke contractual amendments can have far-reaching consequences
• Contract drafters need to take extra care when considering one-off clauses
One of the challenges facing any lawyer crafting some bespoke words is that the reasons behind a specific clause’s inclusion are often far more prosaic than the sometimes far-reaching consequences that result from the courts applying the principles governing contractual interpretation to the words used.
And the prosaic/far-reaching conundrum certainly seems to fit Fraser J’s recent judgment in Larkfleet Ltd v Allison Homes Eastern Ltd [2016] EWHC 195 (TCC); [2016] PLSCS 42.
The background
The case arises out of the development of three houses in Market Deeping. When the building contract for the houses was entered into on 1 September 2001, the claimant property developer and defendant contractor were owned by the same shareholders and controlled by the same directors. By that stage, negotiations were well advanced for the sale of the defendant, then called Swallow Homes Ltd but already trading under the name Allison Homes Eastern Ltd (“Allison”), to the Kier group of companies. That sale happened 11 days later.
NHBC Buildmark cover is an insurance policy available to purchasers of new-build properties. Individual builders obtain registration with NHBC and pay an annual premium to be able to offer NHBC cover to their customers. NHBC provides cover for a 10-year period (in Larkfleet, this was 10 years from the dates of practical completion of each of the three properties). If a customer makes a successful claim under the policy, NHBC pays out and then looks to recover its costs from the builder.
The amount of the annual premium can vary; and contractors can pay reduced amounts depending on the length of time they have been registered with NHBC and the history of claims being made against them.
Because the directors and shareholders of the claimant knew that they were about to sell the defendant, they took the relatively unusual step of registering Larkfleet Ltd (“Larkfleet”) with NHBC in order to establish a history that would hopefully result in reduced premiums being paid in due course.
However, because Larkfleet was not a builder, it added an additional clause to the JCT design and build contract that it entered into with the defendant (the “additional clause”): “[Larkfleet] will register the site with the NHBC…and [Allison] warrants to accept responsibility for any defect and any expense incurred due to defective work for the period of 10 years for the NHBC warranty.”
So far, so prosaic: the clause was included in a contract between two companies owned and controlled by the same people so that one (which was not doing any building) could establish a history of dealing with NHBC before the other (which was the builder) was sold off.
The dispute
There were problems with the foundations of all three properties. The NHBC cover expired on separate dates between March and September 2012. Before the cover had expired, the homeowners made successful claims under the Buildmark policies and NHBC sought to recover those costs from Larkfleet. In turn, Larkfleet looked to rely on the additional clause and sought compensation from Allison. It commenced proceedings in April 2014.
Allison raised two separate challenges. First, because the original building contracts had not been executed as deeds, the contractual and tortious six-year limitation periods (including the alternative tortious one for latent defects) had long expired. Secondly, the additional clause only covered “defective work for the period of 10 years for the NHBC warranty”. For each of the three houses, that period had expired on separate dates in 2012.
The decision
At first blush, Allison’s arguments seemed quite attractive. The claim appeared to have been commenced well outside of the contractual and tortious limitation periods and after the expiry of the 10-year period of cover provided by NHBC.
However, Fraser J disagreed. Having considered all of the well-known recent authorities on interpretation (including the recent decision of the Supreme Court in Arnold v Britton [2015] UKSC 36; [2015] EGLR 53), he held that the wording of the additional clause “goes far wider than, and is different to, merely providing a 10-year period for claims arising under” the JCT contract. In particular, he felt that it made “no sense” for the defendant to “warrant to accept responsibility” for claims made under the NHBC warranty if that warranty was already part of the obligations on the contractor under the JCT contract. That wording had to create an additional obligation on the defendant. The clause operated as an assumption of responsibility by Allison “for defects that were to become manifested in the future during the period of the NHBC warranty.” That included the claims in this case.
Fraser J then confirmed that the cause of action arose when Allison failed to comply with the obligations placed on it by the additional clause. As the claim was issued within six years of that failure, there was no limitation problem.
The implications of the case
Fraser J’s judgment is persuasive and it is difficult to criticise his analysis of the facts or application of the law. However, a bit of me cannot help but think that the decision has resulted in consequences that are significantly further reaching than the JCT contract’s drafters might have assumed when the additional clause was first considered by two parties owned and controlled by the same people.
Stuart Pemble is a partner at Mills & Reeve LLP
