When does time start to run on a contractor insolvency claim under a NHBC new homes policy?
September 2024The Technology and Construction Court recently delivered helpful judicial guidance on when an insured’s cause of action under an the NHBC ‘Buildmark Choice’ policy, providing cover for contractor insolvency before practical completion arises. The judgment in Peabody Trust v National House-Building Council [2024] EWHC 2063 (TCC)[1] concerns an application for summary judgment, or strike out, made by the NHBC based on a potential limitation defence to a claim under the policy.
Background Facts
In November 2015, Catalyst Housing Limited (“Catalyst”) appointed Vantage Design & Build Limited (“Vantage”) under an amended JCT Design and Build Contracts 2011 to design and construct 175 new dwellings, including 88 social housing units (“Units”). The total contract sum was £23,878,482, with £10,358,510 allocated to those Units. The Units were insured under the National House-Building Council’s (“NHBC”) ‘Buildmark Choice’ policy, protecting Catalyst, to whose rights Peabody Housing Association (“Peabody”) had succeeded, against various construction risks such as contractor insolvency prior to practical completion of the project.
Construction commenced in or about mid-December 2015, however Vantage encountered financial issues, resulting in it ceasing work and the later appointment of administrators during June 2016.
In July 2016, Peabody initiated a tender process to select a new contractor. It subsequently appointed Stack London Ltd (“Stack”) as the construction management contractor via an amended JCT Construction Management Agreement 2011, in January 2017, to undertake and complete the project works. Stack was tasked with procuring further contracts to complete the project works. Following the removal of squatters from the site in September 2016, Stack commenced the completion of the construction works. Practical completion of the Units eventually was reached on 19 January 2021.
Peabody then issued a claim against the NHBC for over £ 913,555 plus interest on 24 July 2023 (the “Claim”). The Claim sum comprised: (a) £815,500 for additional costs incurred beyond what would have been paid to the original contractor, Vantage; and (b) legal and other fees and expenses, totalling approximately £98,000. This figure also included a claim (to be pro-rated for the Units) for ‘site security’ costs, totalling £56,350.
The Policy
The pertinent section of the ‘Buildmark Choice’ insurance policy referenced in the Claim is titled “Option 1 – Insolvency cover before practical completion“, stipulating:
“…[B] When the section applies
This section applies if you lose the amount paid to the contractor in accordance with the building contract or have to pay more to complete the building of the home(s), because the contractor is insolvent or commits fraud.
[C] When you can claim
You can only claim under this section up to the date of the Buildmark Choice certificate.
Contact us and tell us if you have lost the amount you paid to the contractor or the contractor has not completed the home(s).
[D] What we will do
We will pay you the reasonable extra cost above the contract price including professional fees, for work necessary to complete the home(s) to the NHBC requirements; or
We will reimburse the amount paid to the contractor in accordance with the building contract which cannot be recovered from them.
[D1] In addition, we will pay the cost of reasonable precautions to secure the work defined in the building contract against unauthorised entry, theft and vandalism until work resumes.
[E] Conditions and limitations
This option will only apply if included on the quotation and the additional premium has been paid to and accepted by us.
There are limits to how much we will pay (as explained on pages 14 & 15)…”
Although a number of words appear in bold in the original policy wording, being definitions (including “insolvent“), these were not generally included in bold in the judgment issued – see above.
Under Option 1, the claimant could claim its “reasonable extra costs above the contract price” of completing the project works up to a limit of 10% of the original contract sum (c. £10.36 million).
The issue to be determined
The Judge had to decide whether there was any limitation defence to the Claim under the insurance policy. This involved an assessment of when time started to run for the purposes of Peabody being able to claim against NHBC under Option 1 of the policy. Since the insurance policy was a contract, Peabody had six years to bring a claim under the Limitations Act 1980. This point could therefore only be determined by interpreting and applying the language used in the policy.
The Parties’ positions
The Parties agreed Option 1 was relevant since Vantage went into administration, an alternative contractor completed the works, and practical completion was reached. However, in January 2024, the NHBC filed a summary judgment application (to get Peabody’s Claim dismissed or struck out) on the grounds that the claim was statute barred pursuant to Section 5 of the Limitation Act 1980. In doing so, Peabody asserted that over six years had elapsed since Vantage entered administration on 29 June 2016, and the Claim being issued in late July 2023. In its application the NHBC contended that the relevant limitation period commenced, and time started to run, with Vantage’s administration on 29 June 2016, i.e. this was the date marking the accrual of the contractual cause of action. The Judge called this the ‘Insolvency Point’.
If NHBC’s analysis was correct, over six years would have elapsed since Peabody had a claim against NHBC, meaning Peabody would have been time-barred and effectively meaning that the application must be granted.
Peabody’s position however was that since Option 1 “applies if you…have to pay more to complete the building of the home(s), because the contractor is insolvent“, the coverage included the additional cost resulting from the insolvency, and not the actual insolvency itself. Consequently, Peabody argued that the relevant cause of action arose not on the date of insolvency but at a subsequent date (i.e. when the final or additional costs were known). Peabody also argued that it did not have to pay more prior to March 2020 since there was money left in the ‘tank’ when Vantage ceased working.
The Judge indicated that the evidence concerning when this loss occurred was unclear, potentially requiring expert assessment. Accordingly, if Peabody was correct, NHBC’s application would need to be dismissed.
Decision
A decision was only reached on the Insolvency Point: a court can decide straightforward points of construction on a summary judgment application provided it is satisfied it has sufficient evidence and the parties have properly addressed the issue. However, the remaining issues of fact and the validity of the Claim itself necessitated evidence or were too complex for summary disposal proceedings.
The Judge held that NHBC was incorrect in asserting that the time commenced from insolvency. The Judge rejected NHBC’s argument that insolvency automatically requires an insured to incur additional costs to complete the works, both as a matter of fact and construction.
The Judge pointed to the broad definition of ‘Insolvency’ in the NHBC Policy, which encompasses situations like administration and receivership for example. The Judge acknowledged that an administration might be successful, enabling the project to be completed without undue difficulties and without extra costs being spent by the insured. The insured event was not the insolvency itself, but the resulting necessity for the relevant insured having to pay more than the agreed contract sum to complete the works. Therefore, he concluded that the point at which time started running for the claim was the point at which Peabody “had to pay more to complete the units, as a result of that insolvency” [paragraph 69]. Until it became apparent that Peabody did have to pay more than the original contract sum however, it could not be said to have had a claim under the policy.
The Judge also concurred with Peabody’s submission that it would not make commercial sense for the insurer to be liable to indemnify the insured upon the occurrence of insolvency (as defined) and irrespective of whether any actual loss was incurred by the event. The limitation under the policy to reasonable extra cost was intended as no more than a cap on a claim based on actual costs.
The Claim will continue to progress to trial, barring any successful NHBC appeal or settlement in the interim.
Commentary
The NHBC Buildmark policy is well known and prevalent in industry. This judgment is important to legal and insurance practitioners, insurers, brokers, as well as those obtaining new homes warranties and similar insurance cover. It is also likely to be of wider interest to developers and contractors.
An important takeaway mentioned in the industry press is clarity on the general principle of the point at which time for a claim under new homes warranties such as this one starts to run for limitation purposes – as outlined above. This decision is therefore likely to be positively received by those routinely procuring projects or securing such warranty policies. Given the current market within the UK construction industry and recent trends of contractors facing increased costs and cash flow issues, the risk of contractor insolvency resulting in additional costs to employers remains a real and potentially significant risk in practice. Further, in the wider landscape, the enhanced requirements associated with the building safety regime, particularly in the context of the design and construction of dwellings and higher-risk buildings and future anticipated changes following the release of the Grendell Inquiry’s Phase 2 Report, potentially further amplifies the overall exposure to risk to parties involved with these types of projects.
However, insurance policies and limitations/exclusions are not all standard or blanket within the UK market. This decision concerned Option 1 of a specific policy. Accordingly, it will be important to understand the scope of any such new build insurance and the circumstances for notifying any claims under this on a case-by-case basis.
If you have questions about this decision or the issues covered above, please contact James Vernon or your Beale & Co lawyer. For more information on our specialist construction and insurance expertise, including on construction insurance matters, please visit our website.
[1] Peabody Trust v National House-Building Council [2024] EWHC 2063 (TCC) (06 August 2024) (bailii.org)
Download PDF