Building Liability Orders – Where are we now?March 2023
Building Liability Orders (BLOs) and Information Orders have been in force since 28 June 2022. Over 8 months have now passed and the impact that these orders will have in practice, and how these orders will change the liability landscape for construction projects, remains to be seen. However, we anticipate that significant developments in this area will occur over the next coming months. This article therefore explores the potential impact that these orders could have and how they may work in practice.
Why were BLOs Introduced?
Developers often create subsidiary companies, such as ‘shell’ companies or special purpose vehicles (SPV), for the sole purpose of carrying out particular development projects. Once the project has concluded, it is generally commonplace for developers to transfer any assets out of the subsidiary company to other parts of its business and then look to dissolve the company.
While this corporate structure is useful for developers, it often leads to a situation where the company which undertook the works on a project is either dissolved or holds limited assets of value. This can significantly impact a Claimant’s recovery position if defects are found post-completion of the project.
The introduction of BLOs and Information Orders aims to address the above situation by broadening the Claimant’s recovery rights and introducing a way of extending liability beyond the original subsidiary company to its associated companies.
How does a BLO work?
Under section 130 of the Building Safety Act 2022 (BSA 2022), the High Court has the right to make a BLO. Once ordered, a BLO extends the specific liabilities of one body corporate to an associated company/companies, making them jointly and severally liable.
A BLO may be made in relation to any “relevant liability” (s130(3)), which is defined as a liability which is incurred:
- Under the Defective Premises Act 1972 (DPA);
- Under section 38 of the Building Act 1984 – which is a new cause of action relating to a “breach of duty imposed by building regulations so far as it causes damage”. However, section 38 has not yet been brought into force (and it is not currently known when it will be); or
- Resulting from a “building safety risk” – which is defined as a “…risk to the safety of people in or about the building arising from the spread of fire or structural failure” (s130(6)).
Who can liability be extended to?
A successful BLO application will mean that the “relevant liability” of one body corporate is also the liability of another “specified” body corporate (s130(2)).
A body corporate can only be “specified” if it is or has been “associated” with the original body corporate during the “relevant period” (s130(4)).
The “relevant period” is widely defined as any time from when the building works started up to the date the BLO is made (s130(6)), and so has the potential to capture a wide pool of associated companies.
A body corporate is “associated” with another body if one of them controls the other, or a third party corporate controls both of them (the definition of control is set out in section 131 of the BSA 2022). Whether a company is “associated” will depend on the facts of each case and the specific corporate structure in place. However, it will likely include a company’s parent or sister company/companies.
Further, and importantly, the BSA 2022 provides that, even if the original body corporate is dissolved, a BLO can still be made in relation to its associated companies (s130(5)).
Just and Equitable
A limitation attached to the making of BLOs is that, in order to be successful, the applicant needs to persuade the High Court that it would be ‘just and equitable’ to order a BLO (s130(1)).
The legislation does not prescribe what factors should be considered by the Court when making this decision, and so it remains to be seen how this threshold will be interpreted in practice. However, given its non-prescriptive nature, we suspect the Court’s interpretation of what constitutes ‘just and equitable’ will be highly dependent on the facts of each case.
In addition to BLOs, section 132 of the BSA 2022 introduces the right for a Claimant to apply for an Information Order. If granted, this order requires a specific company to give specified information or documents related to its associated companies (s.132(2)). This may be a powerful tool for potential Claimants to use in order to determine whether there is merit in applying for a BLO and/or which company/companies a BLO application should be targeted at. To obtain an Information Order, the applicant will need to show that it requires the specified information or documents in order to enable it to consider whether to apply for a BLO.
In principle, these orders could result in a significant broadening of the potential liability exposure for past and future projects – as it opens up the possibility for associated companies, who were not involved in the works, to be held jointly and severally liable. This effectively pierces the corporate veil which group company structures have historically relied upon. We therefore expect to see a surge of applications for BLOs / Information Orders in 2023. We then anticipate there will be much legal debate regarding how these orders are to be properly interpreted and applied by the High Court, and in particular, what factors will come into play when the High Court consider if a BLO is ‘just and equitable’.
If you have any questions about this article, please get in touch with Emily Hunt or Antony Smith.Download PDF