Contractual implications of the URS v BDW judgment and risk management

In May this year, the Supreme Court handed down judgment in URS Corporation Ltd v BDW Trading Ltd. We previously commented on the impact of this decision on building safety claims here, and this note will cover the contractual implications of the judgment with some potential tips for parties in projects.

Background

In summary, BDW Trading Ltd (“BDW”) was a property developer who appointed URS Corporation Ltd (“URS”) as their structural engineering and design consultant for the construction of 12 tower block buildings with residential units between 2005 and 2012 in London and Leicester. In late 2019, BDW conducted investigations on a block and identified potential structural defects and claimed that defects identified were attributable to URS’ design (despite there being no obvious physical damage). BDW voluntarily undertook remedial works based on the liability it had to the occupiers under the Defective Premises Act 1972 (the “DPA”), and subsequently initiated a negligence claim against URS to recover these costs.

The Supreme Court decided that, where remedial work had been undertaken because there was a risk to the safety of building occupants, the fact that payments for that remedial work were made voluntarily did not mean, as a rule of law, that the loss was outside the scope of the duty of care or too remote. Developers will therefore be encouraged by this outcome to undertake remediation work without delay.

In addition, the judgment found that contribution claims and claims for negligence arising from a liability under the DPA are subject to the same extended limitation period as actions under section 1 of that Act. Developers can now look to pursue a claim on projects going back 27 years, given that the limitation period was extended retrospectively for 30 years in 2022 (previously it was unclear whether the DPA would apply to recovery actions against the supply chain under the DPA, and also whether developers would be able to bring a claim under the DPA as well as the individual tenants). This is likely to give rise to an increase in the number of claims made in cases where dwellings are unfit for human habitation.

Contractual implications

In terms of negotiating and agreeing contracts, it will be important for those in the supply chain to ensure that they are not agreeing to extend the limitation period further than what is required under the Limitation Act 1980 or the DPA. We have seen examples of blanket 15-year limitation periods being introduced, which is wider than the contractual position. The 30-year period applies to claims under the DPA before the introduction of the Building Safety Act 2022 (“the BSA”) – the clock started on 28 June 2022, while the 15-year period applies to claims under the DPA after the introduction of the BSA (see our note on the extended limitation periods here). No other claims will be caught by either period. Similarly, parties should seek to avoid extending their liability to all parties who may be able to rely on the DPA by way of collateral warranties or third-party rights. They should be looking to agree on an aggregate cap of collateral warranties/third-party rights where possible, as well as limiting the potential pool of beneficiaries.

Building Liability Orders (“BLOs”) are a mechanism introduced under the BSA that allows the court to assign liability for remediation costs to corporate entities associated with building safety issues, however it is important to stress that the court will apply specific tests to determine the appropriateness of issuing a BLO, and this is not up to the parties of the contract to determine.  We are seeing attempts in contracts to extend third party rights or obligations to provide collateral warranties to “associated” companies, and these should be resisted.

Appointments usually include standard obligations to comply with statutory duties and so this may make it easier for claims to be brought within the normal six- or 12-year period without necessarily having to establish the breach of contract or negligence, but for establishing the breach of the statutory duty only. It will therefore also be important that compliance with statutory duties is limited to the duties which apply to the services, and those which are in force at the time of providing the services. Parties should also look to include a change in law provision in their appointments (particularly given the evolving nature of the BSA). This will not protect against the risk of a claim being brought against them by a developer; however it is one way to ensure that you are not agreeing to extend your liability beyond your statutory duties.

In practice, we consider that any claims brought by developers will still need to show that the member of the supply chain has breached its obligations, caused a loss and failed to act reasonably in what they did. The decision therefore places even greater importance on knowledge retention in relation to projects. Having and retaining the documentation to stand behind the design process and any decisions made will be particularly important, as the extended time periods are likely to mean less reliable witness evidence is available to defend claims.

Conclusions

The judgment reinforces the principle that costs should be borne by those responsible for the defects by significantly expanding the utility and effectiveness of the DPA and contribution claims, particularly by developers, to recover costs from negligent professionals and builders. The judgment is especially important for those working on residential properties, given that the DPA applies to these buildings, however one of the intended changes of the BSA (which has not yet been brought into force – when this will happen is currently unclear) is to extend the limitation period for claims brought under section 38 of the Building Act 1984 to 15 years. Section 38 of the Building Act 1984 provides a statutory right to claim compensation for physical damage caused by a breach of the Building Regulations and applies to all buildings subject to Building Regulations approval.

It is important to note that the extended limitation periods under the DPA cannot be contracted out of, and the additional focus on building safety is not something which can be avoided (any limitation of liability clause will not be effective to the extent that the works in question are caught by the DPA). What can be avoided, however, is agreeing to liability which extends the statutory position. We have outlined above some key ways of doing this in your appointment with the client. Alongside having an effective contract which protects your position, document retention and storage is essential for the duration of the project, as this may help to clarify any decisions made later down the line. In terms of the retrospective 30-year period, it is worth going back through any relevant documentation and carrying out an audit process.

As a final general comment, we are seeing very wide drafting in relation to the BSA which goes far beyond the remit of the Act, including indemnities, extended limitation periods and administrative/ burdensome requirements. For additional support and/or information relating to contract negotiation and project advice (with a specific focus on the BSA/ DPA), please contact Andrew Croft or Rhia Gould.