As is now well documented, the Building Safety Act 2022 (BSA) received Royal Assent on 28 April 2022, implementing widespread amendments that have been described as the biggest change to building safety regulation in a generation. A number of its provisions came into force two months thereafter, on 28 June 2022. Amongst these was one of the more controversial measures introduced by the BSA, the Building Liability Order.
In this article, we consider Building Liability Orders in more detail, including the rationale for their introduction, the potential subjects of a Building Liability Order, the test that the court will apply in deciding whether to make a Building Liability Order, and their impact on the historic legal doctrines of privity of contract and separate legal personality.
What are Building Liability Orders and why are they needed?
Historically, it has been relatively common practice in property development for developers to set up subsidiary 'shell' companies, or special purpose vehicles (SPV), with very few assets, to carry out particular projects. Once the developments are completed, the subsidiary companies are then typically wound up and any assets transferred elsewhere in the business. The prospect of enforcing any claims against the SPV, and recovering any money, is near impossible – with the result being that the corporate developer group has no long-term liability for the developments in question.
The rationale behind the introduction of Building Liability Orders is to address this issue and prevent developers from escaping liability for safety defects by hiding behind complicated legal structures.
Accordingly, section 130 of the BSA confers a power on the High Court to grant a Building Liability Order if they consider it "just and equitable" to do so. This is an order which will extend a "relevant liability" of a body corporate (Party A) so that it will also be a liability of an "associated" body corporate (Party B). Parties A and B may then become jointly and severally liable for the relevant liability.
This will overcome the issue described above: a party with a claim arising from a "relevant liability" will effectively be able to make that claim against both A and B, and if successful, may recover damages from either A or B.
What is a "relevant liability"?
The BSA defines a "relevant liability" as a liability incurred either:
- Under the Defective Premises Act 1972 (DPA 1972);
- Under section 38 of the Building Act 1984; or
- As a result of a "building safety risk".
We previously reported on the widening of the scope of the DPA 1972 in the BSA. Prior to 28 June 2022, a claim under the DPA 1972 could only be brought if it related to the "provision" of a dwelling (i.e. the original construction or conversion works). The BSA inserts a new section 2A into the DPA 1972 which expands this to cover claims arising out of "any work undertaken on an existing dwelling, provided that work is done in the course of a business". The duty is owed both to the person for whom the work is done, and "each person who holds or acquires an interest (whether legal or equitable) in a dwelling in the building".
Moreover, as we also observed, the limitation period for claims under the DPA 1972 has been significantly extended:
- For claims under section 1 only for works which were completed on historic projects from six to 30 years retrospectively.
- For claims under section 1 and section 2A of the DPA, the limitation period has been extended from six to 15 years prospectively i.e. for any project which completes on or after 28 June 2022.
We also reported on section 38 of the Building Act 1984, which provides that a "breach of a duty imposed by building regulations so far as it causes damage" is actionable – and the extension of the limitation period for claims thereunder to 15 years, prospectively. This Government factsheet (withdrawn in July 2022) indicated that the intention was to commence section 38 of the Building Act 1984 alongside the Defective Premises Act changes, on 28 June 2022. However s. 38 is not yet in force and it is not known when it will be brought into force. If / when s. 38 comes into force, it will provide a statutory right to claim compensation for physical damage (e.g. injury or damage to property) from those responsible, where such damage is caused by a breach of the Building Regulations.
The final potential "relevant liability", as noted above, is described in the BSA as liability incurred "as a result of a building safety risk". The Explanatory Notes to the BSA describe this as "a risk to the safety of people in or about a building arising from the spread of fire or structural failure." This potentially has wide scope in light of the increased focus on building safety, cladding and fire-safety claims in the wake of the Grenfell tragedy.
Thus, where Party A is the dissolved shell company with no assets from which to recover, and Party B is its parent company, a party with a claim against A for any of the above types of liability may apply for a Building Liability Order to be made on B. The claimant will need to show that B has been "associated" with A during the "relevant period", namely at any point between the time when A started carrying out the works which incurred the relevant liability and the Building Liability Order being applied.
What does "associated" mean?
Section 131 of the BSA provides that a body corporate is 'associated' with another body if:
- one of them 'controls' the other; or
- a third body corporate controls both of them.
This will encompass, for example, parent companies and subsidiaries, as well as sister companies within a group structure.
What test will the High Court apply in deciding whether to make a Building Liability Order?
As noted above, the BSA provides that the High Court may make a Building Liability Order if it considers it just and equitable to do so. But what does "just and equitable" mean in practice?
The BSA does not define the meaning of "just and equitable". Accordingly, its meaning will be a question of judicial interpretation in each case. As at the time of writing, there is not yet any judicial guidance as to its meaning, although we can reasonably expect such guidance to be forthcoming.
In the House of Lords' debates concerning the Building Safety Bill (as it then was), Lord Greenhalgh indicated that the House was considering whether "further work" was needed in respect of the factors to be considered by the High Court, such as producing guidance with the Judicial College. He also explained that it is expected that the High Court will consider a 'variety of factors' when deciding whether to grant a Building Liability Order. These will include "the extent of the damages being sought and whether a fair trial can take place".
Information Orders
Section 132 of the BSA also provides a right for prescribed persons (to be defined in regulations) to apply to the High Court for an Information Order. An Information Order, once granted, will require a specified body corporate to disclose information as to persons who are or have at any time since the commencement of the relevant work been associated with a company which is subject to a "relevant liability" (as described above). The intention is for Information Orders to provide a 'route' to obtain information to support an application for a Building Liability Order.
Commentary
The impact on the concepts of separate legal personality and 'piercing the corporate veil'
The approach outlined above, whereby developers carried out construction works through SPVs which were subsequently wound up, relied upon the long-established principle of company law that the obligations and liabilities of a company are those of that company alone (i.e. the concept of 'separate legal personality'). There are very limited circumstances in which the courts will look beyond the separate legal personality of a company and 'pierce the corporate veil'.
However, the granting of a Building Liability Order (as well as certain other provisions of the BSA, which we examine separately) will do precisely that: it will allow for the corporate veil to be 'pierced' by extending liability for construction work to associated entities such as parent or group companies.
Coupled with the extended limitation periods under the DPA 1972 and the Building Act 1984, the potential exposure of developers has been significantly broadened by the introduction of Building Liability Orders.
How this will play out in practice – as well as the interpretation of 'just and equitable' – remains to be seen as sections 130-132 of the BSA are applied and tested by the courts. Watch this space in 2023.
If you have any questions about this article, please get in touch with Sue Ryan or Sean Garbutt.
Footnote
[] Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34.