In our latest alert, we review the judgment in Larkfleet Ltd v Allison Homes Eastern Ltd which highlights the potentially significant liability implications arising from National House Building Council (NHBC) cover for contractors involved in residential developments. You may be on the hook in terms of possible liability for a lot longer than you realised...

An unexpected exposure?

In this case, the Technology and Construction Court (TCC) found that a claim against a contractor was not time barred, despite there being a gap of some 12 years between practical completion of the works and the commencement of proceedings, even though the building contract in question was signed as a simple contract and not as a deed.

The background

Swallow Homes Limited, subsequently acquired by Allison Homes Eastern Ltd, (the Contractor), was engaged by Larkfleet Ltd (the Developer) to design and build residential properties at Market Deeping in Peterborough under a standard form JCT 1998 contract with bespoke amendments.

The NHBC Scheme was integral to these proceedings. As Mr Justice Fraser noted:

"In summary, a contractor who is engaged upon building residential properties will, if registered with the NHBC, offer those properties for sale with the benefit of what is called NHBC Buildmark Cover. This protection lasts for 10 years from completion and enables a purchaser, if certain defects appear within certain periods, the comfort of knowing that the NHBC will investigate any claim, organise any necessary remedial works, and provide resolution of what may (and in this case appear to be) major defects such as inadequate foundations which emerge over time."

It was the Developer (and not the Contractor as you would normally expect) that registered the properties with the NHBC. The Contractor of course carried out the design and then built the properties. The parties agreed a bespoke amendment (clause 2.5.5) to the contract as follows:

"The Employer [i.e. the claimant] will register the site with NHBC under the Employer's registration and the contractor [i.e. Swallow ] 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."

The properties were built and the Developer sold the properties in 2002. This case relates to three specific houses (the Houses) which reached practical completion on various dates in 2002. In each case, therefore, the expiry date on the NHBC Insurance Certificates for the property was 10 years later i.e. cover extended to an end date in 2012.

Prior to the spring of 2011, defects in the foundations started to emerge in the Houses. These claims were notified by the homeowners to the NHBC. The NHBC validated the claims and notified the Developer to seek reimbursement. In turn, the Developer notified the Contractor of the defects.

A dispute arose, with the Contractor arguing that any claim was by now time barred. In due course, the Developer issued court proceedings - by this time, it was April 2014, some 12 years since the works had been completed.

In January 2016, the matter came before the TCC to determine preliminary issues concerning the effect of clause 2.5.5 of the Contract.

The key area of dispute

Unsurprisingly, the Developer was arguing that a wide interpretation of clause 2.5.5 was correct and that as long as the loss arose from a defect which triggered the NHBC cover for a particular house, then this loss could be passed on to the Contractor by the Developer.

In contrast, the Contractor argued that clause 2.5.5 meant that the limitation period ended at the expiry of the 10 years of NHBC cover i.e. that if the Developer had not commenced proceedings before the NHBC cover expired, the claim would be time barred.

TCC decision - the key points

In summary, the key points from the judgment in terms of what the TCC considered to be the correct contractual interpretation of this clause were as follows:

  • a cause of action for breach of the obligation in clause 2.5.5 would occur either:
    • when the Contractor is asked to comply with its obligation and then refuses to do so; or
    • if the Contractor does not respond to the request, a reasonable time after the Contractor was asked to take responsibility.
  • On the facts in this case, the key events (for limitation purposes) were:
    • a letter of 24 May 2011 in which the Developer notified the Contractor that the  Houses were being monitored for subsidence;
    • the Contractor's letter in response of 3 September 2013 stating that all 3 claims were time barred; and
    • 14 April 2014 - the date proceedings were issued by the Developer.
  • The relevant breach therefore occurred between 24 May 2011 and 3 September 2013 and in any event not earlier than 24 May 2011 meaning that the claim was not out of time on any interpretation.
  • Mr Justice Fraser therefore held that the Developer's claim was not time-barred.

Analysis - and how to limit exposure

At first glance, this decision may seem surprising. The claim arose out of a contract executed "under hand" (a simple contract) and liability for defects would therefore ordinarily run for six years from practical completion - for these Houses, that six years would have run out on various dates in 2008. (If the agreement was a deed, the liability would run for 12 years but the contract here was not a deed.)

Put in simple terms, however, the Contractor (whether knowingly or otherwise) agreed to a contractual amendment (the insertion of the bespoke clause 2.5.5) which meant that its liability to accept responsibility for defects covered by the NHBC Scheme continued for years longer than it otherwise would have been. The Contractor would be in breach of this obligation by refusing to accept responsibility for those defects, once the claim was passed on. Any proceedings arising out of that claim would then have to be issued within six years of the breach.

So before finalising such contracts, think and think again - any clause linking obligations to the NHBC Scheme (or comparable) needs careful analysis as it may keep you on the hook for a lot longer than you originally envisaged or intended.