BDW Trading Ltd v Ardmore Construction Ltd [2024] EWHC 3235 (TCC)
We report on two recent decisions which highlight the importance of adjudication in the context of building defect claims. These decisions will be of wider interest to the construction industry given the proliferation of such claims in the wake of the Building Safety Act 2022 (“the BSA”) and extended retrospective limitation periods under the Defective Premises Act 1972 (“the DPA”).
Firstly, the Supreme Court in Abbey Healthcare v Augusta has brought welcome clarity to the question of whether collateral warranties give rise to the statutory right to refer disputes to adjudication. The case also provides a helpful reminder of the key features of adjudication.
Secondly, the TCC has recently handed down judgment in BDW Trading v Ardmore Construction, a decision which provides a striking illustration of how adjudication can be used to obtain a ‘fast track’ resolution of complex high-value defect claims arising from historic building projects. It also confirms that the ‘Fiona Trust principle’ applies to adjudication clauses: therefore, it will be presumed that contracting parties intend that all disputes arising from their contractual relationship should be resolved by the same tribunal. Importantly, this opens the door for claimants to commence adjudications for breach of the DPA relating to building contracts that are subject to adjudication.
In Abbey Healthcare, Lord Hamblen helpfully explained the background to adjudication. The starting point is the Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”), which confers a statutory right to refer to adjudication any dispute which arises “under a construction contract”. The 1996 Act was introduced with the twin purposes of (a) improving cashflow for ongoing construction projects, and (b) providing a streamlined dispute resolution process.
Lord Hamblen observed that the decision in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd [2020] UKSC 25 discusses the background to the 1996 Act and its success in meeting those twin purposes (paras 11 to 14), as well as identifying important features of adjudication procedure (paras 20 to 26) including the following:
We turn now to the recent decisions that help to illustrate these features.
It is common practice in the construction industry for ‘collateral warranties’ to be provided to third parties (such as funders, purchasers and prospective tenants), giving them contractual rights against contractors should defects arise in respect of their works. The central issue in this case was whether the collateral warranty given by Simply was a ‘construction contract’ within the meaning of the 1996 Act.
The claim involved fire safety defects that were subsequently discovered in a care home that had been constructed by Simply. Abbey obtained a collateral warranty from Simply and brought an adjudication in respect of its losses. Simply refused to pay and challenged the adjudicator’s jurisdiction on the grounds that the collateral warranty was not a ‘construction contract’ within the meaning of the Act.
Abbey issued proceedings and sought summary judgment. The High Court held that the collateral warranty was not a construction contract and dismissed the application. Abbey’s appeal to the Court of Appeal succeeded by a bare majority. Simply appealed to the Supreme Court.
As a question of statutory interpretation, Lord Hamblen found that a collateral warranty will not be an agreement “for” the carrying out of construction operations for the purpose of section 104(1) of the 1996 Act if it merely promises to perform obligations owed to someone else under the building contract. There needs to be a separate or distinct obligation to carry out construction operations for the beneficiary; not one which is merely derivative and reflective of obligations owed under the building contract.
On the facts, Lord Hamblen held that the Abbey collateral warranty was not a construction contract within that statutory definition. Furthermore, there were good reasons for concluding that in general collateral warranties are not intended to fall within the scope of the 1996 Act. For example, one of the twin purposes of the Act – improvement of cashflow – would not be furthered by its application to collateral warranties.
Therefore, third parties such as funders, purchasers and tenants who benefit from collateral warranties generally will not be able to make use of adjudication.
In contrast, as illustrated clearly in this case, parties to construction contracts are able to adjudicate even on very old historic projects, thereby benefitting from one of the twin purposes: the streamlined dispute resolution process.
Ardmore had been employed under a JCT contract to design and construct an apartment block known as Crown Heights, which was completed in 2004.
Following the Grenfell tragedy, BDW (as assignee of the employer’s rights under the contract) undertook investigations which revealed that Crown Heights suffered from various fire safety defects. At this stage, Ardmore benefited from a limitation defence. However, the BSA retrospectively increased the limitation period for a claim under section 1(1) of the DPA from 6 years to 30 years. This prompted BDW to write a letter of claim to Ardmore, nearly 20 years after practical completion.
BDW subsequently commenced an adjudication. After an “unusually protracted timetable” (a relative term given that the whole process was concluded within 6 months), the adjudicator gave his decision. He determined that: (a) Ardmore had breached its duties under the building contract (and could not rely on a limitation defence due to deliberate concealment of its breaches); (b) Ardmore was also liable under the DPA in respect of fire safety defects; and (c) Ardmore must pay c.£14.5 million in damages plus the adjudicator’s costs.
BDW issued a claim form in the TCC seeking enforcement of the award by summary judgment. Ardmore acknowledged that in the vast majority of cases the court will enforce the decision but said that this was a rare case in which the court should take a different approach. It relied upon a number of grounds. We focus on the two that are of wider interest.
Ardmore contended that the adjudicator had no jurisdiction to determine a claim under the DPA. Under the 1996 Act adjudication is limited to disputes which are “under the contract”, a phrase which mirrored the adjudication provisions in the contract. Ardmore referred to the wider language of the arbitration clause, arguing that this created a strong inference that the adjudication clause should be interpreted narrowly and could not encompass a claim under the DPA.
Mrs Joanna Smith J referred to the decision in Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, where the House of Lords had “deprecated linguistic distinctions of this kind” when interpreting an arbitration clause. In this context, the House of Lords held that there was a presumption that the parties intended that all disputes arising from their contractual relationship should be decided by the same tribunal, unless the language clearly excluded specific matters from the arbitrator’s jurisdiction.
The judge found that this reasoning also applied to adjudication clauses, and that the building contract did not contain clear language to displace the ‘Fiona Trust presumption’. Therefore, the adjudicator did have jurisdiction in relation to the claim under the DPA.
Ardmore also contended that the unique combination of a 20-year-old project and the pursuit of a £15 million professional negligence claim by way of adjudication created “an inherently unfair situation”, in that it had almost no relevant contemporaneous documentation and had to rely upon documents provided by BDW. Ardmore argued that adjudication was primarily designed for the resolution of live or recent disputes and had very limited procedures to manage the disclosure process, so had “insufficient teeth” to address this “inequality in arms”.
Mrs Joanna Smith J observed that it was common ground that adjudication is inherently a “rough and ready” process and that the threshold for a valid natural justice challenge is high. Against this backdrop, the judge gave Ardmore’s arguments short shrift, finding that any paucity of information going into the adjudication was due to Ardmore’s poor historic record keeping and its decision not to carry out any detailed investigations into the issues raised in the letter of claim. Furthermore, the adjudication process did enable Ardmore to obtain disclosure of key documents from BDW.
These decisions demonstrate the importance of identifying the dispute resolution mechanisms that are available under the contract in question. Where adjudication is available, claimants may be encouraged to bring building defect claims arising from historic projects using this process. Not only is the fast-paced and cost-effective nature of adjudication likely to prove attractive to many claimants, but the constricted timetable may create a tactical advantage for the referring party if the responding party has not fully prepared their case.
The BDW case serves to highlight the importance of retaining relevant records from historic projects and/or undertaking investigations once potential claims are intimated. Similar points are likely to arise in relation to claims that come before the courts involving retrospective limitation under the DPA. In particular, a defendant who argues that such a claim should be dismissed in order to avoid a breach of their “Convention rights” (s.135(5) of the BSA) may find the courts unsympathetic where their own record keeping has been poor.
More generally, it can be seen that the extended retrospective limitation periods under the DPA are bringing claims that were previously time-barred back into scope, leading to the development of case law in different areas as claimants explore new avenues to pursue claims. In this regard, the Supreme Court recently heard the appeal in URS Corporation Ltd (Appellant) v BDW Trading Ltd (Respondent) UKSC/2023/0110 (another case involving BDW) and that judgment is eagerly awaited.
It will be appreciated that retrospective limitation under s.1 of the DPA only applies to projects for the provision of new dwellings. The BDW v Ardmore case also demonstrates how a finding of “deliberate concealment” can defeat a limitation defence, so may provide an alternative route for pursuing claims involving commercial properties or refurbishment projects that are not subject to s.1 of the DPA.
From the perspective of insurers, the increased prominence of adjudication to resolve historic building defect claims will be of interest. Property insurers may wish to consider this avenue when advancing subrogated claims (albeit legal costs are not generally recoverable under adjudication). Liability insurers will take note that contractors’ policies often include extensions in respect of insured liabilities which arise from adjudication decisions. Therefore, where it is anticipated that a claimant may commence an adjudication, there is all the more reason to investigate and prepare thoroughly at an early stage.
If you’d like to know more about anything covered in this article, please get in touch.
Edwin Millburn - Partner and Construction SIG Lead
Stephanie McCarthy - Associate and Construction SIG member
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