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The New Construction Product Cause of Action

Construction Product Cause of Action

If you’re involved in the construction industry and haven’t heard of the new Construction Product Cause of Action, I strongly urge you to read this article. If you’re the CEO of a product manufacturer, developer or main contractor, you might want to have a strong drink handy. The regulation of construction in Great Britain is about to experience the most seismic shift in its history.

The Building Safety Bill

It can’t have escaped most peoples’ attention that the Building Safety Bill has been ping-ponging between the Commons and the Lords at the moment, but will soon move forward for Royal Assent, becoming law sometime in the Summer. Most reporting on the BSB has focused on the protections it intends to afford leaseholders as they seek to remediate their defective blocks of flats. Also notably, in the Bill are provisions such as the requirement for property managers to cover the duties and responsibilities under the “role” of a Building Safety Manager.

What has largely gone under the radar is the eye-opening legislation being introduced to give leaseholders and building owners the commensurate ability to recover defect remediation costs from Industry. I will discuss these measures here, highlight some of the possible implications and propose one suggestion that I think the Government should make to help prevent the situation descending into chaos.

In summary, my conclusion is:

a. Companies deemed responsible for a legacy of problems requiring remediation, are royally in trouble, with seemingly nowhere to hide. What was considered legal or “accepted practice” at the time will be no defence.

b. Companies may face a tidal wave of claims and class actions. Many could become insolvent.

c. Procurement and specification methods are going to change – there is no way to avoid liability.

d. Certified and tested systems from trusted, well-capitalised businesses will benefit. Hopefully, the industry will become a meritocracy, incentivising long-term investment in technologies, skills and training.

e. Certified construction products and systems should be elevated to ‘deemed to satisfy’ status to avoid a total litigation meltdown and uncontrollable rise in vexatious claims.

Construction Product Cause of Action

What is going to happen?

There are three huge, complementary, things happening:

1. Changes to the Defective Premises Act

a. Extended time periods – 30 years retrospectively, 15 years prospectively.

b. Retrospective extension to apply only to external wall products, but prospective extension to apply to all construction products.

c. Expansion of scope to include refurbishment, not just new build.

d. Legal obligation introduced for building owners to attempt all remedial cost recovery before passing on to leaseholders – see below.

e. This will apply to all buildings in England and Wales, not just dwellings.

2. Introduction of the Building Liability Order.

This has been hitherto been presented as intended to give courts the power to bypass the protection of Special Purpose Vehicles i.e. where a developer legal entity is set up by a parent or sister company and then liquidated post-completion, to prevent future claims. That game appears to be up. However, this power would also appear to give the Court the ability (in conjunction with other legislation here) to disregard the structural protection of a large product manufacturer who has established geographical or product specific limited liability divisions in order to protect its parent company.

3. Introduction of the Construction Product Cause of Action.

a. This gives developers, leaseholders and freeholders the ability to claim against a product manufacturer (or distributor, consultant etc) who has supplied a defective or mis-sold product that has caused a breach of Building Regulations necessitating remediation.

b. This again, will apply 30 years retrospectively for external wall products, and 15 years prospectively for all construction products. It will be irrelevant who is at fault or what was accepted practice at the time. This has huge implications, as if future research shows something to be dangerous, then those who sold it are on the hook (some will argue that it is legally unfair to penalise for unimaginable changes). Economic/financial losses will be covered as well as damages. These are notoriously much harder to quantify and almost certainly, much greater in magnitude (eg medical claims). This will apply in Scotland as well as England and Wales.

What are the major potential impacts?

I’m sure by now, you can probably anticipate much of the rest of this article. The potential consequences, both positive and negative, of these measures could be headlining-ly huge. The four that jump out to me the most at the moment are:

1. The retrospective nature of these measures combined with the removal of the need for a contractual connection, mean that certain companies deemed responsible for multiple, problematic buildings are in BIG trouble. The fact that there isn’t even a requirement to prove fault, exacerbates this. This is probably going to be a hugely effective, but possibly long-winded, way of getting the polluter to pay and it’s been well-publicised that leaseholders are unlikely to be able to afford to litigate against a large company. I expect to see a lot (more) of corporate asset-protection and re-branding. The potentially catastrophic news for plc’s is that liability will not be limited to ‘divisions’ due to the introduction of the Building Liability Order that unpicks multiple layers of limited liability protection.

2. It should drive a much-welcome culture change in attitude to future risk, both in the development and testing of products as well as their specification and procurement:

If in doubt, don’t use it.

There will be nowhere to hide from liability and 15 years of potentially not being able to sleep at night. Value-engineering and specification-breaking will become a perilous adventure. Hopefully we will see a rapid shift to the specification of third-party certified products and systems. Building to accepted standards of the day will be no defence – if the goalposts shift (let’s say toxicity gets regulated or it turns out the timber does in fact burn after all) then those who supplied or marketed such products will be liable as well as the builders that used them and the designers who specified them.

3. This could drive companies out of the market, and not just those who fall foul of the legislation. Historic liability may become unquantifiable and it may become impossible for the Professional Indemnity sector to operate economically. The removal of such cover may force many companies to pack up or focus on less risky sectors. With almost limitless liability, will shareholders of major companies tolerate the risk of operating under such a regime?

4. The construction sector is already highly litigious and manufacturing companies with juicy balance sheets are often the last contractual “man standing” in a dispute. Given the costs of going to trial, even vexatious claims are often ‘settled’ when economic common sense prevails. This legislation now compounds the situation with a legal obligation for property owners to pursue all avenues before passing costs on to leaseholders. That’s almost certainly going to result in an escalation of legal claims. In order for the construction sector to become the most lucrative market for lawyers, I propose that the use of a third-party system or product be elevated to the privileged status of ‘deemed to satisfy’ that would prevail in the event of a claim and a tightening of regulations. In the absence of mandatory third-party certification, this seems a necessary balance to prevent a market meltdown and unintended consequence of the industry going dysfunctionally downhill.

Construction Product Cause of Action

Next Steps

This legislation is being rushed through parliament, for obvious reasons. Buildings remain dangerous where remediation has stalled. Meanwhile leaseholders face financial ruin, family plans are on hold, flat sales are impossible and mental health is deteriorating. Legal experts have written about what a poor ‘new law’ process this has created, lacking appropriate scrutiny and leaving open the serious possibility that it will be challenged at the highest level as being a breach of “corporate human rights”. Billions of pounds are at stake – major companies could go bust and pension funds hit hard, affecting innocent people who’ve worked hard and saved all their lives. This could extend a transitional period of uncertainty for years. It’s an horrendous situation.

Will it expedite a resolution? Maybe. Hopefully. But this legislation could have been introduced in parallel with a commitment from the Treasury to fund remediation up front and use such measures to recover funds itself from Industry, without further burdening building owners and innocent leaseholders.

What cannot be disputed is that construction practices are going to change. Buildings should become safer and built to a higher standard as a result of this legislative direction.

Regarding fire safety specifically, we currently have ongoing the review of Approved Document B. This comprises work such as reviews on trigger heights and toxicity regulation.

Construction Product Cause of Action

The likelihood is that regulations are going to get tighter, not weaker and the goalposts will move accordingly, widening the net of liability.

For example, if you build a 12m high building today using combustible materials and Approved Document B changes to prohibit them above 11m, then you would be liable to a claim for the next 15 years. If you built one (or were involved in the supply of materials to one) in the past 30 years and the court deems you responsible for a dangerous building, you will also now be liable. You thought after six years you were safe (or possibly insured), but not anymore.

It should be noted that this legislation is not limited to fire safety provisions. The Defective Premises Act test of unfit for habitation is arguably being lowered either by definition or interpretation. The court will deem a building unfit for habitation if it isn’t “capable of occupation for a reasonable time without risk to the health or safety of the occupants, and without undue inconvenience or discomfort to the occupants”. That will cover issues such as mould, damp, structural failures and even failure to meet thermal or acoustic regulations. And here we go again – the ghost of B4.1 and its infamous “adequately”. What is ‘reasonable’? What’s the threshold for ‘risk’? That leaves a lot of room for subjective judgement and legal arguing. This needs to tighten up in advance, rather than wait for case law to drift slowly into the equation.

Dame Judith Hackitt had a presentiment that industry shouldn’t wait for legislation to start acting differently. Well, now we’ve seen precisely where that legislation is going, you really have little choice. Forward-thinking, high-quality businesses will prevail and even prosper under this new regime. Unfortunately for others, “acting differently” would have needed to start back in 1992.

More information can be found here: https://www.gov.uk/government/publications/building-safety-bill-factsheets/redress-factsheet#defective-premises-act-1972

By Dr Jonathan Evans, CEO, Ash & Lacy