Larkfleet Ltd v Allison Homes Eastern Ltd

This is a judgment of certain preliminary issues concerning limitation, and whether the claims brought by the claimant are time-barred. The action brought by the claimant, Larkfleet Ltd, which is a property development company, concerns residential properties and damage suffered to their foundations. The claimant contracted with Swallow Homes Ltd (“Swallow”) on 1 September 2001 on a standard form building contract, namely the JCT Standard Form With Contractor’s Design 1998 Edition (“the Building Contract”). As will be explained further below, the Building Contract was subject to certain bespoke amendments, one of which is of central importance to the preliminary issues. The particular amendment in question concerns an unusual arrangement entered into between Swallow and the claimant relating to responsibility under the NHBC Scheme for the newly built residential homes that were the subject of the Building Contract. Under the Building Contract, Swallow was to design and build certain residential properties for the claimant at Market Deeping in Peterborough. The claimant was to sell, and did sell, those new residential properties as a developer would in the usual way.

The involvement of the defendant, Allison Homes Eastern Ltd (formerly known as Kier Residential Eastern Counties Ltd) in these proceedings arises as follows. The defendant acquired the business of Swallow by a contract dated 12 September 2001 which is referred to in paragraph 6 of the Amended Defence as “the Acquisition Agreement”. That agreement is not before the court. The defendant admits in its pleadings that it bears the contractual responsibilities that were upon Swallow under the Building Contract. The Claim Form avers that the Building Contract between the claimant and Swallow was assigned to the defendant. At the hearing of the preliminary issues, it was suggested in the claimant’s skeleton argument that there must have been an implied novation of the Building Contract to the defendant; it was no longer suggested by the claimant that there had been an assignment. The defendant’s counsel Mr Thompson described its own investigations into the legal mechanism by which the defendant itself had acquired the business of Swallow as “ongoing”. This was surprisingly vague, given the defendant was a party to the Acquisition Agreement. Mr Thompson also said that the defendant was unable to assist the court in terms of the legal process by which it had acquired Swallow’s liabilities; again, this is surprisingly vague. I make no criticism of either counsel, as this information doubtless reflects their instructions, but it is surprising that no cogent answer was available. At this stage of the action, therefore, the court is in the regrettable position that a precise and accurate description of the legal mechanism by which the defendant acquired Swallow’s liabilities and contractual obligations is not available. However, and regardless of that precise legal mechanism, in these proceedings the defendant accepts legal responsibility for any claim in contract against Swallow, but not for any claims for breach of duty or negligence. It is now common ground that the Building Contract was not executed by the parties as a deed, although one line of the Claim Form (since deleted) suggested that it was at least part of the claimant’s case at one stage that it ought to have been. For limitation purposes therefore, the Building Contract was not executed as a deed.

The end purchasers of the residential properties in question, which are numbers 19, 20 and 22 Prestland, Towngate Court, Towngate East, Market Deeping, Peterborough, appear to have been residential occupiers. They each purchased the properties with the benefit of the protection provided by the National Homes Building Council, or NHBC. The NHBC Scheme is integral to these proceedings, and central to the bespoke clause under consideration in the Building Contract. 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. There is no doubt that NHBC Buildmark Cover is an attractive feature for a developer or builder to be able to offer to a purchaser. Indeed, some (if not all) purchasers of newly built properties are only likely to consider making such a purchase if the newly built property has such cover, or similar cover provided by other organisations. The cover is variously described as insurance, and a warranty, by the NHBC. Purchasers, and their mortgagees if they are buying with a mortgage, take comfort that a property with NHBC Buildmark Cover has been built to certain standards and if something goes wrong, they are protected.

This case concerns the NHBC Scheme, but does not directly concern the NHBC itself which is not a party. Different cover to a property with the benefit of such cover is provided by the NHBC during two periods, namely years 1 and 2, and thereafter in the period years 3 to 10. This cover is provided for an overall period of 10 years which is stated, by reference to precise calendar dates, on a certificate issued by the NHBC. This document is entitled “NHBC Insurance Certificate”. Each certificate is given to the home owner and states on its face:

“This certificate brings the Buildmark cover into operation. The protection for the Owner under the Buildmark cover expires on the end date given above. NHBC’s liability is set out in the Buildmark booklet. NHBC does not accept any other liability for the Home.”

The dates on the relevant certificates for each of the properties 19, 20 and 22 expired on 26 September 2012, 25 April 2012 and 14 March 2012 respectively. On all three certificates “The Builder” was specified as “Larkfleet Ltd” – the claimant – and the NHBC Registration No. was 79003. Practical Completion occurred for each of the properties on three different dates, each 10 years earlier than the date given as the expiry dates of the certificates.

In this case, the building contractor was not the claimant but was Swallow. The registration number used for the NHBC, however, was that of the claimant, and the builder specified on the certificates was the claimant. The claimant had its own registration with the NHBC and I assume the NHBC was content for the claimant to use its registration for these properties. In any event, both the claimant and Swallow agreed and knew that it was the claimant who would register the properties with the NHBC.

Clause 2.5.5 of the Building Contract between the claimant and Swallow was inserted by amendment and stated:

“The Employer [ie the claimant] will register the site with NHBC under the Employers registration and the contractor [ie 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.”

Essentially, therefore, these plots and the houses built upon them were registered with the NHBC under the NHBC registration of the claimant, and not Swallow, and the parties agreed clause 2.5.5 to deal with this situation.

Put in summary – and given that this is a hearing of preliminary issues this introduction is made without any findings on the facts concerning the damage, in particular when it occurred or why – defects emerged in the foundations of the three properties in question. The three home owners made claims against the NHBC within the 10 year period of the NHBC cover. The NHBC investigated those claims, agreed them with the home owners, organised remedial works, and has incurred expense in so doing. The NHBC notified the claimant of this and holds the claimant responsible. The claimant brings proceedings against the defendant in respect of those claims, both in contract and in tort for negligence in respect of design, and the defendant maintains that both types of claim against it by the claimant are time-barred. Central to resolution of the plea of time-bar by the defendant is the correct construction of clause 2.5.5 set out in paragraph 6 above.

The claim was commenced by way of a claim form issued on 14 April 2014. Particulars of Claim were served on 12 August 2014 and a Defence was served on a date which is not apparent from that document, because when it was amended the date of service of the original pleading was omitted from the amended version. In both the original Defence and the amended version, the following was pleaded by the defendant in paragraph 3:

“At the outset, it is [the Defendant’s] case that the claims set out in the Particulars of Claim are time barred pursuant to the Limitation Act 1980 for the reasons set out in Section B below. The remainder of this Defence is pleaded without prejudice to this primary position”.

Section B of the pleading states that practical completion of the properties occurred more than six years prior to the issue of the Claim Form, and that the properties were registered with the NHBC on 21 January 2002, more than ten years prior to the issue of the Claim Form. So far as the claim for negligence is concerned, the defendant maintains that the claimant had the necessary knowledge to bring an action by 4 February 2011 at the latest, which is more than three years before the issue of the Claim Form. Accordingly, it is said, the claimant cannot rely upon section 14A of the Limitation Act 1980.

On 8 October 2015 the defendant issued an application to strike out the claim, alternatively sought summary judgment on its defence, supported by a witness statement from Mr Grewal of its solicitors, also dated 8 October 2015. That witness statement explained that no response had been received to Section B of the Defence, and that the claims both in contract and in tort were time barred. The claimant served a witness statement in response from Mr Hick dated 27 November 2015 opposing the application and explaining the commercial purpose of the bespoke amendment, namely clause 2.5.5. I will deal with the contents of this and the other statements below in Section D “The Factual Background”.

The defendant’s interlocutory application came before His Honour Judge Raeside QC sitting as a Judge of the High Court on 7 December 2015. Mr Thompson, who appeared on that application for the defendant, explained that due to the regrettable and incomplete Particulars of Claim, the approach was adopted on that occasion that is set out in the Order of 7 December 2015 made by the Judge. This was to give both parties general permission to amend their pleadings on later dates in December, starting with an amended Particulars of Claim to be served one week after that hearing, with the following then to occur as set out in paragraphs 5 and 6 of the Order:

“5.

There shall be a Preliminary Issues hearing at 10.30am on the first available date after 12 January 2016 on the issue of whether the Claimant’s case is statute barred. The time estimate for this hearing is one day.

6.

The parties shall prepare for the Preliminary Issues hearing in accordance with the Technology and Construction Court Guide.”

It does not appear that draft pleadings were available at the hearing of 7 December 2015. It must have been intended by the learned Judge, when he made that order, that the parties would either agree the facts, or prepare a Schedule of Assumed Facts. This is for two reasons. Firstly, no directions were given for service of evidence by either party. Also the Technology and Construction Court Guide which is expressly referred to in the Order makes it clear in paragraph 8.2.2 that if issues are to be dealt with as preliminary issues “there would be either no or relatively limited oral evidence”. No orders were made for any disclosure.

Secondly, in McLoughlin v Jones [2002] QB 1312 the Court of Appeal made clear what the approach should be in terms of ordering, and hearing, the trial of preliminary issues. That case concerned a claim brought by Mr McLoughlin against his solicitors for breach of contract and negligence. Those solicitors had represented him on criminal charges of robbery and causing grievous bodily harm, for which he was initially convicted and sentenced to four years imprisonment. He explained to his solicitors prior to his trial that he had been wrongly identified and instructed them to seek witnesses to the incident in question, which they failed to do. After he was convicted and imprisoned, he himself advertised for witnesses in the local newspaper and by this means found a witness who had not appeared at the trial. Three months after his conviction, upon being told about this fresh evidence, the Court of Appeal quashed his conviction and ordered a retrial. At that second trial he was acquitted. He brought proceedings against his first firm of solicitors, based upon the serious consequences he had experienced as a result of his conviction and imprisonment, including the serious psychiatric reaction and breakdown he had suffered. On the trial of a preliminary issue as to whether the defendants owed Mr McLoughlin a duty to protect him from any foreseeable psychiatric illness, the judge at first instance held this was not a reasonably foreseeable consequence and struck out his claim. This decision was reversed on appeal, in the course of which comment was made by the Court of Appeal on the use of preliminary issues. David Steel J stated the following which I have distilled from the points made by him in paragraphs 61 to 66 of the judgment:

1.

The outcome of the appeal in that case was “attributable in large part to the parties’ failure to use the procedure for determining preliminary issues properly”;

2.

The claim was highly fact-sensitive but no attempt had been made to establish the factual premise for the issue of law on which the judge was invited to rule;

3.

“As Lord Scarman observed in Tilling v Whiteman [1980] AC 1, 25: ‘Preliminary points of law are too often treacherous short cuts’. The dangers are all the greater where, as here, the preliminary issues are set in motion in a casual and unstructured way”;

4.

The right approach to preliminary issues should be (inter alia) that the questions should usually be questions of law and should be decided on the basis of a schedule of agreed or assumed facts.

(emphasis added)

In that case the actual order for the preliminary issues had been in the following terms, as set out in the judgment of David Steel J in paragraph 64: “The questions of limitation and foreseeability shall be tried as preliminary issues before a High Court judge”. The similarity in wording between those issues, and the wording of the order in this case which the parties invited the judge to make, are obvious. Paragraph 8.4.1 of the Technology and Construction Court Guide expressly refers to the potential pitfalls of having limitation issues dealt with by way of preliminary issues.

Following the service of the amended Particulars of Claim, amended Defence and amended Reply, substantial issues of fact between the parties remain and it does not appear that any effort has been made by the parties to agree a Schedule of Assumed Facts. As well as the evidence that had already been served for the strike out application, the parties served other witness evidence exhibiting large numbers of documents. The defendant served a statement from Mr Colm Crowley, the Technical Director, dated 12 January 2016, who is a chartered engineer. He was not involved at the time but provided the result of his views about when the foundations must have been designed. The claimant served a second witness statement from Mr Hick dated 14 January 2016 and also served what was called an expert report from Mr Christopher Madge dated 13 January 2016, that gentleman being a chartered civil engineer. The defendant objected to the claimant’s reliance on that latter document, as no permission had been given for any expert evidence.

Quite apart from the fact that Mr Crowley’s statement could itself be said, potentially, to contain opinion evidence, there had been no directions for service of any evidence for the hearing of the preliminary issues in any event, either factual or expert. This is doubtless because of the points above explained in paragraphs 11 and 12. Had either party made it clear to the learned judge on 7 December 2015 that such evidence would be required, he would doubtless not have contemplated making an order for any preliminary issues in the way he did.

The claimant brings its claim in both contract and tort. Neither party sought to call oral evidence on the hearing of the preliminary issues. Two rather important facts, that are directly relevant to the tort claims, are in issue between the parties, and hotly contested. These are the date the damage to the foundations occurred; and the date upon which the claimant had the relevant knowledge for the purposes of section 14A(5) of the Limitation Act 1980. That provides the starting date for reckoning the period of limitation under section 14A(4)(b), if that period expires later than the period contained in section 14A(4)(a) which is six years from the date on which the cause of action accrued.

There was correspondence between the parties prior to the preliminary issues hearing that made it clear there was something of a gulf between them about how the matter should proceed at the hearing. The claimant took the view, understandably, that if there were important disputed facts, the matter could only proceed on the assumption that the facts pleaded by the claimant were true. The defendant disagreed with this. At the hearing itself, the defendant’s counsel Mr Thompson expressly invited the court to make findings of facts on the written material before it (including the contemporaneous documents) without hearing any oral evidence, either factual or expert, because he said that was the proportionate way to proceed. This was objected to by Mr Hargreaves QC, who appeared for the claimant before me but had not appeared before the Judge on 7 December 2015.

The parties were also not agreed about the terms of the preliminary issues to be decided. Competing versions were proposed; the claimant proposed four, two dealing with the point of contractual construction of clause 2.5.5 and two dealing with the date of accrual of the cause of action in tort. The defendant proposed one, dealing with the point of construction of clause 2.5.5 and the effect of that clause upon causes of action both in contract and in tort. In my view, inadequate consideration had been given by the parties to the difference between a strike out/summary judgment application, which is a summary interlocutory process, and the hearing of preliminary issues, which are part of the trial process, can involve the calling of evidence (so it can be tested in cross-examination) and which provide binding findings at first instance. Given the lack of agreement between the parties on the two key facts for the cause of action in tort, namely the date of damage and the date of knowledge for the purposes of section 14A(5) of the Limitation Act 1980, the court cannot in a summary way make findings on disputed issues concerning the relevant dates for limitation purposes of the cause of action in tort. I am not prepared to make binding findings of fact on the documents, particularly in the light of opposition from the claimant to doing so, and without hearing any evidence. There is an additional difficulty which is the absence of the Acquisition Agreement. The court could potentially consider the scope of the duty of care of Swallow to the claimant, but in the absence of any legal detail concerning the way any of Swallow’s duties were passed to the defendant it cannot consider the position of the defendant to the same level, or any level, of detail.

It is however possible (and indeed desirable) to resolve the points of construction between the parties concerning the meaning and effect of clause 2.5.5. Such a point is suitable for determination as a preliminary issue and requires only limited evidence of fact, which does not appear to be controversial. However, such an issue or issues should have been agreed by the parties in advance of the order being made, and certainly in advance of the hearing. The hearing therefore proceeded with each party contending for differently worded issues.

The claimant proposed two preliminary issues dealing with the point of construction, which were developed during the hearing and in their final form are as follows:

“Issue 1: When does the claimant’s cause of action under clause 2.5.5 for breach of the obligation to accept responsibility for defects accrue?

Issue 2: When does the claimant’s cause of action under clause 2.5.5 for expense incurred due to defective work accrue?”

It can be seen that these two issues presuppose the existence of two separate causes of action arising under clause 2.5.5.

The defendant proposes a single preliminary issue. This is as follows, and although I term it Issue 3, that is for identification, as it is really an alternative to Issues 1 and 2:

“Issue 3: Does clause 2.5.5 of the Building Contract operate to preclude claims for defects (whether in contract or in tort) from being brought against the defendant after expiry of the 10 year NHBC warranty period?”

The undesirability of hearing and deciding preliminary issues where the wording of the issues themselves is not only not agreed or ordered by the court, but the approach to the issues is different, is obvious. I will analyse and decide the points of construction of clause 2.5.5 and answer the issues above, so far as is possible, on the basis of that analysis. Issue 2 above on the claimant’s formulation only arises if there are two separate causes of action. Issue 1 on the claimant’s formulation is simply a different way of wording the same points concerning contract as the defendant’s issue, although the latter issue includes reference to the cause of action in tort as well.

Mr Hick was, at the time of the contract, in the curious position of being the “joint managing director” of both the contracting parties, namely the claimant and Swallow. Swallow was trading as “Allison Homes”. Mr Hick explained that in 1998 he and “the other directors/shareholders of Swallow” had set up the claimant as a separate entity because he had it in mind that Swallow might be sold to a larger developer. He explained that the claimant had built a few houses, but no more than 15, by 2001. In the summer of that year, negotiations were well advanced for the sale of Swallow to the subsidiary of Kier Group plc which ultimately purchased it. For that reason, he wanted to “build up” the claimant’s business but the claimant had no building capacity of its own. It was therefore “part of [his] strategy that, as part and parcel of the sale of Swallow, the claimant had contracts in place (with Swallow) to build out the sites owned by the claimant, including Prestlands.” The Building Contract was entered into on 1 September 2001 before Swallow’s business was sold. Although he was joint managing director of both companies, he signed the contract for the claimant and his fellow director Mr Paul Adams signed it for Swallow.

Clause 2.5.5 was inserted for the following reasons, explained in paragraph 11 and part of paragraph 12 of Mr Hick’s 1^st witness statement:

“11.

In the normal course, it would have been the builder (ie the Defendant) who would register the site with the NHBC (or take out similar insurance-based cover against defective building works) and it would be the builder who would deal with any claims of defective workmanship arising in the ten year period covered by the NHBC warranty.

12.

I wanted to build up the Claimant’s business of building residential dwelling houses and I was particularly keen that, in doing so, I should quickly build up a ‘history’ with the NHBC. This would enable the Claimant to establish a good NHBC rating and, in the process, obtain the benefit of discounted NHBC premiums which that rating would attract. It was for this reason that clause 2.5.5 was inserted into the Contract.”

Mr Hargreaves QC makes the point that the above evidence, being given by a person who was, unusually, a director of both contracting parties, is admissible for the purposes of deciding the point of construction because it is part of the factual matrix known to both parties at the time. Mr Thompson accepts paragraph 11 is part of the factual matrix, but although he objected to part of paragraph 12 (as he said it contained statements of subjective intent). I am not sure that paragraph 12 takes the matter that much further in any event. I accept that it must have been known to both parties, because Mr Hicks was managing director of both companies. To be fair to Mr Thompson, his interpretation of the clause does not, to any appreciable degree, require the invocation of commercial justification as he argues that the meaning of the words themselves in clause 2.5.5 is clear. However, regardless of that, I accept the submission of Mr Hargreaves QC and the passages I have reproduced above were part of the factual matrix known to both contracting parties at the time.

What happened afterwards, some years later, after the properties were sold with the benefit of the NHBC Buildmark Cover, and after Swallow’s business had been sold to the defendant, is that damage occurred to the foundations of the three properties. Subsidence and settlement occurred with cracking at the properties caused, it is said, by inadequate fill in the foundations. These claims were notified by the homeowners to the NHBC. The NHBC validated the claims and notified the claimant of this “in the spring of 2011” (the expression used by Mr Hick in his witness statement). There is a potential issue about who designed those foundations, but for present purposes that does not matter and the claimant’s case proceeds on the basis that the design was performed by the defendant.

There is no difference between the parties concerning the legal principles governing the court’s approach to construction. These are well known and my attention has been drawn to the well-known case of Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896. There are also more recent clarifications of the correct approach, the most relevant being Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 and more recently in Arnold v Britton [2015] UKSC 36. In that case, Lord Neuberger, with whom Lord Sumption and Lord Hughes agreed, emphasised seven factors (Footnote: ¹) concerning construction of contract terms. The first six of those seven factors are relevant here, and the passage in Lord Neuberger’s speech is as follows:

“14.

Over the past 45 years, the House of Lords and Supreme Court have discussed the correct approach to be adopted to the interpretation, or construction, of contracts in a number of cases starting with Prenn v Simmonds [1971] 1 WLR 1381 and culminating in Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900. ”

15.

When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions. In this connection, see Prenn at pp 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as HE Hansen-Tangen) [1976] 1 WLR 989, 995-997 per Lord Wilberforce, Bank of Credit and Commerce International SA (in liquidation) v Ali [2002] 1 AC 251, para 8, per Lord Bingham, and the survey of more recent authorities in Rainy Sky, per Lord Clarke at paras 21-30.

16.

For present purposes, I think it is important to emphasise seven factors.

17.

First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

18.

Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.

19.

The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235, 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191, 201, quoted by Lord Carnwath at para 110, have to be read and applied bearing that important point in mind.

20.

Fourthly, while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.

21.

The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties.

22.

Sixthly, in some cases, an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract. In such a case, if it is clear what the parties would have intended, the court will give effect to that intention. An example of such a case is Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56, 2012 SCLR 114, where the court concluded that:

“any … approach" other than that which was adopted "would defeat the parties' clear objectives", but the conclusion was based on what the parties "had in mind when they entered into" the contract (see paras 17 and 22).””

The seventh factor is not relevant to this case as it deals exclusively with contracts concerning service charges.

Neither party suggests that clause 2.5.5 is poorly drafted – each contends for a particular meaning based on the language in fact used. Neither party prays commercial common sense in aid as its primary tool to achieve the construction contended for. It is common ground that the starting point is the language used. Mr Hargreaves QC invites me to form a “first impression” based on a first reading of the clause, and relies upon the fact that the language is clear. He submits that it is not concerned with limitation at all. Mr Thompson submits that the primary purpose of the clause is indeed limitation, and given the answer he contends for regarding his issue which is at paragraph 21 of this judgment above, which is a simple answer of “Yes”, his submission is to the effect that limitation of causes of action both in contract and in tort are directly affected by the clause.

There is no evidence that the clause was drafted by lawyers, and indeed such evidence as there is, suggests it was not. Both contracting parties – claimant and Swallow – were controlled by the same people, one of whom was Mr Hick. Mr Thompson accepts that the 10 year period referred to is exactly the same as the period stated on the face of each NHBC Certificate.

The clause agrees that for this site, it will be the claimant who will “register the site with NHBC”. Given that it is clear that the NHBC Scheme governs defects, and given the Building Contract comprised a commercial agreement that Swallow would design and build the properties, the next part of the clause was the sensible counter-balance to such registration, namely an acceptance of responsibility on the part of Swallow for defects and expense arising within that same period. Absent that second part of the clause, the claimant would be responsible to the NHBC for defects under the NHBC Scheme. Defects in design or construction would have been the responsibility of Swallow under the terms of the Building Contract. Defects under the NHBC Scheme would also be Swallow’s responsibility (to the NHBC) had it been Swallow who had registered the site with the NHBC. Had Swallow registered the site, Swallow would have been identified on each NHBC Certificate as the Builder. For this site, for whatever reason, the claimant was registering the site, and would therefore be identified on the NHBC Certificates as “the Builder”; in reality, “the Builder” was Swallow. Clause 2.5.5, properly construed, recorded this situation between the claimant and Swallow. Swallow was accepting that responsibility even though it was the claimant who was registering the site.

In order to determine the effect that this has upon the limitation position between the claimant and Swallow, therefore, it is necessary to consider the NHBC Scheme and how it operates. This scheme was known to both parties (namely the claimant and Swallow) and its operation formed part of the factual matrix in any event. It is specifically referred to in the clause in question.

This works in the following way. Although the NHBC provides many different types of service, for the purposes of these proceedings it is only necessary to concentrate on that provided to the purchasers of newly built properties. The purpose of the NHBC Scheme generally is two-fold, and this can be seen from the NHBC documents put before the court by the parties. One is to provide protection to consumers, in this instance the consumers being those who purchase newly constructed residential properties. The other is to raise standards amongst those companies that construct new homes. The NHBC sets down standards known as NHBC Requirements. Building companies pay a registration fee to the NHBC. The level of that fee, or those fees, depends upon a company’s premium rating. This is explained by the NHBC in the documents before the court in the following way. In this extract “you” and “your” is addressed to the builder:

“What is Premium Rating?

NHBC’s Premium Rating scheme works on the same principle as your ‘no claims’ bonus for car insurance. Just as good drivers benefit from discount, good builders and developers pay reduced home-registration fees. Your premium rating is based on your claims record and the amount of time you have been on the NHBC Register. We [ie the NHBC] use this rating to calculate how much you should pay to register homes. The scheme aims to encourage quality in the industry as builders with a poor claims record inevitably pay higher premiums. This should motivate builders to improve their standards.”

The fees for registration are calculated on two factors. One is how long a company has been on the NHBC Register. The other is how a company’s claims record compares with the national average.

So far as the house purchaser or home owner is concerned, their protection comes from the Buildmark Cover. It is stated as being “Your Policy from NHBC” and the definition of “you” and “your” for these purposes means the First Owner of the property in question or a later Owner (if the property is sold on). The protection therefore stays with the property, and means that the first purchaser could sell on with the subsequent purchaser taking the property with the comfort of such remaining period of the 10 years as is unexpired at the date of the sale. This is important as it avoids later purchasers having potential legal issues concerning privity of contract (or lack of it) with the company that built the property. The Scheme is described in the Introduction as “insurance cover”.

Section 1 deals with the situation where the builder fails to complete; broadly, the NHBC will ensure that the purchaser is repaid any amount paid to the builder if, for reasons of insolvency or fraud, the builder does not commence building the property. If the builder starts to build, but does not complete, the property due to insolvency or fraud, the NHBC will repay to the purchaser the amount paid to the builder which cannot be recovered. This enables purchasers to buy NHBC registered properties so-called “off-plan”, which is before or during the building phase, with peace of mind that their deposits will not be lost if the builder does not complete.

Section 2 deals with the situation in the first 2 years after completion. For defects notified to the builder during this period – defects in this case being a defined term under the NHBC Scheme, and meaning “a breach of any mandatory NHBC Requirement” – the builder is obliged to put these right at no expense to the purchaser. If the builder fails to do so, the NHBC will either pay any arbitration award or court judgment against the builder, or if the builder is insolvent, will pay for the cost of work for which the builder would otherwise have been liable. It should be noted that these defects are not defined in the same way as a defect under a building contract between a purchaser and the builder of the property in question.

Section 3 deals with years 3 to 10. Subject to financial limits, which in the version of the NHBC Cover extant for these properties was £500,000 for a newly built home (or £250,000 for a converted one), the NHBC will “either pay for the items in the green panel on [page 9] or, at our option, arrange for the necessary work to be carried out at our expense”.

The green panel referred to lists the following, inter alia:

“A. The full Cost, if it is more than £500 indexed, of putting right any actual physical Damage caused by a Defect in any of the following parts of the house….

Foundations

Load-bearing walls

Non load-bearing walls

Wet-applied wall plaster….”

The list continues. Section B in the panel includes the cost of putting any defect in a chimney or flue, and section C includes reasonable costs for removal, storage and alternative accommodation if it is necessary to vacate the property.

It can therefore be seen that a purchaser, in years 3 to 10, would have recourse to the NHBC in respect of the defects listed, which could be described as major defects. They require damage to be caused, as Damage is defined in the Buildmark Cover as “Physical damage to the Home caused by a Defect”. Defect is defined, not by reference to this Building Contract (or indeed any building contract), but by reference to “a breach of any mandatory NHBC Requirement by the builder or by anyone employed by him or acting for him”. It would be the NHBC who would pay for the defects (as defined by the NHBC) to be remedied, together with reasonable consequential costs in Section C, such as removal, storage and alternative accommodation if necessary. The NHBC would either pay for the defects or otherwise have the necessary remedial work remedied without cost to the home owner.

The NHBC Rules for Builders and Developers Registered with the NHBC gives the NHBC the right to payment from the builder to the NHBC of all or some of the costs of investigating a claim by a builder (in rule 28a); or any sum which the NHBC “decides to pay or becomes liable to pay including NHBC’s administration and legal costs” because the builder or developer has failed to satisfy its liabilities under the NHBC Scheme Document (rule 29). That latter phrase refers to any document issued by the NHBC, including what is called any “Buildmark Offer” which would be issued after a claim is made under the “Buildmark Cover”.

Mr Hick’s written evidence is that the NHBC effectively gives the errant building contractor a choice. If that building contractor reimburses the NHBC for its expenditure, its rating would remain unaffected. If it does not, its premiums are increased and it bears the financial burden in that way. There are documents before the court that broadly support that, but it is not necessary to make any findings on the methodology of recovery for the purposes of the preliminary issues. Suffice it to say, that if a building contractor has remained in legal existence, the NHBC Rules give the NHBC the right to obtain recovery from that contractor of any sums it has paid out to remedy the consequences of failures by that building to comply with NHBC Requirements. I assume the course of action adopted by the NHBC will depend upon a variety of factors, including the solvency or otherwise of the building contractor responsible. In this case the NHBC notified the claimant in a letter dated 10 May 2011 that “the costs of any repairs we pay for will be included in the calculation of your premium rating”.

It can therefore be seen that the scope of a building contractor’s responsibilities to the NHBC, and by extension to the purchaser, under the NHBC Scheme are different to, and wider than, any responsibilities to an employer under a non-amended JCT Standard Form. In this case, if Swallow were the party responsible to the NHBC, its responsibilities would be different to, and wider than, any responsibilities to the claimant, who was the Employer under the Building Contract (without the clause 2.5.5 amendment). These responsibilities to the NHBC cover defects as defined by the NHBC, not defects under the Building Contract. In this case, the Building Contract uses, in clause 16.2 (in the standard terms of the Building Contract) and 16.3 (added by bespoke amendment) the phrase “defects, shrinkages and faults” which are not defined by means of the NHBC Requirements, but rather by a failure by the Contractor, Swallow, to comply with its obligations under the Building Contract. Other clauses added by amendment such as 16.3.1, 16.3.2 and 16.3.3, categorise defects in the Building Contract further as “Emergency Defects”, “Serious Defects” and “Routine Defects”. This is different to the way defects are defined under the NHBC Scheme. It can also be seen that under the NHBC Scheme, the building contractor retains a responsibility for the 10 year period not only to the original purchaser, but to subsequent purchasers. That simply would not be the case, absent assignment or novation, unless the NHBC Scheme were used – indeed, given the frequency with which people move home, and buy and sell properties, the coverage extended to subsequent purchasers may well be one of the Scheme’s major attractions.

It is clear therefore from the wording of clause 2.5.5 that it goes far wider than, and is different to, merely providing a 10 year period for claims arising under the Building Contract. If it were aimed solely at that point, it would not need to refer to the NHBC warranty, which is part of the NHBC Scheme, at all. The clause uses the words of assumption of responsibility – the phrase “warrants to accept responsibility” makes no sense if that responsibility were already contained within the terms of the Building Contract. When one considers the operation of the NHBC scheme, and the fact that Mr Thompson accepts (as he must) that the 10 years referred to in the clause is identical to the 10 years on the NHBC Certificate, it can be seen that the period “10 Years for the NHBC warranty” cannot refer to a limitation period at all, so far as the claimant and Swallow are concerned. It refers to the period for which the NHBC cover applies to the property, and within which a home owner can make a claim under the NHBC Scheme. It is important that a claim is made within the 10 year period, because after that period no home owner could make any claim on the NHBC Scheme. The cover for the property would have expired.

The home owner has cover up to the end of the 10^th year, up to the specific date on the certificate when it is stated that the period of cover ends. If, say, a claim was brought by a home owner in the 11^th month of the 9^th year, that would be a valid claim made in time under the NHBC Scheme. It would take some time after that to be investigated and, if valid, expense incurred in relation to that claim would then be passed on by the NHBC to the party who registered the site, in this case the claimant. However, unless that also took place within the 10 years, on Mr Thompson’s analysis of clause 2.5.5, any claim by the claimant would be time-barred. That would be directly contrary to the express wording of the clause. It would also not make sense when clause 2.5.5 is considered in the context of the other clauses in the Building Contract dealing with defects arising under the Building Contract. Clause 2.5.5 is dealing, in my judgment, with an entirely different regime, namely defects under the NHBC Scheme.

It is clear to me that the objective intention of clause 2.5.5 is to put Swallow in the shoes of the claimant so far as claims “due to defective work” made by a purchaser (or subsequent purchaser) under the NHBC Scheme are concerned. This would only apply for the 10 year period because the NHBC are only providing cover to the home owner for that period. In my judgment the words used are clear, and expressly state that it is Swallow who will ultimately have that responsibility under the NHBC warranty, notwithstanding the fact that it was the claimant who was registering the site. The NHBC would look to the claimant if any valid claims were made in the 10 year period; the claimant would pass those on to Swallow. It is a contractual assumption of responsibility by Swallow to the claimant, for the claimant’s responsibilities to the NHBC.

The defendant seeks to rely upon Oxford Architects Partnership v Cheltenham Ladies College [2007] PNLR 18 to supports its analysis. In that case Ramsey J held that a clause in the architect’s terms of engagement was a limitation of the claimant’s rights (in this case, the Ladies College) to sue, over and above the law of limitation of actions. In other words, the parties had agreed a separate limitation provision. However, in that case the clause in question, clause 5, stated as follows:

“No action or proceedings for any breach of this Agreement or arising out of or in connection with all or any of the Services undertaken by the Architect in or pursuant to this Agreement, shall be commenced against the Architect after the expiry of [6] years from completion of the Architect’s Services….”

It can readily be seen that the wording of the clause in that case is wholly different from clause 2.5.5 in this one. The clause in the Oxford Architects case is expressed in mandatory language (“no action….shall be commenced…..after”), and is directly concerned with limitation under the agreement itself, and breach of the agreement itself. The clause expressly refers to “the expiry of 6 years from” a particular date. None of that can be said to be any feature of clause 2.5.5, and that authority does not assist the defendant.

Further, although clause 2.5.5 states that “the contractor 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 construction argued by the defendant would be directly contrary to that in effect. If the period of 10 years is construed as a limitation period, or as extending the limitation period up to the date on the NHBC Certificate, then the acceptance of responsibility would only apply if proceedings were issued in respect of “any defect and any expense incurred due to defective work” within that 10 year period. This is importantly different to accepting responsibility for “any defect and any expense incurred due to defective work for the period of 10 Years for the NHBC warranty”. Mr Thompson argued that in reality the clause meant, not that the limitation period was being extended, but that the defendant promised not to raise any limitation defence against proceedings issued against it within that period. Given that limitation in English law acts as a procedural bar and does not extinguish the substantive right, this would amount to the same thing in any event. Even if, in law, it might be different, its effect would be precisely the same, and it is vulnerable to the same criticism – its effect would be directly opposite to the words actually used in clause 2.5.5. Proceedings against the defendant would have to be issued within that 10 year period for the claimant to be able to enforce the express assumption of responsibility for claims made in what is accepted by the defendant to be exactly the same 10 year period. That cannot, in my judgment, be the correct construction of the clause.

Although first recourse must be had to the words themselves, this construction also benefits from continuing to make commercial common sense when considering the third and fourth factors identified by Lord Neuberger in Arnold v Britton. Commercial common sense for these parties included the fact that obligations were being assumed by the claimant to the NHBC, those obligations being referral to the design and construction of the properties. That design and construction was being performed by Swallow. It made commercial common sense for the Building Contract to identify that the parties expressly agreed that it was to be the party designing and constructing the properties who would assume the ultimate responsibility “for the period of 10 Years for the NHBC warranty.”

The defendant also argues that for clause 2.5.5 to impose obligations in addition to those under the un-amended Building Contract, or for defects outside the scope of the Building Contract, it must be an indemnity. Reliance is placed by the defendant upon Total Transport Corporation v Arcadia Petroleum Ltd (the “Eurus”) [1996] 2 Lloyds LR 408 where Rix J (as he then was) construed a provision in a charter-party and concluded it did not constitute an indemnity. Because, it is said, clause 2.5.5 is not an indemnity, it cannot impose obligations additional to those in the Building Contract.

I accept the submission of Mr Thompson that this clause is not an indemnity. This clause is not worded, in my view, as an indemnity. It does not begin to utilise the words or language of an indemnity, and it is not phrased as an indemnity. However, the claimant does not seek to have it operate as one. I do not accept the submission of the defendant that, in order for obligations to be imposed by a clause, or assumed by one party and recorded in such a clause, in addition to those that would pertain absent that clause, the clause itself must be an indemnity to be effective. The fact that it is not an indemnity does not mean that it cannot constitute an agreement of the type, and in the terms, that I have explained in paragraph 45 above. There is no requirement that it be an indemnity in order to operate as Swallow assuming responsibility for defects that were to become manifested in the future during the 10 year period of the NHBC warranty. So far as foreseeability and remoteness are concerned, the losses that would potentially arise if a claim were made to the NHBC by a home owner are recoverable without the need for the clause to be an indemnity.

Yet further, the defendant seeks to have the clause construed as applying not only as a limitation provision, but one that would affect claims both in contract and in tort. Mr Thompson accepted that the words in clause 2.5.5, on his construction of the clause, would have the effect of increasing the limitation period for claims in contract to 10 years from the date of practical completion, yet potentially reducing the limitation period for claims in tort for latent defects, which could appear much closer towards the end of the 10 year period. In the example of a claim by a home owner for something that had become apparent in the 11^th month of the 9^th year, for example, the limitation period would not be that provided for under the Limitation Act. It could, perhaps, be as short as a week or so depending upon how close to the end of the 10 year period the latent defects manifested themselves.

In my judgment, that construction of clause 2.5.5 contended for by the defendant cannot be right. The clause does not refer to claims in tort at all, and does not purport to do so. It does not have the sufficiently clear words that would be necessary to have the effect contended for by the defendant, which could operate to reduce the otherwise applicable periods of limitation. Indeed, it does not have any such words at all, whether clear or not.

Mr Hargreaves QC argued that the two different preliminary issues identified by him were necessary because there were two causes of action that could arise under clause 2.5.5. It is necessary therefore to consider the cause, or causes of action, that would arise under clause 2.5.5 and when it, or they, would accrue.

Mr Hargreaves QC argued that the reference in the clause to the acceptance of responsibility “for any defect and any expense incurred due to defective work” meant a distinction was being drawn by the parties between the defects themselves, and any expense incurred by the claimant in terms of the obligation to the NHBC to reimburse it for its financial outlay. However, that submission fails to pay sufficient, or any, attention to the distinction under the NHBC Scheme between defects that arise in years 1 and 2 – in respect of which the builder has an obligation under the scheme to remedy the defects, with the NHBC being responsible to the home owner to pay for such works but only should the builder not do so – and those that arise in years 3 to 10, when the NHBC will pay for the necessary repairs. Mr Hargreaves QC submitted that “expense” refers to a claim by the NHBC for reimbursement from the claimant, and that because this has not yet happened in this case, that cause of action has not yet accrued. I reject that argument.

The submission also fails to consider the different types of expenditure for which the NHBC is responsible to the home owner. As set out in paragraphs 37 and 38 of this judgment above, the relevant green panel of the NHBC Cover in Section 3 on page 9 states that the NHBC will pay both for “A. The full Cost….of putting right any actual physical Damage…” and also, in section C, “reasonable costs for removal, storage and alternative accommodation” if it is necessary to vacate the property. In my judgment that latter head of loss is what is intended by “any expense” in clause 2.5.5. It is intended to make clear that this too is included in the contractual assumption of responsibility. It does not refer to a separate cause of action.

In my judgment, the correct construction of clause 2.5.5 is that there is but one cause of action. The reference to “any defect and any expense incurred due to defective work” simply attempts to make clear that the obligation being assumed by Swallow may require remediation works to be performed by Swallow, and reimbursement of expense to the NHBC, that latter expense including matters such as removal costs and the costs of alternative accommodation as well if that is necessary. There are not two causes of action, there is one. The cause of action for breach of this obligation occurs at the point when the defendant is asked to comply with its obligation and refuses to do so; alternatively, if the defendant does not respond at all, the breach occurs a reasonable time after the defendant was asked to take responsibility. Mr Hargreaves QC, when explaining his two causes of action argument, pointed out that no expense had yet been incurred by the claimant because the NHBC had not yet requested reimbursement. In my view, the rules of the NHBC Scheme impose an obligation upon the claimant to reimburse the NHBC in the relevant amount when the claims were accepted by the NHBC, and/or when they were notified to the claimant. There was no argument on the point and therefore I do not make findings that bind the NHBC. The fact that the amount of expense was not defined when the claimant was informed of this, nor was the full extent of the necessary remedial works identified at that time, does not matter. The claimant can, and does, have an obligation to reimburse the NHBC for the costs of repair without those costs having been finally assessed.

The claimant has stated that it was not notified by the NHBC until February 2011 of the earliest of the three claims, although the letter of 4 February 2011 from the NHBC refers “to previous correspondence”. Absent disclosure, it is not possible to know what that previous correspondence was. By a letter dated 24 May 2011 the claimant notified the defendant that the three properties were being monitored for subsidence. On the documents before the court, that is the earliest date that the claimant could be said to have asserted that the defendant was responsible. That crystallised the obligation upon the defendant to take responsibility for defects and expense arising within the 10 year period covered by the NHBC and within the terms of the NHBC Scheme. This was followed up by another letter from the claimant to the defendant on 22 November 2011. Eventually, by a letter dated 3 September 2013, the defendant responded, but stated that all three claims were time-barred. The breach of the cause of action contained within clause 2.5.5, on the material before the court for the preliminary issue, therefore arose between 24 May 2011 and 3 September 2013. The relevant breach was either the express refusal by the defendant to accept responsibility for defects arising within the 10 year period under the NHBC Scheme, as it had promised to do in clause 2.5.5, or alternatively a failure to accept responsibility which could not have arisen before the first request to do so on 24 May 2011. This was therefore less than three years, and obviously therefore less than six, prior to the issue of the Claim Form on 14 April 2014.

It is not ideal that a precise date cannot be given in the answer to Issue 1. It is also unusual that a building contractor such as Swallow can find itself potentially responsible for defects so long after practical completion. However, that is a function of the legal effect of clause 2.5.5 that I have found, the operation of the NHBC Scheme and its lengthy duration, which is 10 years. Any potential surprise is explained by the fact that the home owners brought their claims against the NHBC towards the end of the 10 year period, and those claims were accepted by the NHBC in February 2011. They were only notified to the claimant shortly after that. The defendant could not have been in breach of its obligation to take responsibility for defects arising within the 10 year period of the NHBC Scheme until it had been asked to do so by the claimant. Failure to do so within a reasonable time, or a refusal to do, constitutes a breach of that obligation, namely the contractual assumption of responsibility to the claimant for defects under the NHBC warranty.

What constitutes a “reasonable time” depends upon all the facts and circumstances at the time, and the court has only a limited snapshot of correspondence between the parties. In the absence of agreement by the parties, and if the point is relevant at that stage, this will have to be determined at trial.

My answers to the different preliminary issues are therefore as follows: