Building Safety Act 2022: a shift in the liability landscape

The recently enacted Building Safety Act 2022 (the “Act”) makes profound changes to the liability landscape in the UK construction industry. A number of new rights of action have been introduced, extended and retrospective limitation periods now apply and liability can now be extended across corporate structures by order of the court in certain circumstances. This Law-Now provides an in-depth review of these changes. For a more general overview of the Act, please see our earlier Law-Now here.

New rights of action

One of the Government’s aims in passing the Act was to expand the avenues available to stakeholders to bring those parties responsible for construction defects to account, particularly in the residential sphere. To achieve this, three new legal avenues of claim have been introduced: a direct right of action against manufacturers and suppliers of construction products; a general right of action for breach of the Building Regulations; and the expansion of existing rights under the Defective Premises Act 1972 (the “DPA”). We discuss each of these in more detail below.

Construction products

The traditional contract structures used for large construction projects typically involve a main contractor and one or more sub-contract tiers. Sub-contractors will usually be responsible for purchasing construction products and materials required for the sub-contract works. Save in rare cases where specific product warranties are procured in favour of the employer or main contractor, the doctrine of privity of contract means that only the sub-contractor in such a scenario will have rights of recourse against the product manufacturer in relation to the costs of remediating dangerous or defective products. This is still the case even where the sub-contractor has provided a warranty to the employer or the ultimate owner of the building in question.

The “liability gap” which this position gives rise to has been highlighted by the cladding remediation issues which have arisen in the wake of the Grenfell Tower disaster. Despite the blame for dangerous cladding lying with manufacturers in some cases, claims against them can be difficult to make out and may be excluded by the conditions of supply contracts agreed by the original sub-contractor or not available at all where the sub-contractor is no longer in existence.

Sections 147 to 151 of the Act seeks to change this position by introducing a freestanding cause of action against construction product manufacturers which cannot be excluded by contract. The new cause of action is available to persons with a legal or equitable interest in a dwelling which is unfit for habitation. The manufacturer of a construction product used in the dwelling will be liable to pay damages in such a case if unfitness for habitation has been caused by one of the following failings:

• the product fails to comply with a statutory requirement;
• the product is inherently defective; or
• a misleading statement has been made in relation to the product.

Liability in relation to misleading statements also applies to anyone who “markets or supplies” a construction product. Recoverable losses include damage to property and economic loss.

Whether a dwelling is unfit for habitation is a question of fact in each case, although a broadly similar test applies under the DPA (discussed below) and existing caselaw is likely to provide guidance. These cases suggest that a dwelling must be significantly defective before it is rendered uninhabitable; basic inconvenience will not suffice.

Causation is likely to be a key issue in claims brought under these new provisions. The burden is on the claimant to evidence that one of the failings noted above has rendered the dwelling uninhabitable. Difficulties can arise where a combination of causes have led to the issue complained about. The Act addresses this to some extent by making clear that the failings noted above need only be “one of the causes” for the dwelling being uninhabitable.

Defective Premises Act 1972

The DPA provides a course of action against those involved in the construction of a dwelling that is determined to be unfit for habitation upon completion. The entity that originally commissioned the work and any person with a legal or equitable interest can claim i.e. leaseholders and subsequent purchasers are included. Claimants must show that work in connection with the dwelling was defective in failing to be “workmanlike” or “professional” (as the case may be) or that “proper materials” were not used. In a similar way to sections 147 to 151 discussed above, these failings must also be shown to have caused the dwelling to be uninhabitable.

Aside from limitation period amendments (considered further below), the Act has amended the DPA so that work to an existing dwelling (providing it is done in the course of a business) is now covered. Formerly, the DPA only covered the construction of new dwellings.

Section 38 of the Building Act 1984

Section 38 of the Building Act 1984 provides a general right of action for breaches of the Building Regulations. The section has not yet been brought into force, but the Government has indicated its intention to do so at the same time as the amendments to the DPA come into force on 28 June 2022.

The scope of section 38 may potentially be very broad for a number of reasons:

• Schedule 1 to the Building Regulations contains specific requirements in relation to construction work, but more general duties are imposed in the body of the regulations. Regulation 7, for example, imposes a general duty that building work be carried out “in a workmanlike manner” and with “adequate and proper materials”. Section 38 allows parts of the Building Regulations to be excepted from its scope by regulation, but short of that both the general and specific requirements will become actionable.
• The section does not restrict the class of persons who can bring a claim and appears therefore to permit claims to be made outside the contractual structure of a project (i.e. a contractor against a sub-sub-contractor) or by third parties uninvolved with the original construction work.
• The rights given by the section may not be capable of exclusion or limitation by contract. This is likely to depend on the extent to which there is held to be a public interest in upholding the right of action conferred by the section (in accordance with the House of Lords’ decision in ICI v Shatwell). It is notable that sections 147 to 151 of the Act relating to construction products discussed above include an express prohibition against contracting out whilst section 38 is silent on the topic.
• The scope of damages recoverable under the section is open to debate. The Government’s “Redress: factsheet” states that “purely financial loss is not covered by section 38” but the section itself refers to “damage” without qualification. An interesting comparison can be made with the Nuclear Installations Act 1965 which imposes a duty to avoid “damage to any property”. Cases in England and Scotland have reached different conclusions as to whether this language requires physical damage (see Blue Circle Industries Plc v Ministry of Defence and Magnohard Ltd v United Kingdom Atomic Energy Authority). A similar debate seems likely under section 38.

Extended limitation periods

The Act has also introduced extended limitation periods for the rights of action discussed above, some of which apply retrospectively. A summary of these periods is set out in the table below.

The retrospective introduction of a 30-year limitation period has attracted criticism from some quarters. The Act itself contemplates that in some circumstances this retrospective change may breach rights guaranteed by the European Convention on Human Rights which is applied domestically by the Human Rights Act 1998. In such circumstances, the new limitation period is not to apply and a court is required to dismiss any action brought in reliance on it. The Act also confirms that previous settlements or court decisions are not to be disturbed as a result of the new retrospective limitation periods.

Building Liability Orders

Sections 130 to 132 of the Act contain highly significant provisions which allow liability for construction work to be extended to associated entities such as parent or sibling companies. Ordered at the court’s discretion if it is considered “just and equitable to do so”, a Building Liability Order can be made in relation to any liability arising under the DPA (as amended), section 38 of the Building Act 1984 or any other claim arising from a “building safety risk”.

The concept of an associated entity under the Act is very broad and includes companies which have been parents or siblings of the company primarily liable “at any time” since the works in question were commenced. Building Liability Orders could therefore be made in relation to projects or companies which have long since been sold or which have only been recently purchased long after construction has been completed.

The Act also provides a right for certain persons (to be prescribed by regulation) to apply for information orders requiring the disclosure of information as to persons who are or have at any time since the commencement of the relevant work been associated with the company primarily liable. Such orders will allow claimants to obtain the information necessary to piece together any complex ownership structures or dispositions which will in turn allow Building Liability Orders to be made in relation to associated entities.

Complementing these rights is the passing earlier this year of the Economic Crime (Transparency and Enforcement) Act 2022 which provides for an Overseas Entities Register requiring beneficial owners of “overseas entities” who own property in the UK to be registered with Companies House. This raises the prospect of claims against foreign entities in relation to UK properties although jurisdictional and enforcement issues may arise.

The Act does not give any guidance as to when a Building Liability Order will be “just and equitable”. This will need to be addressed by the courts on a case-by-case basis as claims are made. It is anticipated, however, that Building Liability Orders will provide a flexible remedy where purchasers are left without a defendant to bring a claim against for serious building defects.

In essence, Building Liability Orders disrupt many historic legal norms – including the doctrines of privity of contract and lifting of the corporate veil. It will no longer be possible for parties to utilise sophisticated corporate structures to insulate themselves entirely against liability.

Conclusion and implications

The Building Safety Act 2022 has truly changed the liability landscape for construction work in the UK. The new rights of action in relation to construction products and the extended rights under the DPA apply solely to residential construction projects, but section 38 of the Building Act 1984 and the ability to apply for Building Liability Orders will apply more generally to both residential and commercial projects. The impact of these changes on the market for construction services as whole, as well as secondary markets such as insurance, is likely to be profound.

The liability provisions of the Act go a long way to achieving the Government’s purpose of ensuring that those responsible for serious construction failings can be held to account by those who suffer loss or harm as a result. Time will tell whether these reforms have swung the balance too far in favour of redress at the expense of a buoyant and competitive construction industry.

References:

ICI v Shatwell [1965] AC 656

Defective Premises Act 1972

Building Act 1984

Blue Circle Industries Plc v Ministry of Defence [1998] EWCA Civ 945

Magnohard Ltd v United Kingdom Atomic Energy Authority (2004) SC 247

Economic Crime (Transparency and Enforcement) Act 2022

Building Safety Act 2022