Navigating Construction Liability Orders | Building News

Tim Claremont (left) is a partner and Gavin Hoccom is a senior partner at law firm Browne Jacobson

The Building Safety Act 2022 received Royal Assent in late April. The government described its contents as “the biggest changes to building safety regulations in a generation”. For once the hype is justified. This is the biggest change in the way the construction industry works, and indeed for anyone involved in the planning and management or ownership of real estate, since the introduction of the Building (Design and Management) Regulations ) In 1994.

Although the changes introduced by the law are wide-ranging, this article focuses on “construction liability orders”, which are part of the measures designed to prevent contractors and developers from avoiding liability for construction failures. . This was deemed necessary in part because it has become common practice in the construction industry for work to be carried out through a Joint Venture (JV) or Special Purpose Vehicle (SPV), as after completion of the work, the JV or SPV can be liquidated with little chance of inherited liabilities from the past being allocated to group entities.

The Building Liability Ordinances, which come into effect today (June 28), are designed to change that.

What is a Construction Liability Order?

A Building Liability Order is an order of the High Court which will allow ‘relevant liability’ of a body corporate (referred to as the ‘original’ body corporate) to be assigned to the ‘associated’ bodies corporate. This will be regardless of whether the original legal entity is active, dissolved or insolvent. In this context:

  • “Relevant Liability” means liability arising under the Defective Premises Act 1972, s. 38 of the Building Act 1984, or as a result of a building safety hazard – that is, a risk to the safety of persons in or around a building resulting from the spread of fire or structural failure.
  • A legal person is “associated” with another if one controls the other, or if both are controlled by the same third party. For example, liability could be imposed on a parent or sister company for any “relevant liability” of an active, dissolved or insolvent group company. In practice, the scope may be wider, since the definition of “control” is broad, including not only the actual possession of shares or voting rights, but also any right to acquire possession thereof. In addition, a body corporate will be deemed to have control if it has the direct or indirect power to ensure that the affairs of another body corporate are conducted in accordance with the wishes of the controlling entity.
  • An “associated” body corporate can only be subject to a building control order if it is, or has been, associated with the original body corporate in the period commencing with the commencement of the works for which the ” relevant liability” has been incurred and ending with the placing of the order.

A court can only make such an order if it is “fair and just” to do so.

There is some uncertainty as to how building liability orders will work in practice. For instance:

  • Who can apply for a construction liability order?
  • Although the extent of liability, in respect of which a construction liability order can be made, has been prescribed, in what circumstances will a court consider it “fair and just” to issue a building liability order?

“It is clear that the law allows construction liability orders to impose liability only on corporations, not natural persons”

With regard to the second point, the term “just and equitable” was considered by the court in the context of section 122(1)(g) of the Insolvency Act 1986, which gives the court the discretion to order that a company enter liquidation. In this context, courts have determined that it is wrong to create categories or headings under which cases must be brought for the clause to apply, and that the court should instead consider the full factual matrix of each affair.

It remains to be seen whether the courts will apply the same approach when it comes to building liability orders. Our initial view is that the courts will avoid the prescribed defined circumstances in which it will be determined “just and equitable” to issue a construction liability order and leave the matter to be decided on a case-by-case basis.

Risk uncertainty

Uncertainty about the practical operation of building liability orders means that it is difficult at this stage to say how the risks associated with these orders can be mitigated.

It is clear that the law allows construction liability orders to impose liability only on corporations, not individuals. It follows that to avoid the risk of liabilities being imposed within the group, one option may be to use SPVs, which are personally owned by individual shareholders outside the group structure. While this may mitigate the risk presented by construction liability orders, there will be business implications for:

  • Insurance, as any independent entity will need to be independently insured;
  • Preferred contractor status and master agreements, which are generally entity-specific; and
  • Taxation, because any distribution from an independent entity will have to be returned to the shareholders personally and subject to personal taxation, and cannot be reinvested within the group.

Before entrepreneurs rush to undertake a group restructuring, the potential benefits of such an operation should be considered with reference to:

  • The substantive hurdles that any application for a construction liability order will face, given the many unknowns mentioned above;
  • The cost and evidentiary difficulties that potential claimants may face when seeking the grant of a building liability order; and
  • The benefit to a plaintiff of incurring the cost and time of applying for a construction liability order if the obligated entities have limited or no resources against which an order can be enforced.