Legal Watch:Property Risks & CoverageJanuary 2015Issue 001

In This Issue:

• Contractor’s liability to apartment owners under the Defective Premises Act 1972

• Effect of removal of fixtures by tenants

• No relief from sanction for failure to comply with unless order

• Business interruption claim unreasonably pursued after part 36 offer

• Insurance Bill

Contact UsIf you would like any further information on the cases or articles featured in this issue, please contact:

Jennie Hogg

T: 0844 245 4607E: jennie.hogg@plexuslaw.co.uk

Robert DellT: 0844 245 4473E: robert.dell@plexuslaw.co.uk

Nathan Rehbock

T: 0207 469 6242E: njr@greenwoods-solicitors.com

Marise Gellert

T: 0207 469 6249E: msg@greenwoods-solicitors.com

Introduction2014 was quite a year within the Property Risks and Coverage (PRC) team. We have welcomed new partners, integrated the property specialists across the combined law firms, rationalised our offering through London, Manchester and Leeds and continued to deliver with the utmost energy right across the full service provision.

We have secured multi-million pound recoveries on major “event losses” and further enhanced KPI performance on our schemes for “aggregated loss” recovery; we have handled the plethora of third party claims after some of the largest fires in the UK, with all the hustle that requires, and at the same time provided studious guidance on the most obscure corners of insurance law. It really has been a year that again demonstrates the benefit of maintaining such a breadth and depth of skills within our one team, providing seamless service across the board and at all value bands on material damage exposures.

On behalf of all of those within PRC, I trust all of our clients and professional colleagues had a wonderful Christmas and we wish you the very best for 2015. We never forget that our clients have choices as to whom they instruct and we will never do less than our absolute level best to deliver the results that put it beyond doubt that the right thing has been done in entrusting instructions to us. Thanking all of you for the continued support.

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For us in PRC, 2015 now involves our rising to the new challenge that we as a group have set for ourselves – of “unlocking extraordinary opportunity for our clients”. Please do keep putting us to the test on that and let us know how we are doing!

Best wishes

Richard HouseagoHead of Property Risks and Coverage

Thanks this month go to Jennie Hogg, for her article on Rendlesham Estates, to Robert Dell for his article on Mandalia v Beaufort and to Nathan Rehbock for his article on British Gas Trading Ltd v Oak Cash & Carry Ltd. We also look at the costs decision in the Sugar Hut case previously featured in October 2014.

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Contractor’s liability to apartment owners under the Defective Premises Act 1972In Rendlesham Estates Plc & Others v Barr Limited (2014) EWHC 3968 (TCC) the Technology & Construction Court found a building contractor liable to residential owners of two apartment blocks, despite there being no contractual relationship between the parties, under section 1 of the Defective Premises Act 1972 (DPA).

BackgroundThe claimants owned 120 of the 171 apartments of a development in Leeds which had been built by Barr Limited (Barr). City Wall Limited (CWL), who was not a party to the proceedings, had, as developers, engaged Barr to construct the two apartment blocks. CWL sold the apartments shortly after construction and following the sales a number of defects became apparent in the individual apartments and common parts, including a faulty intercom system, covered walkways that flooded in heavy rain, and various leaks and instances of mould.

The claimants faced the cost of significant remedial works and were in a difficult position due to the fact:

• There was no NHBC warranty or similar warranty in place; and

• CWL became insolvent; and

• There was no contractual relationship between the claimants and Barr

The claimants sought compensation from Barr under the DPA on the basis that Barr owed them a duty of care to ensure the dwelling was fit for habitation. Barr initially denied liability in full, but later conceded liability in respect of certain defects but disputed the correct measure of damages. Accordingly, the court ordered a trial of issues relating to “purely internal defects” by reference to eight “lead” apartments.

The key issuesThe court considered:

1. Issues of interpretation under the DPA including the meaning of the term “dwelling”, and the phrases “…in connection with the provision of a dwelling” and “fitness for habitation” in the context of section 1 of the DPA.

2. Whether the claim was a representative action under CPR r.19.6

3. The appropriate measure of damages regarding the defects to common parts where other parties would benefit from remedial works and an owner’s service charge liability would usually only amount to a small percentage of the entire costs

JudgmentThe claimants were largely successful in their claims, with the court finding in relation to the key issues that:

• For the purposes of section 1 of the DPA, the “dwelling” was the individual apartment as described in the lease together with, possibly, those parts of the building to which the occupiers of a particular apartment have in practice exclusive access for living – such as their balcony. It was rejected that the whole block or even the common parts formed part of the dwelling

• The application of the words “…in connection with the provision of a dwelling” was much broader. If the work for the provision of the dwelling in question is part of a larger development, carried out by the same contractor, under the same contract to the same specification, then it is certainly arguable that all the work done in the course of the development is done “in connection with the provision of the relevant dwelling”. On the facts the court concluded that the work done to the structural and common parts of both blocks

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was done “in connection with the provision of” each of the apartments in the two blocks. This was because the owner of every apartment had an interest in, and a financial responsibility for, the maintenance and repair of the common parts and a right of access to the same

• After considering Bole v Huntsbuild Ltd (2009) EWHC 483 (TCC) and Harrison v Shepherd Homes Ltd (2011) EWHC 1911 (TCC) the court concluded that a dwelling is fit for habitation under the DPA if, upon completion, it is capable of occupation for a reasonable period of time without risk to health and safety and undue inconvenience or discomfort to occupants

“a dwelling is fit for habitation under the DPA if, upon completion, it is capable of occupation for a reasonable period of time without risk to health and safety and undue inconvenience or discomfort to occupants” • The claim was not a representative action as the

claimants did not share the same interest in the proceedings. Unfitness for habitation was an essential ingredient under the DPA which, on the facts, meant that proof was required in relation to each individual claimant’s apartment

• Barr argued that each claimant owner’s claim for damages should be limited to the share of the cost of the works that the claimant owner would have to pay by way of the service charge for rectifying the defects. In addition Barr argued that only the penthouse owners were entitled to claim for defects to the roof as only

their apartments were rendered uninhabitable. The court rejected this argument on the basis that it would be unfair to limit the recovery to the claimant owner’s share of the service charge as damages for a defective roof should be the cost of repairing the defects. The court held that to limit this recovery would leave the penthouse owners reliant upon other owners to contribute towards the roof repairs, which they may not agree to do

• Applying the relevant legal principles, a number of findings were made as to the different heads of damage including appropriate remedial work. Awards were made for residual blight on the value of the properties following remedial work, and for damages for distress and inconvenience

CommentThe judgment shows how the DPA can impose liability on a contractor without a contractual relationship existing between the contractor and owner or occupant of a property. However, any recovery is limited as the DPA only protects against defects that render a dwelling “unfit for habitation”. A contractual claim remains a preferable form of recourse. Claimants should proceed with caution as the court’s findings in this case are prefaced upon a fact-specific scenario which does not radically extend the application of the DPA.

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Effect of removal of fixtures by tenantsThe case of (1) Arvind Manilal Mandalia (2) Bina Arvind Mandalia v Beaufort Dedicated No.2 Ltd (2014) EWHC 4039 (QB) is an insurance coverage case that will be of particular interest to insurers providing commercial buildings cover or cover to landlords of premises. It provides a good example of how a matter can become costly and litigated where there is a lack of understanding, or a misunderstanding, on the part of an insured, as to the extent of cover or the losses payable under the policy. It also highlights the importance of evidence in proving a claim on the balance of probabilities.

The factsThe claimants were commercial property owners who held an insurance policy with the defendant (the policy). The claimants leased the property, a commercial unit, to tenants in 2005. Those tenants divided the property into two units, which operated as a fast food takeaway and a general grocery store. Thereafter the tenant failed to pay the necessary rent and failed to carry out work required under the terms of the lease. The claimants sought to forfeit the lease by way of legal proceedings, but the court gave relief from forfeiture to the tenant provided they paid the rent arrears by a specified date and carried out specified works to the property. Instead though, the tenant stripped out most of the contents of the property, causing damage in doing so, and left rotting food behind.

Claimants’ claimThe claimants submitted a claim under the policy to their brokers. The claim was originally presented as malicious damage, but as it progressed this was extended. When insurers refused to meet the claim, the claimants referred the matter to the Financial Ombudsman Service (FOS). The FOS adjudicator rejected the claim but the Ombudsman subsequently upheld the claimants’ claim, ruling that the defendant should pay £100,000. The claimants refused to accept this, believing they were entitled to far more.

Proceedings were eventually issued, and the case was presented on the following basis:

• That the damage was caused by the tenant maliciously

• Some items taken by the tenant were the landlords’ fixtures and fittings

• The tenant’s actions had caused significant damage

• The lease provided that the tenant should make good all damage caused by removal of fixtures and fittings

• There was theft of fixtures and fittings

• The costs of returning the premises into a lettable condition and lost rent would be claimed

It is worth noting, for context, that the claimants were claiming a total of £197,864.34 under the policy.

The defendant’s argumentsThe policy provided cover for loss or damage to the property caused by malicious persons and by theft which involved entry to the property by forcible means or assault or violence. The defendant insurers argued that the damage was not malicious damage within the meaning of the policy. It had simply occurred in the process of the tenant removing its property or alternatively it had occurred prior to the tenant’s departure and so amounted to dilapidations under the lease. The defendant insurer also alleged that the claimants had made a fraudulent claim.

Judgment The judge considered the submissions made by both parties. One of the primary issues that the judge identified was the need to distinguish between damage which may have been caused by the tenants during the course of the lease and damages which can be brought with the meaning of the insurance policy and for which the defendant would be required to indemnify the claimant and that which was not. In order to do this the judge needed to consider all the evidence, which he commented on generally:

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• The evidence was circumstantial, rather than direct evidence from the claimants. There was a heavy reliance on photographic evidence

• The judge found the expert evidence of one expert particularly useful in helping to distinguish between malicious damage and damage one would expect to find at the end of a lease

Within the context of the overall evidence the judge found that:

• It was for the claimant to prove on the balance of probabilities what, if any damage was caused maliciously. As above, the claimants had only produced limited evidence, most of which was circumstantial

• The use of the word “malicious” in the policy was intended to mean ill intent. It followed that malicious behaviour and damage could only be found if there was no reason for the damage the tenant had caused in removing items from the property, and that it was done with some deliberation or intent to cause damage

“...malicious behaviour and damage could only be found if there was no reason for the damage the tenant had caused in removing items from the property, and that it was done with some deliberation or intent to cause damage.”• Because of the lack of evidence, the judge inferred

that in most instances any damage was caused by the tenant being less careful than they might otherwise have

been when they removed items they thought they were entitled to remove

• The correct remedy for the claimants was to pursue the tenant for failing to deliver up the premises in a proper state

• Despite the above the judge did conclude, with the assistance of expert evidence, that some damage could be described as malicious and allowed for a limited recovery under the policy

• The judge considered the allegation of theft but concluded there was no evidence that the damage had resulted from theft or that there had been forcible entry to the property, and as such any costs claimed as arising from theft were excluded under the policy and the claimants’ claim in that regard failed

• Most of the work required to return the property to a lettable condition arose out of the tenants’ neglect in the way they carried out work to the property or left the premises when they vacated. It was not covered by the policy and therefore it followed that the claimants’ claim for loss of rent failed, save for a short period that they would have been unable to rent the property whilst repairs to the few items that were damaged maliciously were carried out

• The allegation of fraud was dismissed; the judge concluded that the dispute did not contain the hallmark of someone seeking to deceive an insurer, but rather of seeking to make robust points in relation to a claim made where insurers were taking issue with whether or not certain matters fell within the claim

• The claimants obtained judgment for £15,750

CommentThe decision by the court is a common sense one and yet it is an example of what may inevitably feel a fruitless exercise for the claimants where, without anything other than circumstantial evidence, they rejected an FOS award and ended up with a significantly lower court judgment. It highlights the importance of fully understanding the terms of cover offered by an insurance policy before embarking on expensive litigation.

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The judgment also highlights the importance of having robust evidence that goes beyond circumstantial evidence, if at all possible, as the court will make an inference on the evidence available to it. Absent any evidence other than photographs and videos the judge placed heavy reliance on the only expert evidence that considered the most issues. Whilst the claimants succeeded on some of their claim to be paid under the policy the defendant insurer must feel vindicated in adopting the stance it took in this instance.

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No relief from sanction for failure to comply with unless order The case of British Gas Trading Ltd v Oak Cash & Carry Ltd [2014] EWHC 4058 looks at relief from sanction in the context of a defendant whose defence was struck out for failure to comply with an unless order.

BackgroundBritish Gas Trading Ltd (B) brought a claim against Oak Cash & Carry Ltd (O) for an unpaid debt for the provision of electricity. Proceedings were commenced in February 2013 and the litigation continued. On 5 November 2013 the court ordered a series of case management directions, culminating in an order that the trial, which had been given a time estimate of two days, would take place during the period beginning 7 April 2014 and ending 30 May 2014. On 8 November 2014, a further order was given setting the matter down for trial on 30 April and 1 May 2014.

Amongst the directions given on 5 November 2013 was the requirement that both parties file listing questionnaires by 3 February 2014. No such listing questionnaire had been filed on O’s behalf by 10 February 2014 and on that date the court issued an unless order; that unless O filed the listing questionnaire by 19 February 2014 the defence would be struck out without further order of the court.

On 18 February 2014, O’s solicitors filed a directions questionnaire, and not a listing questionnaire (as had been required by the order), with the court. On 20 February 2014, the court notified O’s solicitors that it had received the directions questionnaire but that this was not the document required and in fact the listing questionnaire was still awaited. O’s solicitors then finally sent the listing questionnaire to the court by fax on 21 February 2014.

On 25 February 2014, B’s solicitors contacted the court requesting judgment in default on the basis that O was in breach of the unless order. On 27 February 2014, O’s solicitors wrote to the court apologising for the mistake and

simply asking the court not to grant the sanction requested by B’s solicitor.

On 18 March 2014, judgment in default was granted, as requested.

Application for relief from sanctionOn 21 March 2014, O’s solicitors applied to the court for relief from sanction and supported that application with a witness statement from the solicitor with the conduct of the case for O. The hearing took place on 15 April 2014 and the county court judge granted relief from sanction and set aside the default judgment. There was, in fact, no formal application before him to set aside the default judgment.

The appealB appealed the grant of relief from sanctions to the High Court on two grounds:

1. The county court judge had erred in that he misapplied CPR 3.9; and

2. The county court judge made an error in setting aside the default judgment notwithstanding that there was no application to do so (and no evidence in support)

It should be noted that the hearing had taken place in the time between the handing down of the judgment in Mitchell and the subsequent handing down of the judgment in Denton.

The decision on appeal On appeal, the High Court judge quoted the following three stage approach from Denton to assist the court in dealing with an application for relief from sanctions:

“24...A judge should address an application for relief from sanctions in three stages. The first stage is to identify and assess the seriousness and significance of the “failure to

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comply with any rule, practice direction or court order” which engages rule 3.9(1). If the breach is neither serious nor significant, the court is unlikely to need to spend much time on the second and third stages. The second stage is to consider why the default occurred. The third stage is to evaluate “all the circumstances of the case, so as to enable [the court] to deal justly with the application including [factors (a) and (b)]”.

Applying the Denton approach, looking at the first stage, the High Court held that not only had O’s solicitors failed to comply with the original order of November 2013, they also failed to comply with the unless order. It could not be said that such a breach was not either serious or significant. O’s solicitors had over three months to complete a not particularly difficult questionnaire. It was not completed and when in due course an attempt was made to comply with the unless order, the wrong form was sent to the court.

Turning then to the second stage, the High Court judge held that although O’s solicitor who had the conduct of the case had personal difficulties during the course of the litigation (his wife had been pregnant and the pregnancy had been beset by problems), this was a significantly sized firm with over 40 qualified solicitors. Therefore, there must be provision for those who have the responsibility of conducting litigation who know that they may not be available because of an ongoing medical condition to delegate the work to others who have sufficient experience. In this case, it was not until about the time that the unless order was issued that O’s solicitor delegated the task of complying with the order to a trainee solicitor. That trainee solicitor must not have had sufficient experience to identify the correct form and must not have had sufficient supervision in the purported compliance with the order. Notwithstanding all due sympathy for the predicament of O’s solicitor, the court held that it could not be a good reason for a failure to comply with the original order throughout a three month period. Nor could it be a good reason for the subsequent failure, having delegated the work to another.

Turning finally to the third stage, the high court judge held that the persistent failure to provide the listing questionnaire meant that, in this particular case, the trial date of two days

was lost. This must be a grave concern when one looks, as the court did in Mitchell, at the overall effect of such a breach and at the impact that it would have not only on the conduct of this piece of litigation but all other cases awaiting dates for hearings.

The High Court judge held that it was to be noted in this case that at the point where B’s solicitors had appreciated the failure of O’s solicitors to provide the required questionnaire, the matter was returned to court and an extension of over two weeks was effectively given by the unless order. It cannot be said that B sought to take advantage of an insignificant or trivial failing on the part of O. A second chance was granted by the issued of the unless order.

In the circumstances, the High Court judge held that the county court judge had misapplied CPR3.9. She also held, insofar as it was necessary for her to determine, that in the absence of an application to set aside the default judgment, the court should not simply take the view that the application ought to have been brought and therefore treat the case as if it had been brought.

“...the court should not simply take the view that the application ought to have been brought and therefore would be treated as though it had been brought”The appeal was therefore allowed and judgment was entered for the claimant.

CommentThis case clearly shows how important it is to ensure that if an error is made, or a deadline missed, every effort is made to rectify this immediately, particularly where, as here, the defendant was given a second chance by virtue of the unless order but still failed to comply in sufficient time.

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Business interruption claim unreasonably pursued after part 36 offer In Sugar Hut Group Ltd & Others v A J Insurance [2014] EWHC 3775 (Comm) the court was required to determine costs following judgment in favour of the claimant (Sugar Hut) on its claim against the defendant insurance brokers (AJB) for business interruption losses and interest following a fire at the claimant’s nightclub. The full judgment on this case was featured in October 2014.

BackgroundOn 13 September 2009 there was a serious fire at the club. As a result the club was effectively unusable for a period of some 49 weeks, eventually reopening on 25 August 2010. The capacity of the club was increased when it was reinstated.

The claimant (Sugar Hut) claimed against its insurers, who sought to avoid the policy on the grounds of a non-disclosure before inception and breaches of warranties under the policy. Separate proceedings challenging the avoidance of the policy failed and the judge in those proceedings awarded the insurers their costs on the standard basis.

Sugar Hut subsequently commenced proceedings against the defendants (AJB), the insurance brokers who procured the policy in March 2009.

The major area of dispute concerned the proper assessment of the overall loss of turnover during the period immediately following the fire until the club reopened in August 2010.

The Part 36 offerIn May 2014 AJB made a Part 36 offer in a letter of £250,000 based on a lost profit of £600,000 including interest which Sugar Hut rejected and the matter duly proceeded to trial on quantum.

The judgment on quantumAt trial the judge found that a number of discrete claims of around £320,000 for losses at Sugar Hut’s other nightclubs, wages, phone costs, alternative accommodation, redundancy costs and other invoices failed.

The judge upheld Sugar Hut’s claim for business interruption losses and interest and held that Sugar Hut was entitled to recover damages inclusive of interest of almost £1.1m from AJB, including business interruption losses of £568,670 gross. After interim payments, that meant that Sugar Hut was owed £277,021 and had beaten the Part 36 offer.

The disputeSugar Hut submitted that the general rule under CPR 44.2(2)(a) should apply, which was that the unsuccessful party should be ordered to pay the costs of the successful party. AJB contended that, although it could not rely on the Part 36 offer, which was beaten by Sugar Hut, the letter was relevant as it based the offer on a figure of £600,000 gross which exceeded the figure awarded for business interruption losses (£568,670 gross). On that basis, AJB argued that Sugar Hut should be deprived of its costs following 21 days after the Part 36 offer.

The judgment1. There was no doubt that Sugar Hut was the successful

party. However, there was good reason to exercise the discretion of the court and depart from the general rule under CPR 44.2. It was important to recognise that Sugar Hut had failed on a number of its claims, which represented a significant element of its overall claim and also gave rise to discrete issues involving disclosure and evidence. In advancing its claim for business interruption losses, Sugar Hut relied on a method of

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calculation based on the actual turnover achieved post-fire after the club reopened but that exercise was entirely rejected by the court. Having regard to CPR 44.2(b), the court took the view that should be reflected in a reduction of 30% in the costs to which Sugar Hut would otherwise be entitled. That reduction took into account the nature and volume of the evidence in respect of those elements of the claim and the respective costs incurred on both sides

2. AJB’s offer fell within CPR 44.2(4)(c). Although the letter did not contain any admissible offer to settle the claim for business interruption losses for £600,000 gross, it was clear that Sugar Hut’s decision to pursue that particular allegation was entirely based on its insistence that the appropriate figure was much higher. Given the terms of the letter, it was not reasonable for Sugar Hut to pursue its claim for business interruption losses for the larger amount of £862,024. The court’s conclusion was not based on a “near-miss” analysis and the court had the benefit of full information on the negotiations which took place, as contained in the exchanges of correspondence. The judge described the case as:

“...a paradigm example of one where the overall claim and certain individual components were indeed very much exaggerated.” On that basis, Sugar Hut was denied its costs from 21 days after the date of the letter containing the Part 36 offer and AJB were entitled to their costs after that date.

CommentThere is no automatic rule requiring reduction of a successful party’s costs if he loses on one or more issues and in any litigation, it is recognised that a winning party may fail on one or more issues in the case. This decision makes it clear that the court can and will continue to exercise discretion in situations where, although on the face of it, the claimant was successful, a significant element of the claim, involving substantial costs was not successful. In practical terms this means that all of the elements of a Part 36 offer need to be considered carefully before it is rejected.

The information and opinions contained in this document are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations. This document speaks as of its date and does not reflect any changes in law or practice after that date. Plexus Law and Greenwoods Solicitors are trading names of Parabis Law LLP, a Limited Liability Partnership incorporated in England & Wales. Reg No: OC315763. Registered office: 8 Bedford Park, Croydon, Surrey CR0 2AP. Parabis Law LLP is authorised and regulated by the SRA.

www.plexuslaw.co.ukwww.greenwoods-solicitors.com

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Contact UsFor information on articles and cases featured in other editions of Property Risks and Coverage Newsletters, please contact:

Marise Gellert

PartnerT: 020 7469 6249E: msg@greenwoods-solicitors.com

Insurance BillThe House of Lords has appointed a Special Public Bill Committee on the Insurance Bill. The bill was last before the Committee for consideration on 15 December 2014, on the basis that any views on the bill were to be submitted to the committee by 27 November 2014.

The bill tackles a range of issues in relation to contracts between insurers and businesses, including amending the Third Parties (Rights Against Insurers) Act 2010 in relation to the insured persons to whom that act applies, which is required before the 2010 act can come into force.

The committee will consider all of the evidence it has received to ensure that the bill will achieve what is intended. Assuming it does, subject to any amendments made at the committee stage, the bill will then pass to the report stage.

We will keep you advised of progress.