16th August 2024
In Peabody Trust v National House Building Council [2024] EWHC 2063 (TCC), the High Court (TCC; Andrew Mitchell KC sitting as Deputy Judge of the High Court) handed down an important decision on when an insured’s cause of action under the NHBC Buildmark policy providing cover for contractor insolvency before practical completion arises. The judgment arises in the context of an application for summary judgment made by the NHBC based on a limitation defence.
Facts
In 2015, Catalyst (to whose rights the Claimant has succeeded) engaged Vantage for the design and construction of 175 dwellings, including 88 affordable units (the “Units”), under a Building Contract. The total contract sum was £23,878,482, with £10,358,510 allocated to the Units.
The 88 Units were covered under the well-known Buildmark choice contract of insurance issued by NHBC, which covered Catalyst against various construction risks, including contractor insolvency before practical completion.
Construction began on 14 December 2015, but Vantage faced financial difficulties, leading to the appointment of administrators on 29 June 2016.
Catalyst initiated a tender process in July 2016 to find a new contractor and engaged Stack London Limited (“Stack”) as a construction management contractor to complete the works. After squatters were removed from the site in September 2016, Stack began the completion of the construction works.
Peabody’s claim was issued on 24 July 2023 (the “Claim”). The Claim was for £913,555.36 plus interest comprising (a) £815,500 for extra costs incurred over and above what would have been paid to the original contractor, Vantage and (b) legal and other fees and expenses, totaling some £98,000, which includes a claim (to be pro-rated so as to relate to the 88 insured units) for “site security” costs in the total sum of £56,350.
The relevant section of the insurance was “Option 1 – Insolvency cover before practical completion”, which in relevant part provides as follows:
When the section applies
This section applies if you lose the amount paid to the contractor in accordance with the building contract or have to pay more to complete the building of the home(s), because the contractor is insolvent or commits fraud.
When you can claim
You can only claim under this section up to the date of the Buildmark Choice certificate.
Contact us and tell us if you have lose the amount you paid to the contractor or the contractor has not completed the home(s).
What we will do
We will pay you the reasonable extra cost above the contract price including professional fees, for work necessary to complete the home(s) to the NHBC requirements; or
We will reimburse the amount paid to the contractor in accordance with the building contract which cannot be recovered from them.
In addition, we will pay the cost of reasonable precautions to secure the work defined in the building contract against unauthorised entry, theft and vandalism until work resumes.
NHBC was therefore to pay the “reasonable extra cost” above the “contract price”. Option 1 cover contained a financial limit of 10% of the original contract price, which was £10,358,510.
The parties’ positions
It was common ground that a claim on an insurance policy, being a claim under a contract of indemnity, is one for unliquidated damages for breach of the insurer’s obligation to hold the insured harmless against an insured peril.
NHBC’s application was made on the basis that, as it alleged, the claim had become statute barred under section 5 of the Limitation Act 1980, by virtue of more than 6 years having passed between Vantage going into administration on 29 June 2016 and the Claim Form being issued in July 2023. NHBC’s position – and the point germane to the application – was that time had started to run from, i.e. the cause of action in contract accrued on, the administration of Vantage on 29 June 2016. The judge referred to this as the Insolvency Point.
Peabody’s position was that because Option 1 “applies if you…have to pay more to complete the building of the home(s), because the contractor is insolvent” the cover for was the additional cost caused by the insolvency, and not the insolvency per se. For that reason, the cause of action did not accrue on the date of insolvency, but rather on a later date.
The decision on the Insolvency Point
The Judge held that NHBC was wrong to say that time runs from insolvency. The Judge did not accept – either as a matter of fact, or construction – NHBC’s contention that the fact of insolvency necessarily meant an insured would have to pay more to complete the works. He noted, in particular, the very wide definition of ‘Insolvency’ in the NHBC Policy, which included, by way of example, administration and receivership. An administration might be successful and allow the completion of the project without undue difficulty, and without any extra spend by the insured.
The judge accepted that the cover did not apply if the insured did not “have to pay more to complete” the works, and that the event insured against was not the insolvency per se but rather the insured having to pay more above the contract price to complete. He accepted Peabody’s submission that it was not a commercially sensible construction for the insurer to be liable to indemnify the insured at the moment of the insolvency regardless of whether there was in fact any loss caused by it.
Mek Mesfin, led by Noel Casey KC of 7KBW, and instructed by Mark London, William O’Brien and Alicia Ogborn of Devonshires acted for Peabody Trust, the Claimant and successful respondent to the application.
For a full copy of the judgment, please see here.
Would you like to know more?
For help and advice talk to a member of our clerking team. They can advise on the best options for your matter.
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