Following the Grenfell Tower disaster of 2017 there has been a steady stream of cases concerning liability for remediation of fire safety defects. Judgment in the latest case; St James Oncology SPC Ltd v. (1) Lendlease Construction (Europe) Limited and (2) Lendlease Construction (Holdings) Limited  was handed down on 12 October 2022.
The case, which concerned fire safety and electrical engineering defects in the basement power plant of the Oncology Centre at St James University Hospital, Leeds, provides useful guidance as to how damages for fire defects will be assessed. In particular, having regard to the intention to reinstate and whether a claimant is required to undertake remedial works before pursuing a contractor for the costs of doing so.
There are also some important points in relation to the risks of amending schedules which are appended to the main contract during the course of the works.
On 15 October 2004 St James Oncology SPC Limited ("the Claimant") was appointed by Leeds University Hospital Trust ("the Trust") to deliver the design, construction, operation and ongoing maintenance of the proposed new Oncology Centre under a PFI Contract. The agreement between the two parties, referred to in the judgment as "the Project Agreement", set out the Trust's construction requirements for the Oncology Centre, which required them to comply with, or offer a design superior to that required by the Health Technical Memorandum 81 ("HTM 81"). HTM 81 sets out guidance on the design of fire precautions in new hospitals / extensions to existing hospitals.
Simultaneously with the Project Agreement, the Claimant appointed Lendlease Construction (Europe) Limited ("Lendlease") under a JCT Design and Build Contract ("the D & B Contract") to design and construct the Oncology Centre. In addition to repeating certain key provisions of the Project Agreement, the D & B Contract required Lendlease to comply with the terms of the Project Agreement, and not to put the Claimant in breach of its obligations under that agreement.
Works commenced in 2004 and practical completion was achieved on 14 December 2007, but deficiencies relating to fire stopping were not discovered until 2014 following risk assessments and other work. At this point the Claimant obtained an initial report, which led to approximately 250 defects being identified. These defects were rectified by Lendlease between 2015 and 2017 but, in doing so, additional concerns were raised around the lack of fire compartmentation within Plant Room 2, the central mechanical and electrical hub for the Oncology Centre.
The Claimant subsequently obtained another report in 2017 which recommended further remedial works due to defects identified in the adopted fire strategy. The original version of the fire strategy provided for 60 minutes' fire compartmentation around the electricity substation in Plant Room 2, but this was removed in the revised version; such that Plant Room 2 was built as a single fire compartment. This meant that "the risk of fire spread horizontally and vertically [was] higher than would normally be acceptable in a fire risk assessment."
The Claimant issued proceedings against Lendlease and its parent company (as guarantor) in December 2019, alleging that the Oncology Centre was defective because it was built in breach of fire safety standards and contractual requirements. Following advice on the level and nature of remedial works required, the Claimant sought damages in the sum of £6.242m which represented the costs of implementing a two stage scheme of remediation works.
In defending the claim, Lendlease argued that because it had constructed the Oncology Centre in accordance with the fire strategy approved by the Trust, it had complied with its contractual obligations. It argued in the alternative that it was not liable for damages in the amount claimed, since the Claimant had no intention of actually carrying out the scheme of remediation works and that other, less costly works, would adequately remediate any issue.
In considering the case, Smith J identified a number of issues which the court had to determine. Those key issues and her decision are as follows:
- Did the Fire Strategy adopt a fire engineering approach as required by HTM 81?
No, the revised strategy represented a derogation from HTM 81. As above, the only time where derogations from HTM 81 was allowed under the Project Agreement was where that derogation could be justified as part of a fire engineering approach, to achieve a standard of fire safety equal or better than HTM 81.
- Was the Fire Strategy discussed, reviewed, agreed and/ or approved by the Claimant, Trust and Building Control, and if so, to what extent?
Lendlease argued that Plant Room 2 was designed and constructed in accordance with the Trust's requirements and was a fire engineered solution that generally followed the guidance in the HTMs where practicable, and was justified to and approved by the Trust and Building Control.
Smith J disagreed and held that there was nothing in the evidence to suggest that any justification for the change in fire strategy was given, and there was no coherent or structured approach to the amendments. Rather, it appeared the amendments to the Fire Strategy were simply required to reflect the 'as built' position. Whilst the Trust did ultimately sign off and approve the fire strategy, they were not involved in any of the discussions regarding the changes and did not do so in the knowledge that the amended strategy represented a derogation from the requirements of HTM 81.
- Were the works completed in accordance with the Fire Strategy?
Yes, however given that Smith J found the strategy had not been properly reviewed, agreed and/or approved, this was somewhat irrelevant.
- Did the defects constitute breaches of contract?
Pursuant to the D & B Contract, Lendlease was at all times responsible for the design of the Oncology Centre and for achieving compliance with the requirements of the Project Agreement, irrespective of any review, approval or comment made by the Claimant and/or the Trust. The fact that the completed Oncology Centre did not satisfy the design obligations therefore constituted defects, and rendered Lendlease in breach of contract.
- Was Lendlease otherwise in breach of contract?
Whilst Lendlease did, in the main, complete the design and construction of the Oncology Centre in accordance with the revised Fire Strategy, this did not satisfy its requirement to comply with the terms of the Project Agreement and the D & B Contract. On that basis, Lendlease was held to be in breach of contract - including a specific requirement for the completed works to comply with the 'Applicable Standards'; most notably that the design of Plant Room 2 failed to comply with the requirements of HTM 81, 2007 and 2011 and Requirements B2 and B3 of the Building Regulations.
In reaching this decision, Smith J found concluded that the facts the Oncology Centre had been operational for 14 years without incident and that during that time PFI Statements of Compliance had been issued to the Trust which did not raise any issues of non-compliance was of no relevance to the question of whether or not Lendlease had breached it's contact. This was more luck than judgment, and the statements of Compliance were certainly not issued as confirmation that Lendlease had satisfied its contractual obligations. Moreover, Smith J commented that there was no evidence of any fire engineering justification that would explain these numerous failures to comply with the Applicable Standards.
Given that the Claimant had successfully made it's case on liability, the court simply had to consider the sum of damages payable by Lendlease.
It was common ground that the correct measure of the Claimant's loss is the cost of reinstatement. Lendlease presented two lines of argument in defence of the costs claimed. Firstly, it argued that it should not have to pay anything; as there was nothing to suggest that the Claimant was actually going to undertake the remedial works. Secondly, and in the alternative, Lendlease argued that the remedial scheme presented by the Claimant was not reasonable or proportionate and that the alleged defects could be remedied by installing a water mist fire-suppression system for considerably less than the sum claimed by the Clamant.
In considering the arguments on quantum, Smith J identified the following issues:
- Does the Claimant intend to carry out the remedial works, and is this relevant?
The general rule is that the measure of damages to be awarded will be the cost of making good the defects, unless that cost is disproportionate. Ordinarily the court is not concerned with how a claimant uses any damages awarded, as long as it can show it has suffered the loss. However when that loss arises out of defective works, the claimant's intention is relevant, as it informs whether the proposed remedial scheme is reasonable.
In determining whether such works are reasonable, the courts will need to consider whether the costs are out of all proportion to the benefit obtained in doing the works. This is a question which will be decided on a case by case basis, having regard to the particular facts of each case.
In considering this point, Smith J distinguished the present case from the decision in London Fire and Emergency Planning Authority v Halcrow Gilbert Associates Ltd  EWHC 2546 (TCC) ("the 2007 case"). In the 2007 case the Judge held that the defendant was not liable for the cost of remedial works, on the basis that there was no documentary evidence to suggest that London Fire would actually carry out the remedial works, or that it was reasonable for them to do so. Moreover, there was an implication that London Fire did not actually think that the remedial works for which they were claiming were suitable.
In contrast, Smith J held that in the present case it was reasonable for the Claimant to have delayed implementing the remedial works given the flat denial of liability by Lendlease. Smith J noted that the delay did not equate to a lack of intention to complete the works, rather that it was "legitimate and commercially prudent" for the Claimant to wait for judgment in its favour before embarking on what was an expensive remedial scheme.
- Were the remedial works necessary and proportionate to remedy the defects?
In determining this issue the court followed the principles set out in Axa Insurance UK Plc v Cunningham Lindsey  EWHC 3023 (TCC). The key point was that, as in Struthers v Davies  EWHC 333 [TCC]; it was not enough for Lendlease to present an alternative scheme that was cheaper.; To reduce its liability, Lendlease had to show that the remedial scheme proposed by the Claimant was unreasonable.
Smith J held that, with the benefit of expert evidence, the works were "necessary, practical and proportionate" given the nature and extent of the defects found, and the increased risk of fire which those defects presented. Importantly, the scheme that Lendlease proposed would still not have satisfied the requirements of the Project Agreement, and in particular, HTM 81, nor was it supported by expert evidence.
The court awarded damages of just over £5million for the cost of rectification works.
The TCC's decision in this case is a reminder of the courts' approach to interpretation of contractual provisions and their preference to find interpretations which give effect to the parties' intentions, where possible. It highlights that parties who wish to vary their contracts should ensure any proposal to do so is clear, and that they comply with the procedural requirements in the contract for any such variation to take effect.
It also serves as a useful reminder that if you do end up in litigation, claimants will need to make sure they obtain expert evidence early; to identify the scope, nature and cost of any remedial works required. Claimants will also need to demonstrate that any delay to starting those remedial works was reasonable Conversely, any defendant wishing to challenge liability for costly remedial works will need to be able to substantiate that those works are unreasonable, and have a costed alternative which can be shown to work.
The Birketts View
Whilst the Claimant was awarded substantial damages in this case notwithstanding that they had not yet implemented the scheme of remedial works; claimants should be warned about waiting until trial to rectify defects even in the face of a bare denial of liability from the defence. In this case, the cost of remedials was very high, and it may be that the court would take a different view where the cost of a remedial scheme was more conservative.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.