Corporate Veil applied in Construction Case

Oakapple Homes (“OH”) used sister company Oakapple Construction (“OC”) to convert an old Derbyshire Mill to a large flat and retail complex. As part of the build contract arrangement OH novated the appointment of their Architect, DTR, over to OH. As the novation substituted OC for OH as Employer under the appointment DTR gave OH the usual duty of care warranty.

The Mill burnt down and also DTR went into liquidation and the liquidator disclaimed their appointment. So the issue arose to what extent DTR’s indemnity insurers were liable for DTR’s duty of care warranties that had been given to OH and some occupiers.

DTR tried to say that OC had contributed to the building being destroyed by negligently departing from their designs.

They said the beneficiaries of the warranties had to have their damages reduced because the warranties DTR gave them said that DTR owed them no greater liability than it did to the Employer under the Employer’s appointment of them, and that Employer was contributorily negligent for departing from their designs.

The court ruled that, even if OC had been contributorily negligent, and, even if OC were OH’s sister company, they were separate bodies and OH could not have had its damages affected by what another company had done. That principle applied whether OH’s damages had been under the appointment, had it never been novated, or under the collateral warranty it had got from DTR at novation.

Secondly the court said that when the warranties talked about the Employer under the appointment, they meant the original appointment, before the novation changed the Employer under that appointment from OH to OC, and, since OH wasn’t guilty of any contributory negligence that would have reduced its damages (on whichever basis), neither would the beneficiaries suffer any such reduction under their warranty claims. Also it was that original unreduced liability DTR’s insurers had agreed to insure, under the indemnity policy, not the measure of DTR’s liablity to OC, which the insurer’s were claiming to have been reduced by OC’s alleged contributory negligence.

As if that wasn’t enough the court thought the relationship between the beneficiaries of the warranties and DTR was totally contractual so statutory damages reduction for contributory negligence did not apply any way. DTR and their insurers would have had to show that the beneficiaries claims against DTR and their insurers were based common law of negligence (which it could not) and that to the extent there was also the contractual duty under the warranties that it was coextensive with, and triggered by, what was in all other respects common law negligence.

Professional indemnity insures will have taken note of a case which has potentially wide implications for them and perhaps greater protection for occupiers and other beneficiaries where property developers offer a one stop shop of development, construction and sometimes design, quantity surveying and project managment from subsidiaries within their Group.

At the same time insurers can be expected to vigorously contest claims where a professional has accepted no supervisory or inspection obligation to pick up a third party’s failure to adhere to its competent designs.

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