Legal: Damages on account

You would be forgiven for thinking that contractors should find little comfort in Triuva Kapitalverwaltungsgesellschaft vs Galliford Try Construction (UK) Ltd. In fact, this recent case offers contractors a powerful means of stepping down claims to their subcontractors which are ultimately responsible for defective works or design.  

The background to the Triuva case will be familiar to anyone who has experienced a defects claim. The claim concerned a 10-storey office block in Birmingham, constructed by Galliford Try under a design and build contract. Water ingress occurred in 2012 and spot inspections identified a number of defects in the cladding system. Remedial works began in 2015, comprising detailed investigations and implementation of a remedial scheme. 

A year later proceedings were issued against Galliford Try,  which in turn commenced a claim against its cladding subcontractor, Alumet Systems (UK) Ltd. But then there was a twist. By late 2016 the defect investigation had identified systemic cladding and curtain walling defects relating to weathertightness, fire safety, and structural integrity, and the remedial works contractor had priced solutions to each of these. With a trial date not yet confirmed but expected to be at least 12 months away, Triuva made an application to the court under civil procedure rule CPR 25(1)(1)(k), seeking an interim payment from Galliford Try in respect of the remedial costs relating to specific defects.

The power of interim payments

Following the widespread adoption of adjudication to provide swift dispute resolution, the use of CPR 25.1(1)(k) has fallen from favour in building disputes. It does, however, remain a powerful tool. Essentially, an application under this provision asks the court to find that the claimant will recover “a substantial amount of money (other than costs)” at trial and to award a payment on account. 

The facts in Triuva relate to a property owner making an application against a contractor under a collateral warranty, and the court’s approach in this case demonstrates that contractors face a significant risk of being ordered to pay a damages in advance of trial. However, the same strategy is equally applicable to contractors seeking recovery of damages from their subcontractors, either alongside defending a claim (as in Triuva) or following the resolution of the main action.

There are several benefits to this strategy. First, part of the damages claim will be paid in advance of trial, resulting in the early recovery of that element of the loss and mitigating the cash flow pressures of protracted litigation. Second, a successful application for interim payment indicates that the court believes the applicant will be successful at trial, which increases the likelihood of favourable settlement, whether by negotiation or mediation. 

Finally, contractors that face defects claims arising out of subcontracted works packages may not want to wait for trial before recovering their losses from subcontractors if they have concerns over those subcontractors’ long-term solvency, and applications for interim payment offer a way of managing that insolvency risk. 

Choose wisely

Not all claims are appropriate for an application for interim payment, and the court is unwilling to allow the application hearing to be used as a “mini trial”. It is therefore important to select heads of claim for your application which allow the court to make a quick decision on liability and quantum. 

Careful selection of which heads of claim should go into the application is necessary, preferably by setting out defects for which there is only a weak defence and also a high degree of certainty over the related costs. 

If the likely remedial costs have been incurred for those heads of claim, so much the better; expert evidence and factual witness statements can demonstrate the existence and cause of the defects, and identify the costs incurred as a consequence of making good the defects. The aim is to present a clear picture to the court that the defects and costs are obvious, and that the claim will be successful should it reach trial. 

And so in Triuva the Technology and Construction Court found that, on the evidence before it, there was no defence to the defects arising from water ingress, fire stopping, defective fixings and missing anti-rotation pins, and inadequate thermal insulation. The claimant was able to satisfy the court as to the existence of those defects, that they fell within Galliford Try’s contractual obligations, and the consequent costs. Agreeing that the claimant would recover “a substantial amount of money (other than costs)” at trial, the court awarded a payment on account of £300,000 plus costs in respect of those defects. Galliford Try made the same application against Alumet and was able to recover the same sums as awarded to Triuva, without sustaining any loss itself. 

The main proceedings and the Part 20 claim between Galliford Try and Alumet subsequently settled before trial.

Whether the use of CPR 25.1(1)(k) becomes more common remains to be seen, but this case is a reminder of some of the strategies open to claimants pursuing defect claims.