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Cite as: [2017] ScotCS CSOH_7

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OUTER HOUSE, COURT OF SESSION

[2017] CSOH 7

 

CA184/15

OPINION OF LORD DOHERTY

In the cause

NATIONAL HOUSE-BUILDING COUNCIL

Pursuer

against

SCOTT HOGARTH HOMES (also known as SCOTTHOGARTH HOMES), and ROBERT GEOFFREY SCOTT and NEIL HOGARTH

Defenders

Pursuer:  McLean QC; Shepherd and Wedderburn LLP

Defenders:  McShane; Blacklocks (for Friel & Co)

17 January 2017

Introduction
[1]        The pursuer is the National House-Building Council (“NHBC”) a company limited by guarantee. It provides warranty and insurance products in relation to new (and newly converted) homes across the United Kingdom. One such product is the Buildmark policy in terms of which the pursuer provides the purchaser of the home with insurance cover against losses caused through the builder or developer having failed to meet NHBC standards in relation to the home. A builder or developer who wishes the pursuer’s products to be offered to prospective purchasers of homes must apply to the pursuer and be accepted on to the NHBC register. Only builders and developers registered with the pursuer may apply to the pursuer to register homes for the purposes of obtaining cover under the Buildmark policy.

[2]        Dan Brownlie carried on business as a builder in Strathaven using the trading name Dan Brownlie & Son. At all material times he was registered as a builder with the pursuer. It is common ground that during 2002 and early 2003 the first defenders were a partnership and the second and third defenders were its partners. On 30 August 2002 the first defenders applied to be registered with the pursuer as a developer. An offer of registration was made by the pursuer to the first defenders on 14 February 2003 and was accepted by them on 15 February 2003. The first defenders were given registration number S3608.

[3]        On 10 March 2003 Scott Hogarth Homes Limited (“SHL”) was incorporated as a company under the Companies Acts. At all material times SHL was controlled by the second and third defenders who were its only shareholders.

[4]        In 2003/4 and 2005 two small housing developments at Eskbank were registered for Buildmark with the pursuer by registered developer S3608. The developments were completed and Buildmark cover was granted by the pursuer to the purchasers of the homes.

[5]        In about 2004 the second and third defenders and the third defender’s father, Stan Hogarth (“Mr Hogarth”), invested together in the purchase of a site in Gorebridge. Planning permission and building warrant for the construction of houses were granted but the development did not proceed. Eventually, in about 2013, the site was sold.

[6]        On 20 July 2006 a further application was submitted by registered developer S3608 to the pursuer to register a housing development at Falconer Court, 47 Commercial Road, Strathaven for Buildmark cover. The pursuer accepted the application. The fourteen homes in the development were completed and sold to individual purchasers in the latter part of 2007. Buildmark cover certificates were issued for the homes between 27 July 2007 and 7 December 2007.

[7]        Following completion, defects became apparent in the homes. The owners made claims on the Buildmark policies in respect of the defects. Following investigations the pursuer paid for remedial work and made other related payments to the owners in respect of the claims. In the present action the pursuer seeks to recoup those sums from the defenders.

[8]        The defenders deny that they are liable to make any payment to the pursuer.  They submit that the first defenders were dissolved when SHL was incorporated. They maintain that the developer registration S3608 was transferred from the first defenders to SHL on about 19 March 2003; that from that moment the registered developer was SHL; and that accordingly SHL was the registered developer who applied for Buildmark cover for Falconer Court. They maintain that on a proper construction of the relevant conditions of registration and the NHBC Rules, the pursuer is not entitled to recover any sum from the defenders or SHL: but that if they are wrong about their interpretation of the conditions and Rules it is the registered developer which is liable, and that the registered developer is SHL not the defenders. If the first defenders are the registered developer, and if on a proper construction of the conditions and Rules they are liable to indemnify the pursuer, the defenders maintain that some of the costs claimed are not recoverable.

[9]        I heard a proof before answer on the commercial roll. The pursuer called nine witnesses, namely, Brian Sharples, a senior claims consultant with the pursuer; John Aitken, a chartered structural engineer employed by the pursuer; Peter Bannister, a building surveyor with Hutton & Rostron; Richard Johnson, a chartered structural engineer with Clancy Consulting; Jim Pettifor, a chartered structural engineer employed by Clancy Consulting; Brian Burn, a chartered structural engineer employed by Clancy Consulting; Alistair Christie, a chartered structural engineer from Cadogans; Robert Campbell, an architect from Cadogans; and Douglas Fiddes, a quantity surveyor. Mr Christie, Mr Campbell and Mr Fiddes prepared reports and gave evidence as independent expert witnesses. The defenders led four witnesses, namely, the second defender; the third defender; Scott Horner, a regional commercial manager with Marley Contract Services; and Mr Hogarth. In terms of two joint minutes of agreement it was agreed that witness statements of nineteen other witnesses (together in some cases with further specified documents) should be treated as their evidence. The evidence was completed within six days.  Counsel then prepared written submissions and I heard oral submissions over the course of two days. I am grateful to counsel for their efforts to agree matters and narrow the issues in dispute, and for the assistance provided by their submissions.

 

Credibility and Reliability
[10]      I shall deal first with the credibility and reliability of the witnesses apart from the second and third defenders. Each of those witnesses appeared to me to be doing his best to tell the truth and to assist the court. Mr Hogarth impressed me as an honest witness who did not shy away from admitting his own shortcomings. Except where I indicate otherwise I have accepted the evidence of these witnesses as being credible and reliable in all material respects.

[11]      Unfortunately, I did not find the evidence of the second and third defenders to be quite as straightforward. I have reservations about their evidence, and there are parts of the evidence of each which I have not accepted. 

[12]      The second defender was vague, and his recollection of matters appeared to be poor. He was not an impressive witness. His evidence did not inspire confidence. He appeared to have a very poor understanding of the NHBC Rules and the legal effects of the Buildmark policy. He conveyed the impression that he was content to delegate to Mr Hogarth almost everything connected to Falconer Court. On the basis of his evidence and the other material placed before me it is very far from evident that care, attention to detail, or good administration had been features of the second defender’s actings at the material times.

[13]      The third defender was a better witness than the second defender, but he too demonstrated a poor comprehension of the NHBC Rules and of the legal effects of the Buildmark policy. Like the second defender, he appeared to have been content to delegate to Mr Hogarth most matters related to the Falconer Court development. Significant parts of his evidence were reliant upon his understanding of what the second defender had done.

[14]      As I discuss below, at the material times both witnesses appeared to me to have a fairly casual approach to the use of the NHBC registration.  There are other aspects of their conduct which make me cautious about their evidence.  After 2003 (and especially following upon the Buildmark application) it must have been plain to them that the pursuer was proceeding on the basis that the registered developer was the first defenders but they did nothing to alter that understanding.  They allowed the pursuer to assume obligations on that basis.  The copy letter of 23 March 2003 was not mentioned until after the action was raised in 2013.  The suggestions that Mr Hogarth did not have the first defenders’ authority, and that the partnership had been dissolved in 2003, also emerged very late in the day. 

 

The First Defenders’ Application for Registration
[15]      The first defenders’ application for registration (Production 6/581, Joint Bundle (“JB”) 593) dated 30 August 2002 was submitted on behalf of “Scotthogarth Homes (Mr R G Scott and Mr N Hogarth)”. It appears that following submission of the application there was some further communication between the pursuer and the defenders in relation to it. One of the things that the pursuer asked for was a copy of the partnership agreement. The second defender’s evidence was that it was a pre-requisite of registration that the agreement was provided to the pursuer. In February 2003 the defenders sent the pursuer a copy of the partnership agreement (which had been executed on 20 January 2003). It stated:

“…

WHEREAS:

 

The parties have agreed to enter into partnership together in the development of residential property on the terms and conditions hereinafter specified.

1. Mr Scott and Mr Hogarth shall be Co-Partners in carrying on the business of developing residential property, under the name of “Scott Hogarth Homes” (the Partnership”).

2. The Partnership shall be deemed to have commenced on the date of last execution hereof and subject to the provisions hereinafter contained, shall continue until either shall give to the other not less than three months prior written notice of dissolution of the same.

7. All transactions shall be entered into and all correspondence conducted in the name of the firm…

14. Subject always to the provisions of Clause 13 (a), in the event that the Partnership is dissolved, the whole assets of the Partnership, including goodwill (if any) shall be realised to best effect and after settlement of all obligations of the Partnership, the net proceeds shall be divided under the supervision of the Accountants specified in Clause 6 and split between the Partners in accordance with the profit sharing ratio set out in Clause 4.

…”

 

[16]      On 14 February 2003 the pursuer wrote to the first defenders indicating that the registration committee was able to recommend that the first defenders be accepted on the Scottish register as a developer, and asking them to sign and return the acceptance of conditions form to allow registration to be finalised. The acceptance of conditions form was in the following terms:

“                                                                                        Date: 14 February 2003

 

                                   CONDITIONS OF REGISTRATION OF THE

                                    NATIONAL HOUSEBUILDING COUNCIL

                              IN ACCORDANCE WITH EXANATORY NOTES

 

 

We the undersigned trading as SCOTTHOGARTH HOMES accept the offer of

Registration with the National House Building Council and agree:

 

1. To comply with the obligations and conditions set out in NHBC's Rules in force

from time to time;

 

1.1 We agree that any dispute between NHBC and ourselves under the Rules will be referred to arbitration which will be carried out in accordance with Rule 55 (or any subsequent modification or amendment of that rule).

 

2. To register any Home(s) being inspected by NHBC at the time of admission to the

Register;

 

3. That my premium rating scale will commence at Dl;

 

4. That this offer is based on an assessment of our financial position. It is understood

that the work and the person responsible for building standards meets NHBC's

Requirements but if those standards fall I will be in breach of the Rules;

 

5. That the Partners of the Company undertake to inform the NHBC in writing of any

Change of the Company within 28 days of such change. In such circumstances,

NHBC reserves the right to alter or impose new conditions. Regrettably, failure to

notify the NHBC of such change may result in deletion from the Register.”

 

[17]      The second defender signed the acceptance of conditions on 15 February 2003 on behalf of the first defenders and duly returned it to the pursuer. Thereafter the pursuer entered the first defenders in the register as developers with developer number S3608.

 

The NHBC Rules
[18]      The NHBC Rules for builders and developers which were in force at the time the defenders registered as developers, and at the time of the alleged letter of 19 March 2003, were the Rules effective from 1 January 2003 (Production 6/6, JB 39). Those Rules continue to apply to any obligation or requirement which arose under them, and it is the terms of those Rules which fall to be considered when construing condition 5 of the conditions of registration.  Subsequent versions of the Rules came into force on 1 January 2005 (Production 6/7, JB 63), 1 October 2006 (Production 6/8, JB 89), 1 August 2009 (Production 6/9, JB 115), and 1 January 2011 (Production 6/10, JB 145). The 2006 Rules were the version in force at the time of the application for Buildmark cover and the grant of cover.  Each version of the Rules was in substantially the same terms.  Except perhaps in relation to the construction of condition 5, I did not understand it to be suggested that any of the differences between the various versions were material to the parties’ dispute. Each version made provision for the pursuer to maintain (for Scotland, England and Wales, and Northern Ireland respectively) a register of NHBC approved builders and developers; and for registration being granted subject to conditions (Rules 2 to 5); and it set out the rights and duties of registered builders and developers (Rules 6 to 58). Rule 2 provided that details of the register could be obtained during normal business hours at the pursuer’s Amersham office. A registered builder or developer was bound to ensure that any home, newly built or to be built or sold by it or on its behalf, to which the Rules applied was registered and accepted for cover either by the pursuer or by another home warranty scheme (Rule 8(a)). The Rules applied to any home built or to be built or sold by the builder or developer or on its behalf for which it submitted a site notification or application for NHBC cover (Rule 7). The builder or developer had to ensure that such homes were designed and constructed in accordance with the building standards in NHBC’s Requirements in force when the concreting of foundations of the home was begun (Rule 10(a)). In the event of the builder or developer not owning the home, Rule 12(b) provided that NHBC might accept the application for NHBC cover but might require an agreement, payment or security against future liabilities as a condition of acceptance. Submission by a registered builder or developer of an application for NHBC cover authorised NHBC to make an offer of cover on the builder or developer’s behalf to the first owner of a home (Rule 19). Homes were inspected at relevant points during the course of construction to ensure that they complied with NHBC Requirements. Rule 27 conferred rights on NHBC and imposed obligations on the registered builder or developer where work to a home was defective. Rule 28 regulated the rights of NHBC and the obligations of the registered builder or developer where an owner made a complaint or a claim to the pursuer under NHBC cover. Rule 41 made provision for circumstances in which a registration might be cancelled (including at the written request of the registered party). Rule 41(b) provided certain circumstances in which a registration would be cancelled automatically. Rules 43 to 45 regulated continuing rights and obligations after cancellation. Rule 48 of each version of the Rules provided that the builder or developer must continue to comply with and be bound by any earlier Rule under which an obligation or requirement had arisen on the date the new version came into effect.  Rule 49 of the 2006 Rules provided:

“You must not deny liability under any NHBC Cover on the grounds:

  (i)   that NHBC was not authorised to offer that NHBC cover on your behalf; …”

 

Rule 50 of the 2003 Rules provided:

Address for communications

50a    NHBC will send all communications under these Rules to your address as it appears on the Register.

50b   You must send any reply to a communication from NHBC to the address given on that communication.

50c    Any communication sent by First Class Post or recorded delivery to the appropriate address will be treated as having been received not later than the second working day after posting and if sent by second class, the third working day after posting.”

 

Rule 51 of each version of the Rules made provision concerning information to be supplied to NHBC. The 2003 Rules provided:

Information to be supplied to NHBC

51a    You must give NHBC written notice of any proposed change of address before that change takes effect.  If you do not do so NHBC will be entitled to rely on any communication as if it were delivered in accordance with Rule 50c regardless of its return, destruction, or onward transmission.

51b   You must give NHBC immediate written notice if:

ii    you are a partnership, and there is any change in your membership then you must give details of the change, and of the name and address of any new partner;

vi   you intend or decide to cease trading …

vii  you cease trading …”

 

In terms of Rule 57(a) NHBC was empowered to amend the Rules after giving reasonable notice to all builders and developers on the register. Rule 57(b) provided that amendments were to take effect from the date they were introduced.

 

The Incorporation of SHL and the Copy Letter Dated 19 March 2003
[19]      SHL was incorporated on 10 March 2003. As already indicated, the second and third defenders were the only shareholders.

[20]      Productions 7/72, 7/73 and 7/74 of Process (JB 613-621) were not agreed documents, and their authors were not called to speak to them. Production 7/72 bore to be a copy of a letter dated 29 November 2005 from Duncan Young & Co, Chartered Accountants, to H M Inspector of Taxes headed “Scotthogarth Homes Limited” and which continued:

“We refer to your letter of 21st October 2005. We address the queries raised in your last letter as follows:

1. An analysis of the opening Work in Progress is attached,

2. A copy of the final partnership accounts to cessation is attached.

3. An analysis of closing Work in Progress is attached

…”

 

[21]      In his evidence-in-chief the second defender indicated that Duncan Young & Co had recommended the incorporation of a limited company; that SHL was incorporated on 10 March 2003; and that “the partnership then ceased to operate in June 2003”. Duncan Young & Co had advised that the partnership’s bank and other bodies be advised of the incorporation of SHL. That had been done. As part of that process the second defender had sent a letter to the pursuer dated 19 March 2003. The letter’s terms were set out in a copy letter (Production 7/6, JB 608):

SCOTTHOGARTH HOMES LTD

13 DOVECOT PARK

EDINBURGH

EH14 2LN

 

NHBC

42 Colinton Road,

Edinburgh

EH10 5BT

 

19th March 2003

 

Ref S3608/DEV

 

Dear Sir/Madame

This is to confirm receipt of registration NHBC certificate and to enclose copy of our  Limited company status. Company No. 245389.

 

Yours Faithfully

 

R G Scott

(Director)”

 

[22]      In cross-examination the second defender conceded that after 13 years he had no real recollection of posting the letter. As far as he was concerned the letter informed the pursuer that the partnership had ceased and that the registered developer should now be SHL. From that date it had been SHL and not the partnership which had carried out development. Sites had been registered with the pursuer and Buildmark cover obtained between 2004 and 2006 for developments in Eskbank. While all the relevant documentation (including the applications) had referred to the first defenders, those developments had been carried out by SHL. Dues for registered developer S3608 had been paid by SHL. It was put to the second defender that it looked a bit suspicious that the letter of 19 March 2003 had not been mentioned to the pursuer until 2013. The second defender did not accept there was anything suspicious about that. He had thought that the pursuer “would have had it on file”. He maintained that he had been unaware of the correspondence with the pursuer in 2008 and 2009 about possible registration of SHL.

[23]      In re-examination the second defender indicated that the first defenders had not carried out any development. The first development carried out by either the first defenders or SHL had been during 2003/2004. His understanding was that the developments at Eskbank had been carried out by SHL “in conjunction with” the pursuer.

[24]      The third defender’s evidence was that, as a result of advice from the first defenders’ accountants, SHL had been incorporated. The tax planning advice from the accountants had been that the land which it was proposed should be developed should be owned and developed by a limited company rather than the partnership. The third defender’s understanding was that the partnership had ceased to exist on 10 March 2003 when SHL was incorporated. He spoke to Production 7/73 being the final accounts of the partnership. SHL took over the first defenders’ work in progress from 10 March 2003. Production 7/74 showed SHL taking over the first defenders’ work in progress.

[25]      The third defender indicated that “we” wrote to the pursuer in March 2003. He had been aware at the time that the second defender had written to the pursuer to inform it of the incorporation of SHL. He could not recall if he had seen the letter in 2003, but before it was drafted he and the second defender had discussed the need to tell the pursuer and others about the incorporation. He was clear that he did not see the letter being posted. His evidence in relation to the letter was based on his discussions with the second defender at the time. Like the second defender, the third defender maintained that he had been unaware in 2008 and 2009 of the correspondence with the pursuer regarding possible registration of SHL.

[26]      Brian Sharples’ evidence was that he had conducted a thorough search of the pursuer’s files. There was no evidence of the purported letter of 23 March 2003 ever having been received. Had it been received, and had the defenders wished that SHL become the registered developer, SHL would have had to submit an application for registration. Receipt of such a letter would have been likely to trigger the sort of correspondence which had been triggered later in 2008 and 2009. Any grant of such an application would have been likely to have been conditional upon the obtaining of satisfactory guarantees and securities to protect the pursuer’s interests.

 

How Matters Proceeded After March 2003
[27]      No change was made to the entry which had been made in the register for the first defenders. Mr Sharples confirmed that his searches disclosed no correspondence between March 2003 and July 2008 which informed the pursuer of any wish to change the registration for S3608. In its dealings with registered developer S3608 the pursuer continued to address all relevant communications to the first defenders (apart from two faxes sent to SHL on 4 May 2009 by a claims inspector with the pursuer, John Clydesdale).

[28]      In 2003/4 applications were submitted by registered developer S3608 for registration of plots in Eskbank and for Buildmark cover for the homes which were to be built on the plots. In 2005 similar applications were submitted by S3608 in respect of another site in Eskbank. In each case Buildmark cover was granted. Such documentary evidence relating to these transactions as was lodged (an invoice (Production 7/9, JB 611) for insurance and inspection fees for plots 1 and 2 at Eskbank Court, 17 Dalhousie Road) suggests that the relevant applications bore to be made in name of, and were granted in favour of, registered developer “S3608 SCOTTHOGARTH HOMES”. It was not suggested to Mr Sharples that SHL had been named on any such applications or documentation.

[29]      However, the Eskbank developments appear to have been carried out by SHL; and it is clear that from about 2004 dues paid by registered developer S3608 were paid from SHL’s bank account.

 

The Strathaven Development
[30]      In 2006 Mr Hogarth was approached by Mr Brownlie, who owned the site at 47 Commercial Road, Strathaven. The site had planning permission for a residential development of fourteen flats. Mr Brownlie was interested in selling the site to a developer. He was also interested in carrying out the building work. Mr Hogarth brought the opportunity to the attention of the second and third defenders. They were interested in the proposal. Mr Hogarth and the second and third defenders each contributed £83,333 to the finance needed for the project. There was a lack of clarity as to the precise legal basis upon which each party contributed those sums (eg as a loan to SHL or otherwise), but it was accepted that ultimately each of the three was to be entitled to a one-third share of any profit from the development. The remaining finance for the project was raised through a bank loan to SHL.  

[31]      Dan Brownlie & Sons were engaged as builders. It was important that Dan Brownlie & Sons were a registered builder because if Buildmark cover was to be obtained for homes they had to be built by a registered builder.

[32]      SHL acquired the site from Mr Brownlie on or before 21 July 2006. The disposition in its favour was registered on that date.

[33]      Mr Hogarth was the person who was to be in charge of the development on a day-to-day basis. The second and third defenders described him as an “agent manager”. Mr Hogarth described himself as an investor and a consultant. There was some dispute as to the sum he was paid for the work he carried out (on Mr Hogarth’s and the second defender’s account, £15,000, on the third defender’s account £69,000), but resolution of that issue is not material to the questions which I have to decide.

[34]      There is no doubt on the evidence that Mr Hogarth was there to look after the developers’ interests on site on a day-to-day basis. That was what the second and third defenders expected of him, and that was the role he played. That included acting on behalf of SHL. SHL owned the site and financed the development. It engaged Dan Brownlie & Son as builders. Dan Brownlie & Son carried out most of the building work, but some other contactors carried out other work. SHL paid for all the building work and materials. On completion SHL sold the flats to purchasers.

[35]      Dan Brownlie & Sons did not assume and perform all of the administrative, logistical, and organisational duties which would normally have been carried out by a main contractor on such a project.  This resulted in Mr Hogarth having to perform many tasks which a main contractor would normally have carried out. Mr Hogarth had no experience of acting as a developer or main contractor on a development like Falconer Court. It was clear that, while he did his best, he was somewhat out of his depth.

[36]      The second and third defenders wanted the homes on the development to have Buildmark cover. They informed Mr Hogarth of the existence of the registered developer registration and number and indicated that he should use it to apply to register the plots at the development and to obtain Buildmark cover for the homes to be built. They told him that it was SHL who was the registered developer. Mr Hogarth’s evidence was that he was unaware of the existence of the first defenders until about 2008. I shall examine the second and third defenders’ evidence in relation to the application in more detail later.

[37]      Mr Hogarth contacted the pursuer with a view to submitting an application. The pursuer provided him with the appropriate application form. The form identified the applicant as the person entered on the register as registered developer viz. S3608 Scotthogarth Homes. Mr Hogarth completed the application. He noticed that the applicant was shown as Scotthogarth Homes rather than as SHL. He thought that was “a clerical error”. Nonetheless, he did not query it, nor did he seek to alter it. As far as he understood Scotthogarth Homes could only refer to SHL. Since he understood SHL to be the registered developer and it owned the site, he ticked the box to confirm that the applicant owned the site. The application identified 14 plots to be registered. It also provided the anticipated sales price bracket for the home to be built on each plot, and the appropriate Buildmark premium to be paid. The application was signed by Mr Hogarth on 20 July 2006. It declared that the first defenders owned the site. On receipt of the application the pursuer returned it to enable a continuation sheet to be completed specifying each plot and the anticipated selling price. The continuation sheet was completed and signed by Mr Hogarth on 7 August 2006, and he resubmitted the application to the pursuer.

[38]      By letter dated 11 August 2006 the pursuer wrote to the first defenders to confirm acceptance of registration of the plots for Buildmark:

“MANAGING DIRECTOR,

SCOTTHOGARTH HOMES,

13 DOVECOT PARK,

EDINBURGH

MIDLOTHIAN

EH14 2LN

 

Our Ref: S3608

11 August 2006

SITE: FALCONER COURT, 47 COMMERCIAL ROAD, STRATHAVEN

Thank you for your registration for NHBC Buildmark Warranty.

The Inspector associated with your site is Ms A Thomson …”

 

The letter went on to remind the recipient of the Buildmark procedure and the inspection stages.

[39]      Throughout the course of the construction at the site the pursuer addressed all communications to the first defenders. Some of those communications were sent to Falconer Court but many were sent to the first defenders at 13 Dovecot Park, Edinburgh, the address for them which was contained in the NHBC register.

[40]      On 26 July 2007 the pursuer wrote to the first defenders at 13 Dovecot Park following a pre-handover inspection of the properties at Falconer Court on 25 July 2007. The pursuer indicated certain identified outstanding items which prevented it from confirming that Buildmark warranty cover could be provided to purchasers, and sought resolution of them and the arrangement of a further inspection. The second defender faxed the letter to Mr Hogarth for his attention. Following the outstanding matters being attended to, and further inspection by the pursuer, the pursuer issued Buildmark certificates for each of the fourteen plots between 27 July 2007 and 7 December 2007.

 

NHBC Requirements
[41]      The relevant NHBC building standards applicable to the development at Falconer Court were NHBC Standards 2006 which were effective from 1 September 2006 (Production 6/579, JB 202)

 

NHBC Buildmark
[42]      The NHBC Buildmark warranty and insurance cover applicable in respect of the properties at Falconer Court was BM8/3 10/05 (Production 6/20/1, JB 176) which applied to properties registered with the pursuer from 1 October 2005.

 

Correspondence in 2008 and 2009
[43]      On 25 May 2008 the second defender wrote a manuscript letter to the pursuer. The letter bore to be written by him on behalf of Scott Hogarth Homes.

[44]      In 2008 the existence of SHL came to the attention of the pursuer. As a result it wrote to the first defenders on 24 July 2008 (Production 6/12, JB 630) asking if SHL wished to become a registered developer. Following two reminder letters from the pursuer (Productions 6/13 and 6/14, JB 630, 631) SHL responded by letter of 9 September 2008 (Production 6/580, JB 633) that “…our company is not engaged in any development work and is unlikely to be so for some time. We will contact you should circumstances change.” There was further correspondence in 2009. On 6 April 2009 SHL wrote to the pursuer advising that “Scott Hogarth Homes is an incorporated company and we would be pleased if you would change your data to reflect that”(Production 7/38, JB 634). By letter to the defenders dated 17 April 2009 (Production 6/15, JB 635) the pursuer advised that if SHL wished to be registered an application would have to be submitted and that an indemnity or bank bond would be required. Despite reminder letters from the pursuer that letter was not replied to. 

[45]      During 2008 and 2009 complaints of defects in the homes were made by purchasers. The pursuer investigated the complaints and issued resolution reports to the first defenders. In 2011 the first defenders sought to submit some of the disputes to arbitration. The arbitration claim which Mr Hogarth submitted (Production 6/177, JB 1078) was in the name of the first defenders. Mr Hogarth’s evidence was that he had submitted it in the first defenders’ name because that was what the pursuer had said ought to be done, and at that stage he had not thought it politic to disagree with the pursuer.

 

Personal Bar

[46]      Both parties advanced pleas of personal bar. Logically, those pleas ought be considered first.

[47]      Counsel for the pursuer submitted that the defenders were personally barred from denying that the first defenders remained the registered developer after 19 March 2003, or from denying that Mr Hogarth had the defenders’ authority to submit the application for Buildmark cover on behalf of the registered developer (Gatty v Maclaine 1921 S.C. (HL) 1; Stair Memorial Encyclopaedia of the Laws of Scotland, vol. 16, paras 16-04 et seq.; Reid and Blackie, Personal Bar, para 5-26). Between 2003 and 2008 the defenders had acted inconsistently with the position which they now sought to adopt. All correspondence from the pursuer to them had shown the registered developer as being the first defenders. The defenders had not challenged or queried that. They were aware from the correspondence to them after the Buildmark application that the application had been made in name of the first defenders, and that the pursuer was treating the first defenders as being the registered developer who had obligations under the cover, but they had said nothing to challenge or query that. They had permitted the pursuer to proceed on the basis that the first defenders had made the application and had incurred the relevant obligations. The pursuer carried out its obligations under the Buildmark cover on the basis that that was the position. It duly carried out inspections, and it assumed obligations to purchasers of homes.

[48]      Counsel for the defenders maintained that the pursuer had done nothing to bar it from advancing the defence which it now advanced. It had duly exercised its right to transfer the first defenders’ registration to SHL and had notified the defenders of that. Moreover, the pursuer had acquiesced in SHL being the registered developer and was personally barred from pursuing the present action against the defenders. The foundation of the defence to the pursuer’s plea of bar, and the foundation of the defenders’ own plea of bar, was that the defenders’ construction of condition 5 was correct, and that they had duly notified the pursuer of transfer of the registration to SHL. Thereafter, the pursuer had acted consistently with that transfer having taken place by accepting payment of dues and fees from SHL.

[49]      In my opinion the defenders’ plea of personal bar should be repelled. Counsel for the defenders accepted that unless I agreed with him that condition 5 entitled the defenders to transfer their registration to SHL, and unless I was satisfied that such a transfer had been notified to the pursuer, the plea could not succeed. Since, as I explain below, I find that the letter was not sent, and I reject the defenders’ suggested construction of condition 5, the plea does not get off the ground. The mere fact that NHBC dues and premiums invoiced to the first defenders were paid by cheques drawn on an SHL bank account is not a matter of any great significance. I accept the evidence of Mr Fiddes and Mr Sharples that it was not unusual in their experience of the construction industry for payment to be tendered by a related entity. The payment by SHL of the first defenders’ bills did not change the fact that the contracting party was the first defenders (Fleming Buildings Limited v Hives [2008] CSOH 103, per Lord Menzies at para 102; [2010] CSIH 8, at paras 16-18, 23).

[50]      I turn then to the pursuer’s plea of personal bar. The defenders appear to have been well aware throughout the period from 10 March 2003 to 7 December 2007 (when the final insurance certificate for a home was granted) that the pursuer continued to treat the registered developer as being the first defenders. All communications from the pursuer referred to the first defenders as the registered developer and were addressed to them. The applications for Buildmark in relation to the Eskbank sites were in the name of the first defenders and it was the first defenders who incurred obligations in respect of that cover (see eg the VAT Invoice/Receipt rendered to the first defenders on 7 October 2005 (Production 7/9, JB 611)). On 11 August 2006, immediately after the Falconer Court application for Buildmark cover was accepted, the pursuer wrote to the first defenders thanking them for “your registration for NHBC Buildmark Warranty”, identifying the inspector associated with “your site”, and reminding the first defenders of the procedures concerning the inspection phases (emphasis added). The defenders were well aware that as the development proceeded inspections were carried out, and that ultimately Buildmark cover was granted, with both the pursuer and the first defenders assuming obligations in terms of that cover. At no time did they suggest that Mr Hogarth lacked authority to submit the application for Buildmark cover for the first defenders. At no point did they state that the pursuer was mistaken in continuing to treat the first defenders as the registered developer and that the registered developer was SHL. They did not at any time maintain that it was SHL rather than the first defenders who would and did incur obligations under the Buildmark cover. By keeping silent they acted inconsistently with the claimed defence which they now seek to assert viz. that the first defenders ceased to be registered developer S3608, that SHL became registered developer S3608, and that Mr Hogarth was not authorised to submit the Buildmark application on behalf of the first defenders. The defenders’ conduct justified the pursuer in believing that the first defenders accepted that they were the registered developer and that it was they who were undertaking obligations in respect of the Buildmark cover. The pursuer acted on that belief to its prejudice. It accepted the Buildmark application, took it through its various stages, and ultimately it undertook insurance obligations to home purchasers. In the whole circumstances the defenders are personally barred from now denying that the first defenders are the registered developer, or that the first defenders are the persons bound to perform the developer obligations which were assumed in respect of the Buildmark cover. It would be grossly unfair to the pursuer to permit the defenders to advance the defence that the first defenders are not the registered developer and that they did not submit, and are not the person bound by, the Buildmark application. 

[51]      That is sufficient to determine that the first defenders are the registered developer, and that the application for Buildmark was made by them. However, even if, contrary to my view, the defenders are not personally barred from advancing these aspects of their defence, in my opinion their defence is not well founded.

 

Was the First Defenders’ NHBC Registration “transferred” to SHL?

Construction of Condition 5
[52]      I reject counsel for the defenders’ submission that condition 5 of the conditions of registration empowered the first defenders to substitute SHL as the registered developer. In my opinion condition 5 bound the defenders to inform the pursuer in writing of any change to the partnership within 28 days of the change. That, in my opinion, is the ordinary and natural meaning of the condition read in its documentary, factual and commercial context. It did not empower the defenders to substitute a limited company as the registered developer in place of the partnership. I am not persuaded otherwise by the fact that there was a degree of overlap between condition 5 and Rule 51b i and ii.  On any view, the ambits of the condition and of Rules 51b i and ii is not identical; and the condition and the Rule impose different requirements as to the time of notification.  In so far as the condition and the Rule conflict, the condition (being a provision specially prepared for the purposes of the particular contract of registration) ought to prevail over the Rule (which was a standard printed term) (see McBryde, The Law of Contract in Scotland (2nd edn), page 8-19, 8-21 and the authorities there referred to).   Part of the relevant context here was that a registered developer undertook onerous obligations in terms of the NHBC Rules. The parties knew that the financial standing of a registered developer was a very material consideration (as was plain eg from condition of registration 4, and from many of the Rules including Rules 10, 27 and 28). A construction of condition 5 which entitles the first defenders to transfer their registration to a different legal entity by mere intimation to the pursuer is at odds with the ordinary and natural meaning of the condition and with commercial common sense. Having regard to the ordinary and natural meaning of condition 5 and its documentary, factual and commercial context, the defenders’ suggested construction of the condition is untenable.

 

What was the Purported Effect of the Letter?

[53]      In any case, even if, contrary to my view, condition 5 empowered such a transfer, the letter of 19 March 2003 was not a notice by the defenders that they wished to be removed from the register and be replaced by SHL as the registered developer. The letter bore to be from SHL, not the defenders, and it merely enclosed a copy of SHL’s certificate of incorporation.

 

Was the Letter Sent?
[54]      I agree with counsel for the pursuer that it is odd that the existence of the letter was not drawn to the attention of the pursuer before 2013 - and in particular that it was not adverted to during the correspondence in 2008. Mr Hogarth was adamant that the correspondence in 2008 had been drawn to the attention of the defenders. I accept his evidence on that matter, and I reject as unreliable the second and third defenders’ evidence that they were unaware of the terms of that correspondence. At that time Mr Hogarth was having a trying time attempting to deal with the complaints which were arising. While he did not have the background experience or qualifications which he needed to perform the tasks which had been left to him, it was obvious that he committed very considerable time and effort to the project both during and after the construction stage. I find it implausible that he would not have kept the second and third defenders abreast of those events and of the important correspondence about SHL.

[55]      On the other hand, counsel for the pursuer did not put it squarely to either of the second or third defenders that the copy letter was a fabrication prepared after the event. The highest matters were put was that it was “suspicious” that the letter had not been founded upon until 2013. Moreover, I accept the third defender’s evidence that there was discussion between the second defender and him about writing to inform the pursuer and others about the incorporation of SHL. That evidence does tend to support the second defender’s evidence that the letter was indeed prepared in March 2003. I also accept that the third defender understood that the second defender had written to the pursuer. Weighing all the evidence I conclude, with some hesitation, that the copy letter of 19 March 2003 was indeed prepared on about that date.

[56]      However, I am not satisfied that the letter of 19 March 2003 was in fact sent. The second defender had no actual recollection of posting it. His recollection generally of matters was poor. He did not impress as someone who was careful or systematic in the administration and management of business matters - far from it. I regret to say that his evidence did not inspire confidence as to its accuracy or reliability.

[57]      I am satisfied by the evidence of Mr Sharples that despite thorough searches of the pursuer’s files there is no record that the letter of 19 March 2003 was ever received.

[58]      If the letter was sent it is strange that the defenders did not seek confirmation of its receipt. From their perspective, it was an important letter. The absence of any response to it ought to have been concerning. It seems from the terms of the letter that on registration of the first defenders the pursuer had sent them a certificate of registration. Had the letter been sent, and had it had the effect the second and third defenders anticipated, receipt of an amended certificate of registration might have been expected.

[59]      I reject counsel for the defenders’ suggestion that the correspondence from the pursuer to the first defenders in 2008 and 2009 indicates that the letter was indeed received in 2003. I find it wholly implausible that if it had been received in 2003 there would have been a five year delay before it was replied to. Other possible explanations for the existence of SHL coming to the pursuer’s attention in 2008 appear to me to be much more likely. Mr Hogarth recalled raising the matter in a telephone conversation with the pursuer. Ultimately he accepted that it was likely that that conversation took place in 2008 prior to the correspondence (and not in 2009 as he had originally thought). Even if that were not so, the possibilities that the matter was raised because the pursuer became conscious of the existence of SHL through payments of dues and premiums being made by cheques drawn by SHL, or because it became evident that SHL was involved in the Strathaven development and its sequellae, appear to me to be much more plausible explanations than the correspondence being a response to a letter supposedly received in March 2003.

[60]      Accordingly, I am satisfied that the letter was not received by the pursuer, and that the reason it was not received was that it had not been sent by the second defender.

[61]      Even if the defenders had established that the letter was posted, reliance upon the deeming provision in Rule 50 would not have assisted them.  The letter was not a reply by the first defenders to a communication from NHBC.  It was a letter from SHL. 

[62]      It is unnecessary to decide whether, if the letter had been from the first defenders and had been posted, it would have been a “communication” in terms of Rule 50c, or whether Rule 50 ought to be construed as distinguishing between communications (emanating from NHBC) and a “reply to a communication.”  Since I heard limited argument on this point, I prefer to reserve my opinion on it.

 

Conclusion

[63]      It follows that the first defenders’ registration was not transferred to SHL.

 

Was the Partnership Dissolved in 2003?

[64]      I do not accept that the first defenders were dissolved when SHL was incorporated and when the first defenders’ work in progress was transferred to SHL.

[65]      It is noteworthy that the defenders do not aver that the first defenders were dissolved. Indeed, the pursuer’s averment (Cond. 1) that the first defenders are a partnership is admitted by the defenders (in Ans. 1). The only qualification to that in Answer 1 is that “the partnership of Scotthogarth Homes has not been responsible for the construction of houses since in or around 2003”; while in Answer 3 the defenders aver:

“Since informing the pursuer of the incorporation of the company the defenders, as a partnership, have not commenced any projects, nor has any payment been made to the pursuer by the partnership. The partnership has not been trading as a developer.”

 

[66]      Notwithstanding their pleadings, the second and third defenders spoke to the first defenders having ceased to exist. During cross-examination of both witnesses it became apparent that they were proceeding on the assumption that dissolution came about (i) on the basis that the partnership ceased trading, and (ii) because the effect of incorporation of SHL was that the partnership was automatically dissolved. In reliance upon that evidence counsel for the defenders submitted that, since partnership is the relation which subsists between persons carrying on a business in common with a view of profit (Partnership Act 1890, s 1(1)), once trading ceased the partnership was dissolved. He further submitted that since the partnership business and assets had been taken over by SHL the presumption was that the first defenders had been dissolved at that time (Chahal v Mahal [2005] EWCA 898, per Neuberger LJ at paras 17-18, 23-25, 28-29).

[67]      While the evidence does appear to be that SHL played a part in the developments at Eskbank and Strathaven, I am not satisfied that the first defenders had no involvement in those developments, or that they ceased trading in 2003. On the contrary, it appears to me that the defenders contributed the first defenders’ NHBC registration as a registered developer to each of those projects and they facilitated the obtaining of Buildmark cover for the developments. The result was that the first defenders were a person “that arranges for the construction of Homes or is concerned in or with such arrangements”(see the wide definition of Developer in Rule 1).

[68]      In any case, the fact is that the pursuer was given no notice of cessation of trading or of dissolution of the partnership. In those circumstances the pursuer was entitled to assume that the partnership continued unchanged (The Law of Partnership in Scotland, J. B. Miller (2nd ed, edited by G. H. Brough), p523).

[69]      I am not persuaded that counsel for the defenders’ reliance upon Chahal v Mahal, supra is apposite. No question of third party rights arose there. Chahal is readily distinguishable from the present case on that ground, and on the further ground that here there was an asset (the first defenders’ NHBC registration as a developer) which SHL did not succeed to, and which the first defenders continued to exploit after the transfer of work in progress to SHL.

 

The Application for Buildmark Cover

[70]      Counsel for the pursuer submitted that on the evidence the correct conclusion was that Mr Hogarth had actual (failing which, ostensible) authority from the defenders to apply on behalf of the registered developer for Buildmark cover; that that was who the application had been made for; and that accordingly it was the defenders who were bound to perform the obligations which arose as a result of that.

[71]      Counsel for the defenders submitted that the application was not, and could not, have been made by or on behalf of the first defenders. He submitted that at the relevant time the registered developer had been SHL, and that the second and third defenders and Mr Hogarth had understood that the application was being submitted on behalf of SHL. The partnership had been dissolved and was incapable of contracting. Mr Hogarth had had no authority to act on behalf of the first defenders. The only authority he had was to act on behalf of SHL. That had been his actual authority. The relationship of agency was consensual (Garnac Grain Company Incorporated v H.M.F Faure & Fairclough Ltd [1968] AC 1130, per Lord Pearson at p 1137B-F; Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, per Lord Wilberforce at p 587E-G). Since Mr Hogarth had been unaware of the existence of the first defenders he could not possibly have consented to act as their agent. Nor had he had implied or ostensible authority to act on behalf of the first defenders (Batt Cables Plc v Spencer Business Parks Ltd 2010 SLT 860, at para 36). The first defenders had not represented to the pursuer (at the time of the application or before then) that Mr Hogarth had authority to act for them (Armagas Ltd v Mundogas SA [1986] 1 AC 717, per Lord Keith of Kinkel at pp 777A‑C, 777G-778D).

[72]      I reject counsel for the defenders’ submissions that the first defenders are not the registered developer, and that they did not make the Buildmark application. For the reasons already given, at the time of the application for Buildmark in 2006 the first defenders remained the registered developer and they were continuing to exploit that registration.

[73]      Both the second and third defenders had a clear interest to suggest that the authority to apply for Buildmark which they gave to Mr Hogarth was only authority to apply on behalf of SHL; and that was the stance which both adopted in examination-in-chief. I do not accept that evidence. I am not persuaded that that was in fact what happened.

[74]      In cross-examination the second defender indicated that Falconer Court was Mr Hogarth’s project and that: “We helped out with NHBC registration”; “We gave our name to the development”. He accepted that there had been no reason for the pursuer to doubt Mr Hogarth’s authority to submit the application for Buildmark which had been submitted. He agreed that Mr Hogarth “had your authority to deal with” the pursuer. While in re-examination counsel for the defenders elicited evidence in response to leading questions which bore to qualify that, I am not disposed to attach any weight to the qualifications in light of the way in which they were obtained.

[75]      In cross-examination the third defender accepted that he and the second defender controlled the NHBC registration S3608. He accepted that they contributed that to the Falconer Court development, and that they gave permission to Mr Hogarth to use the registration and get on and get the Buildmark cover. He accepted that the Buildmark application form which had been submitted by Mr Hogarth had been submitted on their behalf.

[76]      As already observed, in my opinion at the material times both the second and third defenders had an imperfect understanding of the legal consequences of making an application for Buildmark, and a fairly casual approach towards the use of registration S3608. Little thought appears to have been given to what was being done. They knew that they controlled registration S3608 and they wished Mr Hogarth to make use of it to apply for Buildmark cover for the development. It was the existing registration which the defenders wished to be utilised and it was that existing registration which Mr Hogarth understood was to be used. The defenders did not instruct Mr Hogarth to make a further application for registration. He was to apply on behalf of the existing registered developer for Buildmark cover. I am satisfied that the correct analysis of the evidence is that the second and third defenders granted Mr Hogarth authority to apply for Buildmark cover on behalf of registered developer S3608. The second and third defenders may (erroneously) have understood the identity of the registered developer to be SHL, and have conveyed that misunderstanding to Mr Hogarth. However, I am not persuaded on the evidence that that understanding defined and delimited the extent of the authority which the defenders conferred on Mr Hogarth in respect of the obtaining of Buildmark cover. On the contrary, in my opinion the reality was that the essence of the transaction between the defenders and Mr Hogarth relating to developer registration and Buildmark was (i) that the defenders granted authority to Mr Hogarth to apply for Buildmark on behalf of registered developer S3608; and (ii) that Mr Hogarth understood that he was to do that on behalf of registered developer S3608 and that he agreed to do so.

[77]      It follows that the application for Buildmark cover was made on the first defenders’ behalf, and that the resultant contractual obligations are obligations which bind the first defenders.

[78]      In light of the existence of actual authority it is not necessary to say much about ostensible authority. I did not understand counsel for the pursuer to specify a representation by the defenders to the pursuer which provided a foundation for a finding that Mr Hogarth had ostensible authority to submit the application on behalf of registered developer S3608, and I have been unable to identify any such representation.  It follows that I am not persuaded that Mr Hogarth had ostensible authority to submit the Buildmark application on behalf of the first defenders.

 

The Registered Developer’s Contractual Obligations
[79]      Counsel for the defenders submitted that the correct construction of Rules 27 and 28, when read together with Rule 5, was that a registered developer was only bound to reimburse or indemnify the pursuer in terms of Rules 27 or 28 if the parties had agreed a specific condition of registration to that effect. In my opinion, on a proper construction of the Rules and the conditions of registration, that contention is incorrect.

[80]      In terms of condition 1 of the conditions of registration the first defenders were obliged to comply with the NHBC Rules in force from time to time. That included Rules 27 and 28. Rule 5 enabled the pursuer to make separate special provision concerning the matters discussed in the Rule. It did not make it a condition precedent to the applicability of Rules 27 and 28 that the Rule 5 power was exercised to make it a specific condition of registration that the obligations in Rules 27 and 28 bound the first defenders. The defenders’ suggested construction is not the ordinary and natural reading of the relevant provisions. In my opinion it is not even a possible reading of them. I see nothing in the language of the contract, or in its documentary, factual and commercial context, which supports it. On the other hand, each of these considerations seems to me to support the pursuer’s construction.

In my opinion the first defenders are bound by the conditions of registration and the Rules which are in force from time to time, including Rules 27 and 28.

 

The Alternative Bases of Liability
[81]      In Cond 4 the pursuer advanced alternative bases for the defenders being found liable to redress the losses which the pursuer has sustained as a result of granting the Buildmark cover.

[82]      The first alternative basis was that the defenders fraudulently registered the Falconer Court development for Buildmark on the basis that they were its owners and developers when they knew that was not the case. To that alternative case the pursuer added the coda “In any event they would be liable to make good to the pursuer the pursuer’s losses arising from said fraudulent, or at least negligent, misrepresentation of the position.” The second alternative basis was that SHL and the second and third defenders fraudulently registered the Falconer Court development for Buildmark when they knew SHL had no entitlement to do that. The third alternative basis was that the first defenders were in breach of contractual obligations owed to the pursuer under the conditions of registration and the NHBC Rules viz. conditions of registration 4 and 5, and Rule 20.

[83]      So far as the first and second bases are concerned, I accept that at the time the Buildmark application was submitted each of the second and third defenders believed that the first defenders had ceased to be the registered developer and had been replaced by SHL. I am not persuaded that the application contained fraudulent misrepresentations by them. While their belief that SHL had become the registered developer was misguided, I accept that it was genuinely held.

[84]      The coda to the first alternative basis, as developed in submissions, was that the second and third defenders, through Mr Hogarth, negligently misrepresented to the pursuer that the application was made on behalf of the first defenders and that the first defenders owned the site. The argument advanced was that there was a failure on the part of the second and third defenders to take reasonable care not to cause economic loss to the pursuer by negligent misstatement of the facts in circumstances where there was the necessary proximity, foreseeability of loss for the pursuer, reliance on the information provided on behalf of the second and third defenders, and where it would be fair, just and reasonable to impose a duty of care on the second and third defenders not to cause such loss to the pursuer (Caparo Industries Plc v Dickman and others [1990] 2 AC 605). As I have found that the first defenders are contractually liable to the pursuer (and the second and third defenders are liable as partners of the first defenders) I do not think it would be fair, just and reasonable to impose the desiderated delictual duty of care on the second and third defenders. I prefer to reserve my opinion as to whether the other criteria for the imposition of a duty of care are satisfied, since I heard limited argument on the point and it is unnecessary to decide it.

[85]      The fault may be mine, but I have difficulty following the logic of the third alternative basis of liability. If the first defenders are not responsible for the Buildmark application and the losses the pursuer incurred as a result of providing the cover, it is very difficult to see how it can be said that those losses arose as a result of breaches of conditions 4 or 5, or of Rule 20. During submissions, despite the absence of any record for such a claim, counsel for the pursuer also maintained that if the first defenders had ceased trading and been dissolved they had failed notify the pursuer of that, and that that failure had been a breach by the first defenders of Rule 51a vi and vii. Even if I had been inclined to entertain that submission in the absence of a case made on record (which I am not), I would not have been persuaded that the losses claimed were caused by those breaches. The losses which the pursuer claims flow from the grant of the Buildmark cover. I am not satisfied that they were caused by the first defenders’ breach of Rule 51a vi or vii.

 

The Defects and the Pursuer’s Expenditure
[86]      It was common ground that after their sale numerous defects became apparent in  homes. Remedial work was carried out in three phases, an initial set of works focussed on Flat 3/2 (Mr and Mrs Paton); a second phase where Hadden Construction Limited (“Hadden”) were the building contractors; and a final phase where Edinmore Contracts Limited (“Edinmore”) were the building contractors. Ultimately, counsel for the defenders accepted that the pursuer was obliged in terms of the Buildmark policies to carry out the vast majority of the work in phases 1 and 2. However, he did not accept that the pursuer was obliged to carry out any of the phase 3 work.

[87]      Mr Christie and Mr Campbell spoke to most of the defects and explained the respects in which there had been non-compliance with the NHBC Requirements. That evidence was supplemented by the evidence of Mr Aitken, Mr Johnson and Mr Pettifor. The evidence of those witnesses was not undermined in cross-examination, and I accept it. I reject the suggestion that Mr Christie had erred in concluding that the cross-section drawing of the floor in the Patons’ flat (Production 6/43, JB 2136) illustrated the position before any remedial works were carried out under the pursuer’s supervision. In my view he committed no such error. On the contrary, I accept that the drawing shows the position before any work had been carried out for the pursuer (but after initial and unsuccessful remedial work by Mr Brownlie on the instructions of Mr Hogarth).

[88]      Counsel were agreed that the appropriate starting point for calculating the expenditure which the pursuer incurred as a result of its obligations to home owners under the policies. was £1,336,311.51 (i.e. Mr Fiddes’ headline figure of £1,258,147.36, plus his figure for NHBC administration charges, plus contractual interest of £19,880.59 from June 2011 until the raising of the action, less (i) £535.50 which had been incorrectly allocated and (ii) £9,812.57 attributable to wet rot work). Counsel for the defenders maintained that if none of the phase 3 work was work which the pursuer required to carry out under the policies, £517,359.73 of the £1,336,311.51 would not be recoverable. If only the balcony work was irrecoverable the sum of £56,838.40, and proportionate parts of the project management costs incurred to Clancy Consulting and of the NHBC administration costs, would fall to be deducted from the figure of £1,336,311.51. I did not understand counsel for the pursuer to challenge the arithmetic of the defenders’ figures.

[89]      In order to understand the phase 3 work, and the interrelationship between it and the phase 2 work, it is necessary to appreciate that five of the flats on upper floors (Flats 2/2, 2/3, 2/4, 3/2 and 3/3) had lounges with French doors that opened out on to balconies. The lounge floors and the balconies were supported by laminated wooden beams (“Kerto beams”). The Kerto beams continued through the external wall from the lounge, providing cantilevered support to the balconies. During phase 2 work was carried out within the lounges to enhance the strength of the Kerto beams within the lounges and to reduce deflection in the floors there to acceptable levels. During phase 3 the full lengths of the Kerto beams were replaced internally and externally, and the balconies were replaced.

[90]      The evidence was that use of the Kerto beams provided inadequate support for the balconies. There should have been additional non-timber support. The beams should have been adequately protected from water penetration. An appropriate structure should have had a lifespan of 60 years. None of these requirements were met. I accept the evidence that these were breaches of the NHBC Requirements and that the appropriate solution was to replace the existing balconies with balconies which complied with the Requirements.

[91]      The continuing problems with use of the Kerto beams inside the lounges were that they were a conduit for water ingress, that they were vulnerable because of that, and that some further remedial work would be needed to address those problems. There were also concerns that, given the alterations to the beams, the manufacturer’s warranty could no longer be relied upon. Replacement of the beams was a solution to those problems and it made it easier to replace the finishings and refit the floors. Mr Christie’s evidence was that in the whole circumstances it was reasonable to replace the beams internally with new steel beams. Mr Campbell shared that view. I accept that evidence. I am not satisfied that leaving the beams in place, but carrying out remedial work to deal with the problems, would have been more economical or as satisfactory as replacing the beams. It follows that the replacement work was work which the pursuer was obliged to carry out to perform its obligations under the Buildmark policies. It was not disputed that timeous claims had been made under section 2 of the policies in respect of the floors and in respect of water ingress.

[92]      So far as the defective balconies are concerned, counsel for the defenders maintained that there had been no timeous section 2 claims, and that section 3 cover did not extend to defects in balconies.

[93]      In my opinion there were timeous section 2 claims for the balcony defects. A complaint was made on 2 February 2009 by the Falconer Court Residents Association on behalf of all of the owners. At that time the Association noted that the floors in Mr Paton’s flat and in Flat 3/3 were considerably out of level, and the Association registered its “concern regarding the stability of the floor construction throughout Falconer Court”. By August 2009 there had been further complaints about the balcony floors sloping towards the property causing water ingress (see eg Production 6/67, JB 1524). I am satisfied that the pursuer was put on notice within two years of the insurance certificates of apprehended defects in the stability and construction of the floors throughout the development, including the balcony floors. 

[94]      In any case, more specific claims in respect of defects to the balconies were made early on in the section 3 cover period. I do not accept counsel for the defenders’ submission that the defective balconies are not covered by section 3. In my view, on a proper construction of the policies, the balcony floors are “load-bearing parts of the floors”. The ordinary and natural meaning of those words is wide enough to include the balcony floors. The balconies were designed to be walked upon, and each formed part of a continuous floor with the floor of the lounge. I draw additional support from the fact that in relation to the listed part “Ceilings” in section 3 there is a specific exclusion of “Any Defect in a ceiling which is not in the enclosed part of the Home, eg, balcony ceilings.”, but that in relation to floors there is no corresponding exclusion.

[95]      Accordingly, I accept that the work related to replacement of the balconies was work which the pursuer was obliged to do in terms of the policies.

[96]      I turn to deal with certain further specific (and more minor) aspects of the losses claimed which the defenders maintain are not recoverable.

[97]      In relation to phase 1 the defenders maintained that the claim for alternative accommodation provided to the Patons exceeded (by £2,234.79) the sum which ought to have been paid. That was because, it was said, the Patons had been moved out two months before remedial work had begun. The evidence was that the temporary accommodation was provided from 28 May 2010. However, the pre-inspection and recording of the condition of the flat were carried out on 5 May 2010, the schedule of works was prepared on 14 June 2010, and the contract with Morris & Spottiswood for the work was concluded on 15 June 2010. The evidence was that work could have started at any time after 15 June 2010, but in fact it had been delayed and did not begin until about mid-August. In the whole circumstances I am not persuaded that the provision of alternative accommodation to the Patons ought to have been delayed to a later date.

[98]      The defenders’ second point in relation to phase 1 was that the sum of £6,184.88 paid to the Patons for redecoration of their flat was consequential loss which ought to have been excluded by general exclusion (j) of the Buildmark policy. I reject that contention. The sum involved was not consequential loss in terms of exclusion (j). It represented part of the incidental expenditure necessary to remedy the defects in the flat and to put the Patons in the position they would have been had the defects not been present. Rather than carrying out this work itself the pursuer agreed to pay the Patons the reasonable cost of having it done. The pursuer was entitled to do that. In doing it the pursuer was performing its obligations to the Patons in terms of the policy.

[99]      The defenders’ third point in relation to phase 1 was that payments in respect of council tax and utilities were not covered by the policy and ought not to have been paid. I reject that submission. I am satisfied that the utility costs were in respect of utility services used by the pursuer while it was in occupation of the flat for the purposes of the remedial works. I am also satisfied that the council tax liability was in respect of a period that the pursuer occupied the flat.

[100]    In relation to phase 2 the defenders make the same points about utility and council tax payments, and payments for redecoration made to two home owners.  I reject them for the reasons I have rejected the same points in relation to phase 1. The defenders also make the additional point that the pursuer was not obliged to make the ex gratia payment of £1,750 which it made for common area redecoration. Counsel for the pursuer submitted that this had been a reasonable payment to make, but he did not suggest that it was a payment which the pursuer had been obliged to make in terms of the policies. I agree with counsel for the defenders that the pursuer is not entitled to recover that payment. In relation to roofing costs the defenders suggest that some of the costs claimed may have been overstated and be attributable to storm damage; and that Mr Horner’s evidence that tiles only required to be fixed using one nail should be preferred to the evidence of the pursuer’s independent experts. I am not persuaded that any of the roofing costs claimed were attributable to storm damage rather than the defects in the roof to which the pursuer’s experts spoke. In relation to tile fixing, I prefer the independent expert evidence relied upon by the pursuer to Mr Horner’s evidence (which, with all due respect to him, was neither expert nor independent).

[101]    In relation to phase 3 I am satisfied that payments which were made by the pursuers to home owners for rental of their apartments formed part of the remedial costs which the pursuer is entitled to recover from the defenders. The pursuer used the apartments for various project purposes, including decanting residents of flats to which work was being done. However, there are two payments which I am not persuaded the pursuer is entitled to recover. The first is a payment of £1,914.80 to Mr Edgar for work to his boiler flue. The second is the sum of £4,092 for fire protection work carried out by Edinmore. In each case it appears that had the relevant work been carried out appropriately by Hadden, these costs would not have been necessary. In those circumstances I do not think the costs would have been paid or incurred by a reasonable person in the position of the owner spending his or her own money (general exclusion (l) of the policy).

 

Principal Sum and Interest
[102]    It follows that the total principal sum which the pursuer is entitled to recover from the defenders is £1,328,554.71.

[103]    The pursuer seeks interest on that sum at the legal rate from the date of citation until payment. In my opinion making an award of interest at 8 per cent per annum during the period from the date of citation until the date of decree would substantially over-compensate the pursuer for the principal sum having been withheld. In exercising my discretion as to the appropriate award of interest during this period I consider that I am entitled to have regard to the compensatory principle and to the very low bank base rates which prevailed viz 0.5% from the date of citation until 4 August 2016 and 0.25% from 4 August 2016 to date (Farstad Supply AS v Enviroco Ltd 2013 SC 302). In the whole circumstances I am satisfied that an award of interest at the rate of 4% per annum during that period is appropriate, with interest thereafter at the rate of 8% per annum from the date of decree until payment.

 

Objections

[104]    During the course of the proof a number of objections to evidence were made. I sustained an objection to Mr Bannister and Mr Christie giving evidence as to damage caused by wet rot (having regard to the pleadings and to a ruling made by Lord Tyre on 26 May 2016 which is recorded in the Minute of Proceedings of that date). However I allowed those witnesses to give evidence as to other problems caused by water ingress under reservation of questions of competency and relevancy. In several other instances objection was taken and I allowed evidence to be admitted under reservation. When it came to closing submissions only a few of the objections which were outstanding were insisted upon.

[105]    Counsel for the defenders did not insist on any of the objections made by him which had been reserved (including the objection to the evidence of Mr Bannister and Mr Christie about water ingress).

[106]    Counsel for the pursuer insisted on his objection to evidence elicited during cross‑examination of Mr Sharples concerning the proper construction of the conditions of registration and the NHBC Rules. Counsel for the defenders accepted that the objection was well founded. I shall sustain it. Counsel for the pursuer also insisted on his objections to evidence led from the second and third defender as to their understanding at the material time of the meaning and effect of condition 5. In my opinion while that evidence is irrelevant to the proper construction of the condition, it is admissible for the limited purpose of discerning the states of mind of the second and third defenders at the material times (in light of the pursuer’s averments of fraud on the part of the defenders).

 

Disposal

[107]    I shall put the case out by order to enable parties to check the arithmetic in this Opinion, to address the court as to the terms of an appropriate interlocutor to give effect to my decision, and to deal with the question of expenses. 


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NATIONAL HOUSE-BUILDING COUNCIL AGAINST SCOTT HOGARTH HOMES (a/k/a SCOTTHOGARTH HOMES) AND ROBERT GEOFFREY SCOTT AND NEIL HOGARTH [2017] ScotCS CSOH_7 (17 January 2017)

Web Blue CoS

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 7

 

CA184/15

OPINION OF LORD DOHERTY

In the cause

NATIONAL HOUSE-BUILDING COUNCIL

Pursuer

against

SCOTT HOGARTH HOMES (also known as SCOTTHOGARTH HOMES), and ROBERT GEOFFREY SCOTT and NEIL HOGARTH

Defenders

Pursuer:  McLean QC; Shepherd and Wedderburn LLP

Defenders:  McShane; Blacklocks (for Friel & Co)

17 January 2017

Introduction
[1]        The pursuer is the National House-Building Council (“NHBC”) a company limited by guarantee. It provides warranty and insurance products in relation to new (and newly converted) homes across the United Kingdom. One such product is the Buildmark policy in terms of which the pursuer provides the purchaser of the home with insurance cover against losses caused through the builder or developer having failed to meet NHBC standards in relation to the home. A builder or developer who wishes the pursuer’s products to be offered to prospective purchasers of homes must apply to the pursuer and be accepted on to the NHBC register. Only builders and developers registered with the pursuer may apply to the pursuer to register homes for the purposes of obtaining cover under the Buildmark policy.

[2]        Dan Brownlie carried on business as a builder in Strathaven using the trading name Dan Brownlie & Son. At all material times he was registered as a builder with the pursuer. It is common ground that during 2002 and early 2003 the first defenders were a partnership and the second and third defenders were its partners. On 30 August 2002 the first defenders applied to be registered with the pursuer as a developer. An offer of registration was made by the pursuer to the first defenders on 14 February 2003 and was accepted by them on 15 February 2003. The first defenders were given registration number S3608.

[3]        On 10 March 2003 Scott Hogarth Homes Limited (“SHL”) was incorporated as a company under the Companies Acts. At all material times SHL was controlled by the second and third defenders who were its only shareholders.

[4]        In 2003/4 and 2005 two small housing developments at Eskbank were registered for Buildmark with the pursuer by registered developer S3608. The developments were completed and Buildmark cover was granted by the pursuer to the purchasers of the homes.

[5]        In about 2004 the second and third defenders and the third defender’s father, Stan Hogarth (“Mr Hogarth”), invested together in the purchase of a site in Gorebridge. Planning permission and building warrant for the construction of houses were granted but the development did not proceed. Eventually, in about 2013, the site was sold.

[6]        On 20 July 2006 a further application was submitted by registered developer S3608 to the pursuer to register a housing development at Falconer Court, 47 Commercial Road, Strathaven for Buildmark cover. The pursuer accepted the application. The fourteen homes in the development were completed and sold to individual purchasers in the latter part of 2007. Buildmark cover certificates were issued for the homes between 27 July 2007 and 7 December 2007.

[7]        Following completion, defects became apparent in the homes. The owners made claims on the Buildmark policies in respect of the defects. Following investigations the pursuer paid for remedial work and made other related payments to the owners in respect of the claims. In the present action the pursuer seeks to recoup those sums from the defenders.

[8]        The defenders deny that they are liable to make any payment to the pursuer.  They submit that the first defenders were dissolved when SHL was incorporated. They maintain that the developer registration S3608 was transferred from the first defenders to SHL on about 19 March 2003; that from that moment the registered developer was SHL; and that accordingly SHL was the registered developer who applied for Buildmark cover for Falconer Court. They maintain that on a proper construction of the relevant conditions of registration and the NHBC Rules, the pursuer is not entitled to recover any sum from the defenders or SHL: but that if they are wrong about their interpretation of the conditions and Rules it is the registered developer which is liable, and that the registered developer is SHL not the defenders. If the first defenders are the registered developer, and if on a proper construction of the conditions and Rules they are liable to indemnify the pursuer, the defenders maintain that some of the costs claimed are not recoverable.

[9]        I heard a proof before answer on the commercial roll. The pursuer called nine witnesses, namely, Brian Sharples, a senior claims consultant with the pursuer; John Aitken, a chartered structural engineer employed by the pursuer; Peter Bannister, a building surveyor with Hutton & Rostron; Richard Johnson, a chartered structural engineer with Clancy Consulting; Jim Pettifor, a chartered structural engineer employed by Clancy Consulting; Brian Burn, a chartered structural engineer employed by Clancy Consulting; Alistair Christie, a chartered structural engineer from Cadogans; Robert Campbell, an architect from Cadogans; and Douglas Fiddes, a quantity surveyor. Mr Christie, Mr Campbell and Mr Fiddes prepared reports and gave evidence as independent expert witnesses. The defenders led four witnesses, namely, the second defender; the third defender; Scott Horner, a regional commercial manager with Marley Contract Services; and Mr Hogarth. In terms of two joint minutes of agreement it was agreed that witness statements of nineteen other witnesses (together in some cases with further specified documents) should be treated as their evidence. The evidence was completed within six days.  Counsel then prepared written submissions and I heard oral submissions over the course of two days. I am grateful to counsel for their efforts to agree matters and narrow the issues in dispute, and for the assistance provided by their submissions.

 

Credibility and Reliability
[10]      I shall deal first with the credibility and reliability of the witnesses apart from the second and third defenders. Each of those witnesses appeared to me to be doing his best to tell the truth and to assist the court. Mr Hogarth impressed me as an honest witness who did not shy away from admitting his own shortcomings. Except where I indicate otherwise I have accepted the evidence of these witnesses as being credible and reliable in all material respects.

[11]      Unfortunately, I did not find the evidence of the second and third defenders to be quite as straightforward. I have reservations about their evidence, and there are parts of the evidence of each which I have not accepted. 

[12]      The second defender was vague, and his recollection of matters appeared to be poor. He was not an impressive witness. His evidence did not inspire confidence. He appeared to have a very poor understanding of the NHBC Rules and the legal effects of the Buildmark policy. He conveyed the impression that he was content to delegate to Mr Hogarth almost everything connected to Falconer Court. On the basis of his evidence and the other material placed before me it is very far from evident that care, attention to detail, or good administration had been features of the second defender’s actings at the material times.

[13]      The third defender was a better witness than the second defender, but he too demonstrated a poor comprehension of the NHBC Rules and of the legal effects of the Buildmark policy. Like the second defender, he appeared to have been content to delegate to Mr Hogarth most matters related to the Falconer Court development. Significant parts of his evidence were reliant upon his understanding of what the second defender had done.

[14]      As I discuss below, at the material times both witnesses appeared to me to have a fairly casual approach to the use of the NHBC registration.  There are other aspects of their conduct which make me cautious about their evidence.  After 2003 (and especially following upon the Buildmark application) it must have been plain to them that the pursuer was proceeding on the basis that the registered developer was the first defenders but they did nothing to alter that understanding.  They allowed the pursuer to assume obligations on that basis.  The copy letter of 23 March 2003 was not mentioned until after the action was raised in 2013.  The suggestions that Mr Hogarth did not have the first defenders’ authority, and that the partnership had been dissolved in 2003, also emerged very late in the day. 

 

The First Defenders’ Application for Registration
[15]      The first defenders’ application for registration (Production 6/581, Joint Bundle (“JB”) 593) dated 30 August 2002 was submitted on behalf of “Scotthogarth Homes (Mr R G Scott and Mr N Hogarth)”. It appears that following submission of the application there was some further communication between the pursuer and the defenders in relation to it. One of the things that the pursuer asked for was a copy of the partnership agreement. The second defender’s evidence was that it was a pre-requisite of registration that the agreement was provided to the pursuer. In February 2003 the defenders sent the pursuer a copy of the partnership agreement (which had been executed on 20 January 2003). It stated:

“…

WHEREAS:

 

The parties have agreed to enter into partnership together in the development of residential property on the terms and conditions hereinafter specified.

1. Mr Scott and Mr Hogarth shall be Co-Partners in carrying on the business of developing residential property, under the name of “Scott Hogarth Homes” (the Partnership”).

2. The Partnership shall be deemed to have commenced on the date of last execution hereof and subject to the provisions hereinafter contained, shall continue until either shall give to the other not less than three months prior written notice of dissolution of the same.

7. All transactions shall be entered into and all correspondence conducted in the name of the firm…

14. Subject always to the provisions of Clause 13 (a), in the event that the Partnership is dissolved, the whole assets of the Partnership, including goodwill (if any) shall be realised to best effect and after settlement of all obligations of the Partnership, the net proceeds shall be divided under the supervision of the Accountants specified in Clause 6 and split between the Partners in accordance with the profit sharing ratio set out in Clause 4.

…”

 

[16]      On 14 February 2003 the pursuer wrote to the first defenders indicating that the registration committee was able to recommend that the first defenders be accepted on the Scottish register as a developer, and asking them to sign and return the acceptance of conditions form to allow registration to be finalised. The acceptance of conditions form was in the following terms:

“                                                                                        Date: 14 February 2003

 

                                   CONDITIONS OF REGISTRATION OF THE

                                    NATIONAL HOUSEBUILDING COUNCIL

                              IN ACCORDANCE WITH EXANATORY NOTES

 

 

We the undersigned trading as SCOTTHOGARTH HOMES accept the offer of

Registration with the National House Building Council and agree:

 

1. To comply with the obligations and conditions set out in NHBC's Rules in force

from time to time;

 

1.1 We agree that any dispute between NHBC and ourselves under the Rules will be referred to arbitration which will be carried out in accordance with Rule 55 (or any subsequent modification or amendment of that rule).

 

2. To register any Home(s) being inspected by NHBC at the time of admission to the

Register;

 

3. That my premium rating scale will commence at Dl;

 

4. That this offer is based on an assessment of our financial position. It is understood

that the work and the person responsible for building standards meets NHBC's

Requirements but if those standards fall I will be in breach of the Rules;

 

5. That the Partners of the Company undertake to inform the NHBC in writing of any

Change of the Company within 28 days of such change. In such circumstances,

NHBC reserves the right to alter or impose new conditions. Regrettably, failure to

notify the NHBC of such change may result in deletion from the Register.”

 

[17]      The second defender signed the acceptance of conditions on 15 February 2003 on behalf of the first defenders and duly returned it to the pursuer. Thereafter the pursuer entered the first defenders in the register as developers with developer number S3608.

 

The NHBC Rules
[18]      The NHBC Rules for builders and developers which were in force at the time the defenders registered as developers, and at the time of the alleged letter of 19 March 2003, were the Rules effective from 1 January 2003 (Production 6/6, JB 39). Those Rules continue to apply to any obligation or requirement which arose under them, and it is the terms of those Rules which fall to be considered when construing condition 5 of the conditions of registration.  Subsequent versions of the Rules came into force on 1 January 2005 (Production 6/7, JB 63), 1 October 2006 (Production 6/8, JB 89), 1 August 2009 (Production 6/9, JB 115), and 1 January 2011 (Production 6/10, JB 145). The 2006 Rules were the version in force at the time of the application for Buildmark cover and the grant of cover.  Each version of the Rules was in substantially the same terms.  Except perhaps in relation to the construction of condition 5, I did not understand it to be suggested that any of the differences between the various versions were material to the parties’ dispute. Each version made provision for the pursuer to maintain (for Scotland, England and Wales, and Northern Ireland respectively) a register of NHBC approved builders and developers; and for registration being granted subject to conditions (Rules 2 to 5); and it set out the rights and duties of registered builders and developers (Rules 6 to 58). Rule 2 provided that details of the register could be obtained during normal business hours at the pursuer’s Amersham office. A registered builder or developer was bound to ensure that any home, newly built or to be built or sold by it or on its behalf, to which the Rules applied was registered and accepted for cover either by the pursuer or by another home warranty scheme (Rule 8(a)). The Rules applied to any home built or to be built or sold by the builder or developer or on its behalf for which it submitted a site notification or application for NHBC cover (Rule 7). The builder or developer had to ensure that such homes were designed and constructed in accordance with the building standards in NHBC’s Requirements in force when the concreting of foundations of the home was begun (Rule 10(a)). In the event of the builder or developer not owning the home, Rule 12(b) provided that NHBC might accept the application for NHBC cover but might require an agreement, payment or security against future liabilities as a condition of acceptance. Submission by a registered builder or developer of an application for NHBC cover authorised NHBC to make an offer of cover on the builder or developer’s behalf to the first owner of a home (Rule 19). Homes were inspected at relevant points during the course of construction to ensure that they complied with NHBC Requirements. Rule 27 conferred rights on NHBC and imposed obligations on the registered builder or developer where work to a home was defective. Rule 28 regulated the rights of NHBC and the obligations of the registered builder or developer where an owner made a complaint or a claim to the pursuer under NHBC cover. Rule 41 made provision for circumstances in which a registration might be cancelled (including at the written request of the registered party). Rule 41(b) provided certain circumstances in which a registration would be cancelled automatically. Rules 43 to 45 regulated continuing rights and obligations after cancellation. Rule 48 of each version of the Rules provided that the builder or developer must continue to comply with and be bound by any earlier Rule under which an obligation or requirement had arisen on the date the new version came into effect.  Rule 49 of the 2006 Rules provided:

“You must not deny liability under any NHBC Cover on the grounds:

  (i)   that NHBC was not authorised to offer that NHBC cover on your behalf; …”

 

Rule 50 of the 2003 Rules provided:

Address for communications

50a    NHBC will send all communications under these Rules to your address as it appears on the Register.

50b   You must send any reply to a communication from NHBC to the address given on that communication.

50c    Any communication sent by First Class Post or recorded delivery to the appropriate address will be treated as having been received not later than the second working day after posting and if sent by second class, the third working day after posting.”

 

Rule 51 of each version of the Rules made provision concerning information to be supplied to NHBC. The 2003 Rules provided:

Information to be supplied to NHBC

51a    You must give NHBC written notice of any proposed change of address before that change takes effect.  If you do not do so NHBC will be entitled to rely on any communication as if it were delivered in accordance with Rule 50c regardless of its return, destruction, or onward transmission.

51b   You must give NHBC immediate written notice if:

ii    you are a partnership, and there is any change in your membership then you must give details of the change, and of the name and address of any new partner;

vi   you intend or decide to cease trading …

vii  you cease trading …”

 

In terms of Rule 57(a) NHBC was empowered to amend the Rules after giving reasonable notice to all builders and developers on the register. Rule 57(b) provided that amendments were to take effect from the date they were introduced.

 

The Incorporation of SHL and the Copy Letter Dated 19 March 2003
[19]      SHL was incorporated on 10 March 2003. As already indicated, the second and third defenders were the only shareholders.

[20]      Productions 7/72, 7/73 and 7/74 of Process (JB 613-621) were not agreed documents, and their authors were not called to speak to them. Production 7/72 bore to be a copy of a letter dated 29 November 2005 from Duncan Young & Co, Chartered Accountants, to H M Inspector of Taxes headed “Scotthogarth Homes Limited” and which continued:

“We refer to your letter of 21st October 2005. We address the queries raised in your last letter as follows:

1. An analysis of the opening Work in Progress is attached,

2. A copy of the final partnership accounts to cessation is attached.

3. An analysis of closing Work in Progress is attached

…”

 

[21]      In his evidence-in-chief the second defender indicated that Duncan Young & Co had recommended the incorporation of a limited company; that SHL was incorporated on 10 March 2003; and that “the partnership then ceased to operate in June 2003”. Duncan Young & Co had advised that the partnership’s bank and other bodies be advised of the incorporation of SHL. That had been done. As part of that process the second defender had sent a letter to the pursuer dated 19 March 2003. The letter’s terms were set out in a copy letter (Production 7/6, JB 608):

SCOTTHOGARTH HOMES LTD

13 DOVECOT PARK

EDINBURGH

EH14 2LN

 

NHBC

42 Colinton Road,

Edinburgh

EH10 5BT

 

19th March 2003

 

Ref S3608/DEV

 

Dear Sir/Madame

This is to confirm receipt of registration NHBC certificate and to enclose copy of our  Limited company status. Company No. 245389.

 

Yours Faithfully

 

R G Scott

(Director)”

 

[22]      In cross-examination the second defender conceded that after 13 years he had no real recollection of posting the letter. As far as he was concerned the letter informed the pursuer that the partnership had ceased and that the registered developer should now be SHL. From that date it had been SHL and not the partnership which had carried out development. Sites had been registered with the pursuer and Buildmark cover obtained between 2004 and 2006 for developments in Eskbank. While all the relevant documentation (including the applications) had referred to the first defenders, those developments had been carried out by SHL. Dues for registered developer S3608 had been paid by SHL. It was put to the second defender that it looked a bit suspicious that the letter of 19 March 2003 had not been mentioned to the pursuer until 2013. The second defender did not accept there was anything suspicious about that. He had thought that the pursuer “would have had it on file”. He maintained that he had been unaware of the correspondence with the pursuer in 2008 and 2009 about possible registration of SHL.

[23]      In re-examination the second defender indicated that the first defenders had not carried out any development. The first development carried out by either the first defenders or SHL had been during 2003/2004. His understanding was that the developments at Eskbank had been carried out by SHL “in conjunction with” the pursuer.

[24]      The third defender’s evidence was that, as a result of advice from the first defenders’ accountants, SHL had been incorporated. The tax planning advice from the accountants had been that the land which it was proposed should be developed should be owned and developed by a limited company rather than the partnership. The third defender’s understanding was that the partnership had ceased to exist on 10 March 2003 when SHL was incorporated. He spoke to Production 7/73 being the final accounts of the partnership. SHL took over the first defenders’ work in progress from 10 March 2003. Production 7/74 showed SHL taking over the first defenders’ work in progress.

[25]      The third defender indicated that “we” wrote to the pursuer in March 2003. He had been aware at the time that the second defender had written to the pursuer to inform it of the incorporation of SHL. He could not recall if he had seen the letter in 2003, but before it was drafted he and the second defender had discussed the need to tell the pursuer and others about the incorporation. He was clear that he did not see the letter being posted. His evidence in relation to the letter was based on his discussions with the second defender at the time. Like the second defender, the third defender maintained that he had been unaware in 2008 and 2009 of the correspondence with the pursuer regarding possible registration of SHL.

[26]      Brian Sharples’ evidence was that he had conducted a thorough search of the pursuer’s files. There was no evidence of the purported letter of 23 March 2003 ever having been received. Had it been received, and had the defenders wished that SHL become the registered developer, SHL would have had to submit an application for registration. Receipt of such a letter would have been likely to trigger the sort of correspondence which had been triggered later in 2008 and 2009. Any grant of such an application would have been likely to have been conditional upon the obtaining of satisfactory guarantees and securities to protect the pursuer’s interests.

 

How Matters Proceeded After March 2003
[27]      No change was made to the entry which had been made in the register for the first defenders. Mr Sharples confirmed that his searches disclosed no correspondence between March 2003 and July 2008 which informed the pursuer of any wish to change the registration for S3608. In its dealings with registered developer S3608 the pursuer continued to address all relevant communications to the first defenders (apart from two faxes sent to SHL on 4 May 2009 by a claims inspector with the pursuer, John Clydesdale).

[28]      In 2003/4 applications were submitted by registered developer S3608 for registration of plots in Eskbank and for Buildmark cover for the homes which were to be built on the plots. In 2005 similar applications were submitted by S3608 in respect of another site in Eskbank. In each case Buildmark cover was granted. Such documentary evidence relating to these transactions as was lodged (an invoice (Production 7/9, JB 611) for insurance and inspection fees for plots 1 and 2 at Eskbank Court, 17 Dalhousie Road) suggests that the relevant applications bore to be made in name of, and were granted in favour of, registered developer “S3608 SCOTTHOGARTH HOMES”. It was not suggested to Mr Sharples that SHL had been named on any such applications or documentation.

[29]      However, the Eskbank developments appear to have been carried out by SHL; and it is clear that from about 2004 dues paid by registered developer S3608 were paid from SHL’s bank account.

 

The Strathaven Development
[30]      In 2006 Mr Hogarth was approached by Mr Brownlie, who owned the site at 47 Commercial Road, Strathaven. The site had planning permission for a residential development of fourteen flats. Mr Brownlie was interested in selling the site to a developer. He was also interested in carrying out the building work. Mr Hogarth brought the opportunity to the attention of the second and third defenders. They were interested in the proposal. Mr Hogarth and the second and third defenders each contributed £83,333 to the finance needed for the project. There was a lack of clarity as to the precise legal basis upon which each party contributed those sums (eg as a loan to SHL or otherwise), but it was accepted that ultimately each of the three was to be entitled to a one-third share of any profit from the development. The remaining finance for the project was raised through a bank loan to SHL.  

[31]      Dan Brownlie & Sons were engaged as builders. It was important that Dan Brownlie & Sons were a registered builder because if Buildmark cover was to be obtained for homes they had to be built by a registered builder.

[32]      SHL acquired the site from Mr Brownlie on or before 21 July 2006. The disposition in its favour was registered on that date.

[33]      Mr Hogarth was the person who was to be in charge of the development on a day-to-day basis. The second and third defenders described him as an “agent manager”. Mr Hogarth described himself as an investor and a consultant. There was some dispute as to the sum he was paid for the work he carried out (on Mr Hogarth’s and the second defender’s account, £15,000, on the third defender’s account £69,000), but resolution of that issue is not material to the questions which I have to decide.

[34]      There is no doubt on the evidence that Mr Hogarth was there to look after the developers’ interests on site on a day-to-day basis. That was what the second and third defenders expected of him, and that was the role he played. That included acting on behalf of SHL. SHL owned the site and financed the development. It engaged Dan Brownlie & Son as builders. Dan Brownlie & Son carried out most of the building work, but some other contactors carried out other work. SHL paid for all the building work and materials. On completion SHL sold the flats to purchasers.

[35]      Dan Brownlie & Sons did not assume and perform all of the administrative, logistical, and organisational duties which would normally have been carried out by a main contractor on such a project.  This resulted in Mr Hogarth having to perform many tasks which a main contractor would normally have carried out. Mr Hogarth had no experience of acting as a developer or main contractor on a development like Falconer Court. It was clear that, while he did his best, he was somewhat out of his depth.

[36]      The second and third defenders wanted the homes on the development to have Buildmark cover. They informed Mr Hogarth of the existence of the registered developer registration and number and indicated that he should use it to apply to register the plots at the development and to obtain Buildmark cover for the homes to be built. They told him that it was SHL who was the registered developer. Mr Hogarth’s evidence was that he was unaware of the existence of the first defenders until about 2008. I shall examine the second and third defenders’ evidence in relation to the application in more detail later.

[37]      Mr Hogarth contacted the pursuer with a view to submitting an application. The pursuer provided him with the appropriate application form. The form identified the applicant as the person entered on the register as registered developer viz. S3608 Scotthogarth Homes. Mr Hogarth completed the application. He noticed that the applicant was shown as Scotthogarth Homes rather than as SHL. He thought that was “a clerical error”. Nonetheless, he did not query it, nor did he seek to alter it. As far as he understood Scotthogarth Homes could only refer to SHL. Since he understood SHL to be the registered developer and it owned the site, he ticked the box to confirm that the applicant owned the site. The application identified 14 plots to be registered. It also provided the anticipated sales price bracket for the home to be built on each plot, and the appropriate Buildmark premium to be paid. The application was signed by Mr Hogarth on 20 July 2006. It declared that the first defenders owned the site. On receipt of the application the pursuer returned it to enable a continuation sheet to be completed specifying each plot and the anticipated selling price. The continuation sheet was completed and signed by Mr Hogarth on 7 August 2006, and he resubmitted the application to the pursuer.

[38]      By letter dated 11 August 2006 the pursuer wrote to the first defenders to confirm acceptance of registration of the plots for Buildmark:

“MANAGING DIRECTOR,

SCOTTHOGARTH HOMES,

13 DOVECOT PARK,

EDINBURGH

MIDLOTHIAN

EH14 2LN

 

Our Ref: S3608

11 August 2006

SITE: FALCONER COURT, 47 COMMERCIAL ROAD, STRATHAVEN

Thank you for your registration for NHBC Buildmark Warranty.

The Inspector associated with your site is Ms A Thomson …”

 

The letter went on to remind the recipient of the Buildmark procedure and the inspection stages.

[39]      Throughout the course of the construction at the site the pursuer addressed all communications to the first defenders. Some of those communications were sent to Falconer Court but many were sent to the first defenders at 13 Dovecot Park, Edinburgh, the address for them which was contained in the NHBC register.

[40]      On 26 July 2007 the pursuer wrote to the first defenders at 13 Dovecot Park following a pre-handover inspection of the properties at Falconer Court on 25 July 2007. The pursuer indicated certain identified outstanding items which prevented it from confirming that Buildmark warranty cover could be provided to purchasers, and sought resolution of them and the arrangement of a further inspection. The second defender faxed the letter to Mr Hogarth for his attention. Following the outstanding matters being attended to, and further inspection by the pursuer, the pursuer issued Buildmark certificates for each of the fourteen plots between 27 July 2007 and 7 December 2007.

 

NHBC Requirements
[41]      The relevant NHBC building standards applicable to the development at Falconer Court were NHBC Standards 2006 which were effective from 1 September 2006 (Production 6/579, JB 202)

 

NHBC Buildmark
[42]      The NHBC Buildmark warranty and insurance cover applicable in respect of the properties at Falconer Court was BM8/3 10/05 (Production 6/20/1, JB 176) which applied to properties registered with the pursuer from 1 October 2005.

 

Correspondence in 2008 and 2009
[43]      On 25 May 2008 the second defender wrote a manuscript letter to the pursuer. The letter bore to be written by him on behalf of Scott Hogarth Homes.

[44]      In 2008 the existence of SHL came to the attention of the pursuer. As a result it wrote to the first defenders on 24 July 2008 (Production 6/12, JB 630) asking if SHL wished to become a registered developer. Following two reminder letters from the pursuer (Productions 6/13 and 6/14, JB 630, 631) SHL responded by letter of 9 September 2008 (Production 6/580, JB 633) that “…our company is not engaged in any development work and is unlikely to be so for some time. We will contact you should circumstances change.” There was further correspondence in 2009. On 6 April 2009 SHL wrote to the pursuer advising that “Scott Hogarth Homes is an incorporated company and we would be pleased if you would change your data to reflect that”(Production 7/38, JB 634). By letter to the defenders dated 17 April 2009 (Production 6/15, JB 635) the pursuer advised that if SHL wished to be registered an application would have to be submitted and that an indemnity or bank bond would be required. Despite reminder letters from the pursuer that letter was not replied to. 

[45]      During 2008 and 2009 complaints of defects in the homes were made by purchasers. The pursuer investigated the complaints and issued resolution reports to the first defenders. In 2011 the first defenders sought to submit some of the disputes to arbitration. The arbitration claim which Mr Hogarth submitted (Production 6/177, JB 1078) was in the name of the first defenders. Mr Hogarth’s evidence was that he had submitted it in the first defenders’ name because that was what the pursuer had said ought to be done, and at that stage he had not thought it politic to disagree with the pursuer.

 

Personal Bar

[46]      Both parties advanced pleas of personal bar. Logically, those pleas ought be considered first.

[47]      Counsel for the pursuer submitted that the defenders were personally barred from denying that the first defenders remained the registered developer after 19 March 2003, or from denying that Mr Hogarth had the defenders’ authority to submit the application for Buildmark cover on behalf of the registered developer (Gatty v Maclaine 1921 S.C. (HL) 1; Stair Memorial Encyclopaedia of the Laws of Scotland, vol. 16, paras 16-04 et seq.; Reid and Blackie, Personal Bar, para 5-26). Between 2003 and 2008 the defenders had acted inconsistently with the position which they now sought to adopt. All correspondence from the pursuer to them had shown the registered developer as being the first defenders. The defenders had not challenged or queried that. They were aware from the correspondence to them after the Buildmark application that the application had been made in name of the first defenders, and that the pursuer was treating the first defenders as being the registered developer who had obligations under the cover, but they had said nothing to challenge or query that. They had permitted the pursuer to proceed on the basis that the first defenders had made the application and had incurred the relevant obligations. The pursuer carried out its obligations under the Buildmark cover on the basis that that was the position. It duly carried out inspections, and it assumed obligations to purchasers of homes.

[48]      Counsel for the defenders maintained that the pursuer had done nothing to bar it from advancing the defence which it now advanced. It had duly exercised its right to transfer the first defenders’ registration to SHL and had notified the defenders of that. Moreover, the pursuer had acquiesced in SHL being the registered developer and was personally barred from pursuing the present action against the defenders. The foundation of the defence to the pursuer’s plea of bar, and the foundation of the defenders’ own plea of bar, was that the defenders’ construction of condition 5 was correct, and that they had duly notified the pursuer of transfer of the registration to SHL. Thereafter, the pursuer had acted consistently with that transfer having taken place by accepting payment of dues and fees from SHL.

[49]      In my opinion the defenders’ plea of personal bar should be repelled. Counsel for the defenders accepted that unless I agreed with him that condition 5 entitled the defenders to transfer their registration to SHL, and unless I was satisfied that such a transfer had been notified to the pursuer, the plea could not succeed. Since, as I explain below, I find that the letter was not sent, and I reject the defenders’ suggested construction of condition 5, the plea does not get off the ground. The mere fact that NHBC dues and premiums invoiced to the first defenders were paid by cheques drawn on an SHL bank account is not a matter of any great significance. I accept the evidence of Mr Fiddes and Mr Sharples that it was not unusual in their experience of the construction industry for payment to be tendered by a related entity. The payment by SHL of the first defenders’ bills did not change the fact that the contracting party was the first defenders (Fleming Buildings Limited v Hives [2008] CSOH 103, per Lord Menzies at para 102; [2010] CSIH 8, at paras 16-18, 23).

[50]      I turn then to the pursuer’s plea of personal bar. The defenders appear to have been well aware throughout the period from 10 March 2003 to 7 December 2007 (when the final insurance certificate for a home was granted) that the pursuer continued to treat the registered developer as being the first defenders. All communications from the pursuer referred to the first defenders as the registered developer and were addressed to them. The applications for Buildmark in relation to the Eskbank sites were in the name of the first defenders and it was the first defenders who incurred obligations in respect of that cover (see eg the VAT Invoice/Receipt rendered to the first defenders on 7 October 2005 (Production 7/9, JB 611)). On 11 August 2006, immediately after the Falconer Court application for Buildmark cover was accepted, the pursuer wrote to the first defenders thanking them for “your registration for NHBC Buildmark Warranty”, identifying the inspector associated with “your site”, and reminding the first defenders of the procedures concerning the inspection phases (emphasis added). The defenders were well aware that as the development proceeded inspections were carried out, and that ultimately Buildmark cover was granted, with both the pursuer and the first defenders assuming obligations in terms of that cover. At no time did they suggest that Mr Hogarth lacked authority to submit the application for Buildmark cover for the first defenders. At no point did they state that the pursuer was mistaken in continuing to treat the first defenders as the registered developer and that the registered developer was SHL. They did not at any time maintain that it was SHL rather than the first defenders who would and did incur obligations under the Buildmark cover. By keeping silent they acted inconsistently with the claimed defence which they now seek to assert viz. that the first defenders ceased to be registered developer S3608, that SHL became registered developer S3608, and that Mr Hogarth was not authorised to submit the Buildmark application on behalf of the first defenders. The defenders’ conduct justified the pursuer in believing that the first defenders accepted that they were the registered developer and that it was they who were undertaking obligations in respect of the Buildmark cover. The pursuer acted on that belief to its prejudice. It accepted the Buildmark application, took it through its various stages, and ultimately it undertook insurance obligations to home purchasers. In the whole circumstances the defenders are personally barred from now denying that the first defenders are the registered developer, or that the first defenders are the persons bound to perform the developer obligations which were assumed in respect of the Buildmark cover. It would be grossly unfair to the pursuer to permit the defenders to advance the defence that the first defenders are not the registered developer and that they did not submit, and are not the person bound by, the Buildmark application. 

[51]      That is sufficient to determine that the first defenders are the registered developer, and that the application for Buildmark was made by them. However, even if, contrary to my view, the defenders are not personally barred from advancing these aspects of their defence, in my opinion their defence is not well founded.

 

Was the First Defenders’ NHBC Registration “transferred” to SHL?

Construction of Condition 5
[52]      I reject counsel for the defenders’ submission that condition 5 of the conditions of registration empowered the first defenders to substitute SHL as the registered developer. In my opinion condition 5 bound the defenders to inform the pursuer in writing of any change to the partnership within 28 days of the change. That, in my opinion, is the ordinary and natural meaning of the condition read in its documentary, factual and commercial context. It did not empower the defenders to substitute a limited company as the registered developer in place of the partnership. I am not persuaded otherwise by the fact that there was a degree of overlap between condition 5 and Rule 51b i and ii.  On any view, the ambits of the condition and of Rules 51b i and ii is not identical; and the condition and the Rule impose different requirements as to the time of notification.  In so far as the condition and the Rule conflict, the condition (being a provision specially prepared for the purposes of the particular contract of registration) ought to prevail over the Rule (which was a standard printed term) (see McBryde, The Law of Contract in Scotland (2nd edn), page 8-19, 8-21 and the authorities there referred to).   Part of the relevant context here was that a registered developer undertook onerous obligations in terms of the NHBC Rules. The parties knew that the financial standing of a registered developer was a very material consideration (as was plain eg from condition of registration 4, and from many of the Rules including Rules 10, 27 and 28). A construction of condition 5 which entitles the first defenders to transfer their registration to a different legal entity by mere intimation to the pursuer is at odds with the ordinary and natural meaning of the condition and with commercial common sense. Having regard to the ordinary and natural meaning of condition 5 and its documentary, factual and commercial context, the defenders’ suggested construction of the condition is untenable.

 

What was the Purported Effect of the Letter?

[53]      In any case, even if, contrary to my view, condition 5 empowered such a transfer, the letter of 19 March 2003 was not a notice by the defenders that they wished to be removed from the register and be replaced by SHL as the registered developer. The letter bore to be from SHL, not the defenders, and it merely enclosed a copy of SHL’s certificate of incorporation.

 

Was the Letter Sent?
[54]      I agree with counsel for the pursuer that it is odd that the existence of the letter was not drawn to the attention of the pursuer before 2013 - and in particular that it was not adverted to during the correspondence in 2008. Mr Hogarth was adamant that the correspondence in 2008 had been drawn to the attention of the defenders. I accept his evidence on that matter, and I reject as unreliable the second and third defenders’ evidence that they were unaware of the terms of that correspondence. At that time Mr Hogarth was having a trying time attempting to deal with the complaints which were arising. While he did not have the background experience or qualifications which he needed to perform the tasks which had been left to him, it was obvious that he committed very considerable time and effort to the project both during and after the construction stage. I find it implausible that he would not have kept the second and third defenders abreast of those events and of the important correspondence about SHL.

[55]      On the other hand, counsel for the pursuer did not put it squarely to either of the second or third defenders that the copy letter was a fabrication prepared after the event. The highest matters were put was that it was “suspicious” that the letter had not been founded upon until 2013. Moreover, I accept the third defender’s evidence that there was discussion between the second defender and him about writing to inform the pursuer and others about the incorporation of SHL. That evidence does tend to support the second defender’s evidence that the letter was indeed prepared in March 2003. I also accept that the third defender understood that the second defender had written to the pursuer. Weighing all the evidence I conclude, with some hesitation, that the copy letter of 19 March 2003 was indeed prepared on about that date.

[56]      However, I am not satisfied that the letter of 19 March 2003 was in fact sent. The second defender had no actual recollection of posting it. His recollection generally of matters was poor. He did not impress as someone who was careful or systematic in the administration and management of business matters - far from it. I regret to say that his evidence did not inspire confidence as to its accuracy or reliability.

[57]      I am satisfied by the evidence of Mr Sharples that despite thorough searches of the pursuer’s files there is no record that the letter of 19 March 2003 was ever received.

[58]      If the letter was sent it is strange that the defenders did not seek confirmation of its receipt. From their perspective, it was an important letter. The absence of any response to it ought to have been concerning. It seems from the terms of the letter that on registration of the first defenders the pursuer had sent them a certificate of registration. Had the letter been sent, and had it had the effect the second and third defenders anticipated, receipt of an amended certificate of registration might have been expected.

[59]      I reject counsel for the defenders’ suggestion that the correspondence from the pursuer to the first defenders in 2008 and 2009 indicates that the letter was indeed received in 2003. I find it wholly implausible that if it had been received in 2003 there would have been a five year delay before it was replied to. Other possible explanations for the existence of SHL coming to the pursuer’s attention in 2008 appear to me to be much more likely. Mr Hogarth recalled raising the matter in a telephone conversation with the pursuer. Ultimately he accepted that it was likely that that conversation took place in 2008 prior to the correspondence (and not in 2009 as he had originally thought). Even if that were not so, the possibilities that the matter was raised because the pursuer became conscious of the existence of SHL through payments of dues and premiums being made by cheques drawn by SHL, or because it became evident that SHL was involved in the Strathaven development and its sequellae, appear to me to be much more plausible explanations than the correspondence being a response to a letter supposedly received in March 2003.

[60]      Accordingly, I am satisfied that the letter was not received by the pursuer, and that the reason it was not received was that it had not been sent by the second defender.

[61]      Even if the defenders had established that the letter was posted, reliance upon the deeming provision in Rule 50 would not have assisted them.  The letter was not a reply by the first defenders to a communication from NHBC.  It was a letter from SHL. 

[62]      It is unnecessary to decide whether, if the letter had been from the first defenders and had been posted, it would have been a “communication” in terms of Rule 50c, or whether Rule 50 ought to be construed as distinguishing between communications (emanating from NHBC) and a “reply to a communication.”  Since I heard limited argument on this point, I prefer to reserve my opinion on it.

 

Conclusion

[63]      It follows that the first defenders’ registration was not transferred to SHL.

 

Was the Partnership Dissolved in 2003?

[64]      I do not accept that the first defenders were dissolved when SHL was incorporated and when the first defenders’ work in progress was transferred to SHL.

[65]      It is noteworthy that the defenders do not aver that the first defenders were dissolved. Indeed, the pursuer’s averment (Cond. 1) that the first defenders are a partnership is admitted by the defenders (in Ans. 1). The only qualification to that in Answer 1 is that “the partnership of Scotthogarth Homes has not been responsible for the construction of houses since in or around 2003”; while in Answer 3 the defenders aver:

“Since informing the pursuer of the incorporation of the company the defenders, as a partnership, have not commenced any projects, nor has any payment been made to the pursuer by the partnership. The partnership has not been trading as a developer.”

 

[66]      Notwithstanding their pleadings, the second and third defenders spoke to the first defenders having ceased to exist. During cross-examination of both witnesses it became apparent that they were proceeding on the assumption that dissolution came about (i) on the basis that the partnership ceased trading, and (ii) because the effect of incorporation of SHL was that the partnership was automatically dissolved. In reliance upon that evidence counsel for the defenders submitted that, since partnership is the relation which subsists between persons carrying on a business in common with a view of profit (Partnership Act 1890, s 1(1)), once trading ceased the partnership was dissolved. He further submitted that since the partnership business and assets had been taken over by SHL the presumption was that the first defenders had been dissolved at that time (Chahal v Mahal [2005] EWCA 898, per Neuberger LJ at paras 17-18, 23-25, 28-29).

[67]      While the evidence does appear to be that SHL played a part in the developments at Eskbank and Strathaven, I am not satisfied that the first defenders had no involvement in those developments, or that they ceased trading in 2003. On the contrary, it appears to me that the defenders contributed the first defenders’ NHBC registration as a registered developer to each of those projects and they facilitated the obtaining of Buildmark cover for the developments. The result was that the first defenders were a person “that arranges for the construction of Homes or is concerned in or with such arrangements”(see the wide definition of Developer in Rule 1).

[68]      In any case, the fact is that the pursuer was given no notice of cessation of trading or of dissolution of the partnership. In those circumstances the pursuer was entitled to assume that the partnership continued unchanged (The Law of Partnership in Scotland, J. B. Miller (2nd ed, edited by G. H. Brough), p523).

[69]      I am not persuaded that counsel for the defenders’ reliance upon Chahal v Mahal, supra is apposite. No question of third party rights arose there. Chahal is readily distinguishable from the present case on that ground, and on the further ground that here there was an asset (the first defenders’ NHBC registration as a developer) which SHL did not succeed to, and which the first defenders continued to exploit after the transfer of work in progress to SHL.

 

The Application for Buildmark Cover

[70]      Counsel for the pursuer submitted that on the evidence the correct conclusion was that Mr Hogarth had actual (failing which, ostensible) authority from the defenders to apply on behalf of the registered developer for Buildmark cover; that that was who the application had been made for; and that accordingly it was the defenders who were bound to perform the obligations which arose as a result of that.

[71]      Counsel for the defenders submitted that the application was not, and could not, have been made by or on behalf of the first defenders. He submitted that at the relevant time the registered developer had been SHL, and that the second and third defenders and Mr Hogarth had understood that the application was being submitted on behalf of SHL. The partnership had been dissolved and was incapable of contracting. Mr Hogarth had had no authority to act on behalf of the first defenders. The only authority he had was to act on behalf of SHL. That had been his actual authority. The relationship of agency was consensual (Garnac Grain Company Incorporated v H.M.F Faure & Fairclough Ltd [1968] AC 1130, per Lord Pearson at p 1137B-F; Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, per Lord Wilberforce at p 587E-G). Since Mr Hogarth had been unaware of the existence of the first defenders he could not possibly have consented to act as their agent. Nor had he had implied or ostensible authority to act on behalf of the first defenders (Batt Cables Plc v Spencer Business Parks Ltd 2010 SLT 860, at para 36). The first defenders had not represented to the pursuer (at the time of the application or before then) that Mr Hogarth had authority to act for them (Armagas Ltd v Mundogas SA [1986] 1 AC 717, per Lord Keith of Kinkel at pp 777A‑C, 777G-778D).

[72]      I reject counsel for the defenders’ submissions that the first defenders are not the registered developer, and that they did not make the Buildmark application. For the reasons already given, at the time of the application for Buildmark in 2006 the first defenders remained the registered developer and they were continuing to exploit that registration.

[73]      Both the second and third defenders had a clear interest to suggest that the authority to apply for Buildmark which they gave to Mr Hogarth was only authority to apply on behalf of SHL; and that was the stance which both adopted in examination-in-chief. I do not accept that evidence. I am not persuaded that that was in fact what happened.

[74]      In cross-examination the second defender indicated that Falconer Court was Mr Hogarth’s project and that: “We helped out with NHBC registration”; “We gave our name to the development”. He accepted that there had been no reason for the pursuer to doubt Mr Hogarth’s authority to submit the application for Buildmark which had been submitted. He agreed that Mr Hogarth “had your authority to deal with” the pursuer. While in re-examination counsel for the defenders elicited evidence in response to leading questions which bore to qualify that, I am not disposed to attach any weight to the qualifications in light of the way in which they were obtained.

[75]      In cross-examination the third defender accepted that he and the second defender controlled the NHBC registration S3608. He accepted that they contributed that to the Falconer Court development, and that they gave permission to Mr Hogarth to use the registration and get on and get the Buildmark cover. He accepted that the Buildmark application form which had been submitted by Mr Hogarth had been submitted on their behalf.

[76]      As already observed, in my opinion at the material times both the second and third defenders had an imperfect understanding of the legal consequences of making an application for Buildmark, and a fairly casual approach towards the use of registration S3608. Little thought appears to have been given to what was being done. They knew that they controlled registration S3608 and they wished Mr Hogarth to make use of it to apply for Buildmark cover for the development. It was the existing registration which the defenders wished to be utilised and it was that existing registration which Mr Hogarth understood was to be used. The defenders did not instruct Mr Hogarth to make a further application for registration. He was to apply on behalf of the existing registered developer for Buildmark cover. I am satisfied that the correct analysis of the evidence is that the second and third defenders granted Mr Hogarth authority to apply for Buildmark cover on behalf of registered developer S3608. The second and third defenders may (erroneously) have understood the identity of the registered developer to be SHL, and have conveyed that misunderstanding to Mr Hogarth. However, I am not persuaded on the evidence that that understanding defined and delimited the extent of the authority which the defenders conferred on Mr Hogarth in respect of the obtaining of Buildmark cover. On the contrary, in my opinion the reality was that the essence of the transaction between the defenders and Mr Hogarth relating to developer registration and Buildmark was (i) that the defenders granted authority to Mr Hogarth to apply for Buildmark on behalf of registered developer S3608; and (ii) that Mr Hogarth understood that he was to do that on behalf of registered developer S3608 and that he agreed to do so.

[77]      It follows that the application for Buildmark cover was made on the first defenders’ behalf, and that the resultant contractual obligations are obligations which bind the first defenders.

[78]      In light of the existence of actual authority it is not necessary to say much about ostensible authority. I did not understand counsel for the pursuer to specify a representation by the defenders to the pursuer which provided a foundation for a finding that Mr Hogarth had ostensible authority to submit the application on behalf of registered developer S3608, and I have been unable to identify any such representation.  It follows that I am not persuaded that Mr Hogarth had ostensible authority to submit the Buildmark application on behalf of the first defenders.

 

The Registered Developer’s Contractual Obligations
[79]      Counsel for the defenders submitted that the correct construction of Rules 27 and 28, when read together with Rule 5, was that a registered developer was only bound to reimburse or indemnify the pursuer in terms of Rules 27 or 28 if the parties had agreed a specific condition of registration to that effect. In my opinion, on a proper construction of the Rules and the conditions of registration, that contention is incorrect.

[80]      In terms of condition 1 of the conditions of registration the first defenders were obliged to comply with the NHBC Rules in force from time to time. That included Rules 27 and 28. Rule 5 enabled the pursuer to make separate special provision concerning the matters discussed in the Rule. It did not make it a condition precedent to the applicability of Rules 27 and 28 that the Rule 5 power was exercised to make it a specific condition of registration that the obligations in Rules 27 and 28 bound the first defenders. The defenders’ suggested construction is not the ordinary and natural reading of the relevant provisions. In my opinion it is not even a possible reading of them. I see nothing in the language of the contract, or in its documentary, factual and commercial context, which supports it. On the other hand, each of these considerations seems to me to support the pursuer’s construction.

In my opinion the first defenders are bound by the conditions of registration and the Rules which are in force from time to time, including Rules 27 and 28.

 

The Alternative Bases of Liability
[81]      In Cond 4 the pursuer advanced alternative bases for the defenders being found liable to redress the losses which the pursuer has sustained as a result of granting the Buildmark cover.

[82]      The first alternative basis was that the defenders fraudulently registered the Falconer Court development for Buildmark on the basis that they were its owners and developers when they knew that was not the case. To that alternative case the pursuer added the coda “In any event they would be liable to make good to the pursuer the pursuer’s losses arising from said fraudulent, or at least negligent, misrepresentation of the position.” The second alternative basis was that SHL and the second and third defenders fraudulently registered the Falconer Court development for Buildmark when they knew SHL had no entitlement to do that. The third alternative basis was that the first defenders were in breach of contractual obligations owed to the pursuer under the conditions of registration and the NHBC Rules viz. conditions of registration 4 and 5, and Rule 20.

[83]      So far as the first and second bases are concerned, I accept that at the time the Buildmark application was submitted each of the second and third defenders believed that the first defenders had ceased to be the registered developer and had been replaced by SHL. I am not persuaded that the application contained fraudulent misrepresentations by them. While their belief that SHL had become the registered developer was misguided, I accept that it was genuinely held.

[84]      The coda to the first alternative basis, as developed in submissions, was that the second and third defenders, through Mr Hogarth, negligently misrepresented to the pursuer that the application was made on behalf of the first defenders and that the first defenders owned the site. The argument advanced was that there was a failure on the part of the second and third defenders to take reasonable care not to cause economic loss to the pursuer by negligent misstatement of the facts in circumstances where there was the necessary proximity, foreseeability of loss for the pursuer, reliance on the information provided on behalf of the second and third defenders, and where it would be fair, just and reasonable to impose a duty of care on the second and third defenders not to cause such loss to the pursuer (Caparo Industries Plc v Dickman and others [1990] 2 AC 605). As I have found that the first defenders are contractually liable to the pursuer (and the second and third defenders are liable as partners of the first defenders) I do not think it would be fair, just and reasonable to impose the desiderated delictual duty of care on the second and third defenders. I prefer to reserve my opinion as to whether the other criteria for the imposition of a duty of care are satisfied, since I heard limited argument on the point and it is unnecessary to decide it.

[85]      The fault may be mine, but I have difficulty following the logic of the third alternative basis of liability. If the first defenders are not responsible for the Buildmark application and the losses the pursuer incurred as a result of providing the cover, it is very difficult to see how it can be said that those losses arose as a result of breaches of conditions 4 or 5, or of Rule 20. During submissions, despite the absence of any record for such a claim, counsel for the pursuer also maintained that if the first defenders had ceased trading and been dissolved they had failed notify the pursuer of that, and that that failure had been a breach by the first defenders of Rule 51a vi and vii. Even if I had been inclined to entertain that submission in the absence of a case made on record (which I am not), I would not have been persuaded that the losses claimed were caused by those breaches. The losses which the pursuer claims flow from the grant of the Buildmark cover. I am not satisfied that they were caused by the first defenders’ breach of Rule 51a vi or vii.

 

The Defects and the Pursuer’s Expenditure
[86]      It was common ground that after their sale numerous defects became apparent in  homes. Remedial work was carried out in three phases, an initial set of works focussed on Flat 3/2 (Mr and Mrs Paton); a second phase where Hadden Construction Limited (“Hadden”) were the building contractors; and a final phase where Edinmore Contracts Limited (“Edinmore”) were the building contractors. Ultimately, counsel for the defenders accepted that the pursuer was obliged in terms of the Buildmark policies to carry out the vast majority of the work in phases 1 and 2. However, he did not accept that the pursuer was obliged to carry out any of the phase 3 work.

[87]      Mr Christie and Mr Campbell spoke to most of the defects and explained the respects in which there had been non-compliance with the NHBC Requirements. That evidence was supplemented by the evidence of Mr Aitken, Mr Johnson and Mr Pettifor. The evidence of those witnesses was not undermined in cross-examination, and I accept it. I reject the suggestion that Mr Christie had erred in concluding that the cross-section drawing of the floor in the Patons’ flat (Production 6/43, JB 2136) illustrated the position before any remedial works were carried out under the pursuer’s supervision. In my view he committed no such error. On the contrary, I accept that the drawing shows the position before any work had been carried out for the pursuer (but after initial and unsuccessful remedial work by Mr Brownlie on the instructions of Mr Hogarth).

[88]      Counsel were agreed that the appropriate starting point for calculating the expenditure which the pursuer incurred as a result of its obligations to home owners under the policies. was £1,336,311.51 (i.e. Mr Fiddes’ headline figure of £1,258,147.36, plus his figure for NHBC administration charges, plus contractual interest of £19,880.59 from June 2011 until the raising of the action, less (i) £535.50 which had been incorrectly allocated and (ii) £9,812.57 attributable to wet rot work). Counsel for the defenders maintained that if none of the phase 3 work was work which the pursuer required to carry out under the policies, £517,359.73 of the £1,336,311.51 would not be recoverable. If only the balcony work was irrecoverable the sum of £56,838.40, and proportionate parts of the project management costs incurred to Clancy Consulting and of the NHBC administration costs, would fall to be deducted from the figure of £1,336,311.51. I did not understand counsel for the pursuer to challenge the arithmetic of the defenders’ figures.

[89]      In order to understand the phase 3 work, and the interrelationship between it and the phase 2 work, it is necessary to appreciate that five of the flats on upper floors (Flats 2/2, 2/3, 2/4, 3/2 and 3/3) had lounges with French doors that opened out on to balconies. The lounge floors and the balconies were supported by laminated wooden beams (“Kerto beams”). The Kerto beams continued through the external wall from the lounge, providing cantilevered support to the balconies. During phase 2 work was carried out within the lounges to enhance the strength of the Kerto beams within the lounges and to reduce deflection in the floors there to acceptable levels. During phase 3 the full lengths of the Kerto beams were replaced internally and externally, and the balconies were replaced.

[90]      The evidence was that use of the Kerto beams provided inadequate support for the balconies. There should have been additional non-timber support. The beams should have been adequately protected from water penetration. An appropriate structure should have had a lifespan of 60 years. None of these requirements were met. I accept the evidence that these were breaches of the NHBC Requirements and that the appropriate solution was to replace the existing balconies with balconies which complied with the Requirements.

[91]      The continuing problems with use of the Kerto beams inside the lounges were that they were a conduit for water ingress, that they were vulnerable because of that, and that some further remedial work would be needed to address those problems. There were also concerns that, given the alterations to the beams, the manufacturer’s warranty could no longer be relied upon. Replacement of the beams was a solution to those problems and it made it easier to replace the finishings and refit the floors. Mr Christie’s evidence was that in the whole circumstances it was reasonable to replace the beams internally with new steel beams. Mr Campbell shared that view. I accept that evidence. I am not satisfied that leaving the beams in place, but carrying out remedial work to deal with the problems, would have been more economical or as satisfactory as replacing the beams. It follows that the replacement work was work which the pursuer was obliged to carry out to perform its obligations under the Buildmark policies. It was not disputed that timeous claims had been made under section 2 of the policies in respect of the floors and in respect of water ingress.

[92]      So far as the defective balconies are concerned, counsel for the defenders maintained that there had been no timeous section 2 claims, and that section 3 cover did not extend to defects in balconies.

[93]      In my opinion there were timeous section 2 claims for the balcony defects. A complaint was made on 2 February 2009 by the Falconer Court Residents Association on behalf of all of the owners. At that time the Association noted that the floors in Mr Paton’s flat and in Flat 3/3 were considerably out of level, and the Association registered its “concern regarding the stability of the floor construction throughout Falconer Court”. By August 2009 there had been further complaints about the balcony floors sloping towards the property causing water ingress (see eg Production 6/67, JB 1524). I am satisfied that the pursuer was put on notice within two years of the insurance certificates of apprehended defects in the stability and construction of the floors throughout the development, including the balcony floors. 

[94]      In any case, more specific claims in respect of defects to the balconies were made early on in the section 3 cover period. I do not accept counsel for the defenders’ submission that the defective balconies are not covered by section 3. In my view, on a proper construction of the policies, the balcony floors are “load-bearing parts of the floors”. The ordinary and natural meaning of those words is wide enough to include the balcony floors. The balconies were designed to be walked upon, and each formed part of a continuous floor with the floor of the lounge. I draw additional support from the fact that in relation to the listed part “Ceilings” in section 3 there is a specific exclusion of “Any Defect in a ceiling which is not in the enclosed part of the Home, eg, balcony ceilings.”, but that in relation to floors there is no corresponding exclusion.

[95]      Accordingly, I accept that the work related to replacement of the balconies was work which the pursuer was obliged to do in terms of the policies.

[96]      I turn to deal with certain further specific (and more minor) aspects of the losses claimed which the defenders maintain are not recoverable.

[97]      In relation to phase 1 the defenders maintained that the claim for alternative accommodation provided to the Patons exceeded (by £2,234.79) the sum which ought to have been paid. That was because, it was said, the Patons had been moved out two months before remedial work had begun. The evidence was that the temporary accommodation was provided from 28 May 2010. However, the pre-inspection and recording of the condition of the flat were carried out on 5 May 2010, the schedule of works was prepared on 14 June 2010, and the contract with Morris & Spottiswood for the work was concluded on 15 June 2010. The evidence was that work could have started at any time after 15 June 2010, but in fact it had been delayed and did not begin until about mid-August. In the whole circumstances I am not persuaded that the provision of alternative accommodation to the Patons ought to have been delayed to a later date.

[98]      The defenders’ second point in relation to phase 1 was that the sum of £6,184.88 paid to the Patons for redecoration of their flat was consequential loss which ought to have been excluded by general exclusion (j) of the Buildmark policy. I reject that contention. The sum involved was not consequential loss in terms of exclusion (j). It represented part of the incidental expenditure necessary to remedy the defects in the flat and to put the Patons in the position they would have been had the defects not been present. Rather than carrying out this work itself the pursuer agreed to pay the Patons the reasonable cost of having it done. The pursuer was entitled to do that. In doing it the pursuer was performing its obligations to the Patons in terms of the policy.

[99]      The defenders’ third point in relation to phase 1 was that payments in respect of council tax and utilities were not covered by the policy and ought not to have been paid. I reject that submission. I am satisfied that the utility costs were in respect of utility services used by the pursuer while it was in occupation of the flat for the purposes of the remedial works. I am also satisfied that the council tax liability was in respect of a period that the pursuer occupied the flat.

[100]    In relation to phase 2 the defenders make the same points about utility and council tax payments, and payments for redecoration made to two home owners.  I reject them for the reasons I have rejected the same points in relation to phase 1. The defenders also make the additional point that the pursuer was not obliged to make the ex gratia payment of £1,750 which it made for common area redecoration. Counsel for the pursuer submitted that this had been a reasonable payment to make, but he did not suggest that it was a payment which the pursuer had been obliged to make in terms of the policies. I agree with counsel for the defenders that the pursuer is not entitled to recover that payment. In relation to roofing costs the defenders suggest that some of the costs claimed may have been overstated and be attributable to storm damage; and that Mr Horner’s evidence that tiles only required to be fixed using one nail should be preferred to the evidence of the pursuer’s independent experts. I am not persuaded that any of the roofing costs claimed were attributable to storm damage rather than the defects in the roof to which the pursuer’s experts spoke. In relation to tile fixing, I prefer the independent expert evidence relied upon by the pursuer to Mr Horner’s evidence (which, with all due respect to him, was neither expert nor independent).

[101]    In relation to phase 3 I am satisfied that payments which were made by the pursuers to home owners for rental of their apartments formed part of the remedial costs which the pursuer is entitled to recover from the defenders. The pursuer used the apartments for various project purposes, including decanting residents of flats to which work was being done. However, there are two payments which I am not persuaded the pursuer is entitled to recover. The first is a payment of £1,914.80 to Mr Edgar for work to his boiler flue. The second is the sum of £4,092 for fire protection work carried out by Edinmore. In each case it appears that had the relevant work been carried out appropriately by Hadden, these costs would not have been necessary. In those circumstances I do not think the costs would have been paid or incurred by a reasonable person in the position of the owner spending his or her own money (general exclusion (l) of the policy).

 

Principal Sum and Interest
[102]    It follows that the total principal sum which the pursuer is entitled to recover from the defenders is £1,328,554.71.

[103]    The pursuer seeks interest on that sum at the legal rate from the date of citation until payment. In my opinion making an award of interest at 8 per cent per annum during the period from the date of citation until the date of decree would substantially over-compensate the pursuer for the principal sum having been withheld. In exercising my discretion as to the appropriate award of interest during this period I consider that I am entitled to have regard to the compensatory principle and to the very low bank base rates which prevailed viz 0.5% from the date of citation until 4 August 2016 and 0.25% from 4 August 2016 to date (Farstad Supply AS v Enviroco Ltd 2013 SC 302). In the whole circumstances I am satisfied that an award of interest at the rate of 4% per annum during that period is appropriate, with interest thereafter at the rate of 8% per annum from the date of decree until payment.

 

Objections

[104]    During the course of the proof a number of objections to evidence were made. I sustained an objection to Mr Bannister and Mr Christie giving evidence as to damage caused by wet rot (having regard to the pleadings and to a ruling made by Lord Tyre on 26 May 2016 which is recorded in the Minute of Proceedings of that date). However I allowed those witnesses to give evidence as to other problems caused by water ingress under reservation of questions of competency and relevancy. In several other instances objection was taken and I allowed evidence to be admitted under reservation. When it came to closing submissions only a few of the objections which were outstanding were insisted upon.

[105]    Counsel for the defenders did not insist on any of the objections made by him which had been reserved (including the objection to the evidence of Mr Bannister and Mr Christie about water ingress).

[106]    Counsel for the pursuer insisted on his objection to evidence elicited during cross‑examination of Mr Sharples concerning the proper construction of the conditions of registration and the NHBC Rules. Counsel for the defenders accepted that the objection was well founded. I shall sustain it. Counsel for the pursuer also insisted on his objections to evidence led from the second and third defender as to their understanding at the material time of the meaning and effect of condition 5. In my opinion while that evidence is irrelevant to the proper construction of the condition, it is admissible for the limited purpose of discerning the states of mind of the second and third defenders at the material times (in light of the pursuer’s averments of fraud on the part of the defenders).

 

Disposal

[107]    I shall put the case out by order to enable parties to check the arithmetic in this Opinion, to address the court as to the terms of an appropriate interlocutor to give effect to my decision, and to deal with the question of expenses.