Manchikalapati & Others v Zurich Insurance Plc (t/a Zurich Building Guarantee & Zurich Municipal) and East West Insurance Company Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Coulson,Sir Rupert Jackson,Lord Justice McCombe |
| Judgment Date | 05 December 2019 |
| Neutral Citation | [2019] EWCA Civ 2163 |
| Date | 05 December 2019 |
| Docket Number | Case No: 2019/0582, 2019/0589 & 2019/0590 |
| Court | Court of Appeal (Civil Division) |
[2019] EWCA Civ 2163
Lord Justice McCombe
Lord Justice Coulson
and
Sir Rupert Jackson
Case No: 2019/0582, 2019/0589 & 2019/0590
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM FROM THE HIGH COURT OF JUSTICE BUSINESS AND
PROPERTY COUTS IN MANCHESTER TECHNOLOGY AND CONSTRUCTION
COURT (QBD)
HHJ STEPHEN DAVIES
Royal Courts of Justice
Strand, London, WC2A 2LL
Jonathan Selby QC & Charlie Thompson (instructed by WALKER MORRIS LLP) for MANCHIKALAPATI AND OTHERS
Nicholas Baatz QC & Nicholas Maciolek (instructed by KENNEDYS LAW LLP) for ZURICH INSURANCE PLC
Hearing dates: 15, 16 and 17 October 2019
Approved Judgment
This judgment deals primarily with the appeal in respect of the Maximum Liability Cap (‘MLC’). It is in six parts, namely:
Part 1: Introduction
| Part 1 – Introduction | Paragraphs 1 – 7 |
| Part 2 – The facts | Paragraphs 8 – 22 |
| Part 3 – The present proceedings | Paragraphs 23 – 31 |
| Part 4 – The appeal to the Court of Appeal | Paragraphs 32 – 36 |
| Part 5 – The operation of the maximum liability cap | Paragraphs 37 – 71 |
| Part 6 – Conclusion | Paragraphs 72 – 73 |
This is an appeal by a group of leaseholders (whom I shall call “the claimants”) against a decision that their claim under a structural defects insurance policy is limited to the total purchase price of their flats, disregarding the purchase prices of other flats in the block. The central issue in the claimants' appeal concerns the proper construction of the MLC in the policy.
There is a cross-appeal by the insurers on a cluster of issues in respect of which the claimants succeeded, which issues are primarily dealt with in the judgment of Coulson LJ, and a further cross-appeal on the subject of interest, dealt with in the judgment of McCombe LJ.
In this judgment I shall use the following abbreviations: ‘CJS’ means CJS Investments LLP.
‘East West’ means East West Insurance Company Limited.
‘FML’ means Freehold Managers (Nominees) Limited.
‘JCS’ means JCS Homes Limited.
‘LHMC’ means Lawrence House Management Company (City Road) Limited.
‘MLC’ means maximum liability cap.
‘Mainstay’ means Mainstay Residential Limited.
‘Premier’ means Premier Residential Management Limited.
‘Zagora’ means Zagora Management Limited.
‘ZIP’ means Zurich Insurance Plc.
‘ZBC’ means Zurich Building Control Services Limited.
‘Zurich policy’ means the Zurich Standard 10 New Home Structural Defects Insurance Policy.
A copy of the Zurich policy (omitting section 4, which is not relevant for present purposes) is attached as an appendix to this judgment.
There came a time when East West took over the liabilities of ZIP. So it is East West which will pay whatever is due to the claimants under the judgment of this court. Both ZIP and East West are defendants in the action and respondents to the appeal. Since ZIP was active as insurer at the relevant time, I shall refer only to ZIP in the narrative and analytical sections of this judgment. For simplicity I will avoid making repeated references to the fact that liability or concurrent liability now rests with East West.
After these introductory remarks I must now turn to the facts.
Part 2: The Facts
In 2003 JCS obtained planning permission for the construction of two blocks of flats collectively known as ‘New Lawrence House’ at Hulme in Manchester. In 2006 JCS obtained funding for the project from Bank of Ireland.
In 2007 ZIP accepted JCS as an approved builder. It was agreed that ZIP's associated company, ZBC, would provide inspection services during the construction period and that ZIP would issue Zurich policies to the purchasers of the flats. Construction started in June 2007.
From March 2007 onwards individuals started to buy long leases of flats in the development “off plan”. The leases which they purchased were for terms of 125 years. They specified that JCS was the landlord and LHMC was the management company. Each lease contained a plan on which the area of the relevant flat was delineated by a red line. The balcony was outside that red line. The lease required the tenant to pay service charges. In return the management company covenanted to maintain the retained parts and to keep them in good and substantial repair.
ZIP in due course issued a Zurich policy to each leaseholder. As can be seen from the appendix, section 1 of the policy provided cover for the leaseholder during the construction period. Section 2 provided cover during the first two years post-construction. Section 3 provided cover during years 3 to 10.
In section 2 of the policy there are twenty-five bullet points on the right hand side of the page, listing matters not covered. I will refer to these items as ‘section 2 bullet point 1’, ‘section 2 bullet point 2’ and so on. In section 3 of the policy there are twenty-three bullet points on the right hand side of the page, listing matters not covered. I will refer to these as ‘section 3 bullet point 1’, ‘section 3 bullet point 2’ and so on.
I shall refer to condition 10(c) of the policy, which must be read in conjunction with the definition of ‘maximum liability’ in the Definitions section, as the ‘maximum liability cap’ or ‘MLC’.
Flats in the new development were reserved from as early as April 2007. Following upheavals in the financial market and the property market, it became more difficult to sell flats in the new development “off plan”. Nevertheless, construction work on site continued in 2008 and 2009, with some work being carried out in 2010 also. The last of the Claimants entered into their lease of a flat in October 2010. At about the same time the three individuals who controlled JCS took steps to deal with sixty-six flats which remained unsold. Those three individuals formed a limited liability partnership, CJS Investments LLP (‘CJS’), in which there were three partners. CJS then bought the sixty-six remaining flats from JCS with the assistance of funding from Bank of Ireland. JCS then repaid the sums which it had borrowed from Bank of Ireland.
Once all sales were completed, the position was as follows. There were a hundred and four flats in the development. Twenty-six individuals, who are now claimants in the action, were the leaseholders of thirty flats. Mr Grove, who is not a claimant, was the leasehold owner of one flat. Associates of the promoters of JCS were the leasehold owners of seven flats. CJS owned the remaining sixty-six flats.
On 11 th March 2011 JCS transferred the freehold of New Lawrence House to FML. In December 2011 LHMC was struck off the Register of Companies and dissolved.
On 5 th July 2012 FML notified all leaseholders pursuant to clause 9.9 of the leases that it was taking over the maintenance of the development and that it was appointing Mainstay to take over the necessary management services.
During 2012 and 2013 it became apparent that there were serious defects in the building. On 13 th March 2013 Mr Denis Tarasov, the leasehold owner of flat 41, submitted a claim to ZIP on ZIP's standard claim form. He listed the defects as follows:
“Building was never completed to a proper manner/standard:
— no glazing at top floors
— bare wall with no rendering
— NO COMPARTMENTATION (fire risk)
— significant health & safety issues in the block & stairs
— Fire risk & general risk assessment – RED
— Unfinished ceilings with leaks entering the unit itself
— Leaking sewerage pipes into car park.”
This was an opportune moment for FML to dispose of the freehold. On 10 th April 2013 FML transferred the freehold of New Lawrence House to Zagora.
On 18 th April 2013 Premier wrote to all leaseholders, stating that it had become managing agent of the development and urgent works were required. On the same day Mr Andrew Broadhurst of Cobe Consulting wrote to ZIP purportedly on behalf of Zagora and all tenants intimating a claim in respect of numerous defective and incomplete items in the building.
There was then an unfortunate dispute between the partners of CJS on the one hand and Zagora and the individual leaseholders on the other hand as to who had the right to control the development. The final decision was that Zagora and the individual leaseholders had the right to control the development: see Sugarman v CJS [2014] EWCA Civ 1239. Following its defeat in the Court of Appeal CJS went into administration.
Negotiations followed between Zagora, the leaseholders, ZIP and ZBC. Neither ZIP nor ZBC was willing to meet the costs of the substantial remedial works which were required. Accordingly Zagora and twenty-six leaseholders commenced the present proceedings.
Part 3: The Present Proceedings
By a claim form issued in the Technology and Construction Court at Manchester, Zagora and twenty-six individual leaseholders made claims for damages against ZIP, ZBC and East West. Zagora and the individual leaseholders sought to recover the estimated cost of remedial works and related losses on a variety of bases, including deceit by ZBC, an alleged oral agreement by ZIP to rectify and ZIP's liability under section 3 of the Zurich policy.
The claimants itemised the alleged defects in various Scott Schedules.
Most of the claimants' claims failed and are not the subject of any appeal. I shall not trace the history of the first instance proceedings (which were managed most effectively by HH Judge Stephen Davies) but will come straightaway to the claims of the twenty-six leaseholders – the claimants – which were successful.
After a four-week trial in October 2018 and two days of oral submissions in November 2018, HH...
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