Zagora Management Ltd & Others v Zurich Insurance Plc
| Jurisdiction | England & Wales |
| Judge | Stephen Davies |
| Judgment Date | 30 January 2019 |
| Neutral Citation | [2019] EWHC 140 (TCC) |
| Docket Number | Case Nos: B50MA033 & D50MA041 |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Date | 30 January 2019 |
[2019] EWHC 140 (TCC)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS IN MANCHESTER
TECHNOLOGY AND CONSTRUCTION COURT (QB)
Manchester Civil Justice Centre,
1 Bridge Street West, Manchester M60 9DJ
HIS HONOUR JUDGE Stephen Davies
SITTING AS A JUDGE OF THE HIGH COURT
Case Nos: B50MA033 & D50MA041
Jonathan Selby QC & Charlie Thompson (instructed by Walker Morris, Leeds) for the Claimants
Nicholas Baatz QC & Nicholas Maciolek (instructed by Kennedys, Birmingham) for the First & Third Defendant
Tom Asquith (instructed by DAC Beachcroft, London) for the Second Defendant
Hearing dates: 1 – 4, 8 – 11, 15 – 19, 22 – 25 October, 12 – 13 November 2018
Judgment circulated in draft: 13 December 2018
APPROVED JUDGMENT
I direct that pursuant to CPR PD 39A paragraph 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
His Honour Judge Stephen Davies
This judgment is divided into the following sections:
| 1 | Introduction and summary of decision |
| 2 | The witnesses |
| 3 | History of the development and subsequent relevant events |
| 4 | ZBG's involvement in the supervision and certification of the development |
| 5 | The evidence relating to the individual claimants |
| 6 | The terms and proper construction of the leases |
| 7 | The terms and proper construction of the policies |
| 8 | Zagora's claim under the alleged agreement to rectify |
| 9 | Zagora's claim under the policy |
| 10 | The leaseholder claims under the policies |
| 11 | The claim against ZBC |
Introduction and summary of decision
This case is about a development of two blocks of flats in Hulme, Manchester, collectively known as New Lawrence House 1. In short, the claimants are: (1) the freeholder, Zagora Management Ltd (“Zagora”); and (2) some (but not all) of the long leasehold owners of individual flats within the development. They all complain of serious defects in the development as built which they say make the flats un-occupiable due, amongst other things, to major fire safety related defects in respect of which a prohibition notice has been issued by the Greater Manchester Fire & Rescue Service (“the Fire Service”).
As against the first defendant, Zurich Insurance plc (“ZIP”) trading as Zurich Building Guarantee (“ZBG”), which issued building warranties known as “Standard 10 Year New Home Structural Defects Insurance Policies” to cover structural and other major defects in the development, the claimants seek their assessment of the cost of remedying these defects, pleaded at £10.9M plus VAT, together with awards to cover the cost of alternative accommodation whilst the remedial works are undertaken. As against the second defendant, Zurich Building Control Services Ltd (“ZBC”), which inspected and certified approval of the development under the Building Regulations (“Bldg Regs”), they seek damages representing the diminution of their respective interests in the development.
Although ZIP and ZBC are separate limited companies that separation was solely for regulatory compliance reasons and did not reflect any substantive separation between the two businesses. The building warranty and building control teams worked closely together in one department under the
ZBG name, the employees of both businesses were employed by ZIP and the administrative and other support functions were also provided by ZIP. Throughout this judgment I refer to them collectively as ZBG save where necessary or appropriate to refer to them under their separate legal identitiesIn July 2018 ZIP amended its defence so as to plead that pursuant to a transfer scheme sanctioned by order of the High Court of the Republic of Ireland dated 16 March 2018 it has transferred its business to the third defendant, East West Insurance Company Limited (“EWIC”). It contends that as a result of the transfer any of the claims made in this action, whether brought under the building warranties or otherwise, fall to be dealt with by EWIC. The claimants accept that EWIC is the appropriate defendant for the claim under the building warranties, although there remains a question as to whether or not the claim brought by Zagora under what is referred to as “the agreement to rectify” is also subject to the transfer. Sensibly, the parties have agreed that any outstanding issue in that respect can be determined once I have given judgment on the substantive claims.
There are 27 claimants making claims against ZIP. Of these 26 2 are the owners of long leasehold interests in a total of 30 individual flats. These are referred to as the individual leaseholder claimants. Of these individual leaseholder claimants only two purchased the flats for their own or a family member's occupation; the remainder purchased as buy-to-let investments. Some live overseas, although the majority are UK residents.
The other claimant, Zagora, is the freehold owner of New Lawrence House. It pursues a claim against ZIP under what has been referred to as the agreement to rectify. In short, Zagora contends that an agreement was reached between itself and ZIP on a commercial basis under which ZIP agreed to fund works to resolve certain agreed defects regardless of the strict position under the building warranties. Further or in the alternative it pursues a claim against ZIP on the basis that it is – or is to be treated as – an insured under a building warranty. ZIP vigorously disputes both of these claims.
Whilst ZIP accepts that the individual leaseholders are insured under individual Standard 10 building warranty policies they dispute their claims on a number of grounds. In short, ZIP's position is that this is a complex insurance claim in respect of which the individual defects require separate and careful consideration in the light of the conflicting factual and expert evidence and the applicable policy coverage and exclusions.
One complicating feature in relation to all of these claims is that a significant number of the total flats in the development, 66 out of a total of 104, were acquired by a limited liability partnership known as CJS Investments LLP (“CJS”), the individual partners in which were connected with the company, JCS Homes Ltd (“JCS”), which built the development. Of the remaining 8, 7 were acquired by individuals connected with JCS. Neither CJS nor the connected individual leaseholders nor the remaining one unconnected individual leaseholder has played any active part in this case.
However, the role played by the financer of both JCS and CJS, the Bank of Ireland (“the Bank”) has been the subject of considerable debate. JCS went into liquidation in December 2012 and CJS went into administration in November 2014. CJS was originally a party to the claim but discontinued its claim once it became apparent that the connection between CJS and JCS would prevent it from successfully making a claim under the building warranties as a result of a clause in the policies which effectively excluded persons or companies connected with the developer from claiming under any building warranty. The consequences of this in terms of the claimants' ability to recover in full the cost of remedial works to the common parts under the policies requires careful consideration, as does the inter-relationship between the respective rights and obligations of: (a) the individual leaseholder claimants; (b) Zagora as the freehold owner; and (c) the management company which was established to manage the development, Lawrence House Management Company (City Road) Limited (“LHM”) – which is not an insured and which makes no claim of its own against ZIPThe Bank has funded and continued to fund the claim until very recently, when a third party funder known as 123 Pay Limited (“123 Pay”) took over the funding, under arrangements which have been the subject of some controversy and which may require careful consideration, given the arguments raised by ZIP as to the impact of those funding agreements upon the claimants' right to recover. These arrangements and arguments extend to the position of Walker Morris as the claimants' solicitors.
From any sensible perspective it is regrettable that in 2013, at a time when – to put it neutrally – Zagora and ZIP were engaged in a productive dialogue as to a way forward in terms of agreeing and undertaking remedial works to resolve the undoubted problems with the development, a dispute arose between Zagora and CJS as to whether Zagora or LHM – which CJS claimed to control – was entitled to manage the development. This dispute led to LHM obtaining an interim injunction in the County Court restraining Zagora from seeking to manage the development. This injunction had the unfortunate effect of preventing the dialogue between Zagora and ZIP from proceeding to what both parties hoped would be a satisfactory conclusion. The litigation between Zagora and LHM was transferred to the Manchester TCC (“the TCC action”) where it proceeded to a trial before HHJ Raynor QC. Separately, a further action was brought in the Manchester Chancery Division (“the Chancery action”) to establish who controlled LHM. The Chancery action also proceeded to a trial before HHJ Raynor QC.
Although HHJ Raynor QC found in favour of LHM in the TCC action and CJS in the Chancery action his decision in the Chancery action was overturned on appeal, the Court of Appeal concluding that on their true construction the – undoubtedly poorly drafted — voting provisions of LHM had the perhaps surprising effect that the individual leaseholders, as the owners of the minority of the flats, rather than CJS as the owners of the...
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