Cases against Zurich Insurance plc (ZI), Zurich Building Control Services Ltd (ZBC) and East West Insurance Company Limited reveal that the tort of deceit may be used to overcome the problems posed by strict limitation periods if serious structural defects are  discovered many years after completion which should have been obvious to a professional conducting proper inspections at the outset.

Most private law claims must be brought within six years of completion, see here. For deceit, however, time does not ‘begin to run until the plaintiff (claimant) has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it’ (Limitation Act 1980, s32). This may be useful if a building has been signed off fraudulently (for structural warranty purposes or possibly building regulation certification), as that sign off might amount to a representation that the building was built in accordance with the requisite standards.

The Zurich cases involve claims made under new home structural defects insurance policies, and a claim on the basis of deceit, brought by the freeholder and about one-third of the long leaseholders, most of whom had bought flats off-plan. In the first case, Zagora Management Ltd and others v Zurich Insurance and others (2019) the deceit claim was brought against ZBC for fraud in connection with building regulation certification. Although the building inspector was found guilty of deceit in relation to the issue of the Building Regulations final certificates, the case failed on this ground because the claimants had not established that they (or their conveyancing solicitors) had relied on these certificates. The warranty claim succeeded but was capped at the original purchase price of the claimants' flats, a sum significantly lower than the total cost of remediation as the developer (who had since entered administration) had retained about two-thirds of the flats. The Court of Appeal has since increased the cap to the purchase price of all flats in the development, with much of its judgement devoted to a discussion of contractual interpretation, having particular regard to interpretations that support the purpose of the policy.

The most recent case, Goldman and others v Zurich Insurance and others, involves a deceit claim not against ZBC but against ZI in connection with their issue of ‘cover notes’ with the new home building warranty. The reported decision involved an application by ZI for the case to be ‘struck out’, alleging that bringing the claim was an ‘abuse of process’ (on the basis that it could and should have been brought in the earlier litigation). The strike out application failed as the leaseholders had not consciously decided not to pursue a deceit claim in the earlier litigation and the significance of the issue of the insurance cover notes only emerged during cross-examination in the earlier trial. This aspect of the case can now proceed.

The case concerned two blocks of flats known as New Lawrence House. They had major fire safety defects and after the Grenfell fire the Fire and Rescue service served a prohibition order. The buildings have ‘stood empty and sealed up ever since’. Beyond the legal claims, the cases illustrate various features common to the emerging fire safety crisis. First, a ‘close relationship’ can exist between certification for home warranty provision and for building control, which can often mean that the surveyors employed by the insurer are carrying out the dual role of both being the ‘approved building inspector’ and carrying out 'warranty inspections'. This is true not only of Zurich but also of other leading providers of structural warranties, such as NHBC. It’s clear from the Zurich cases that this closeness can undermine robust process, particularly when many warranty policies don’t require inspection of parts of the building that may be necessary for Building Regulations sign off. Secondly, it demonstrates that record keeping can be ‘unreliable’. In the Zurich cases papers had been lost containing all files relating to the development; hard copies had disappeared and there was very little by way of electronic record (even though there had been regular electronic communications). Although the judge at first instance was reluctant to attribute any more sinister explanation it was, he said, ‘extremely unimpressive, to say the least’. Other leading warranty providers have also been known to say there were no inspection records available even within the warranty period.

The Zurich cases also illustrate the scale of regulatory failure - not only were there major fire safety defects but some balconies had not been installed (‘clearly a risk of injury through someone exiting the French doors’), and the Building Regulations final certificate (‘remarkably’) included some flats which had not in fact been built.  They also show the sheer effort and time lag involved in litigation, and the costs that owners are put to in order to claim under an insurance policy that is supposed to be designed to offer home-owners protection. The Zurich saga is not yet over: an application has been made for permission to apply to the Supreme Court, and the deceit case in relation to the insurance cover notes is only just getting going.

For the many developments that are ‘timed out’ of most private law actions, the longer limitation period in deceit may offer some hope. However, it is not an easy claim to pursue. The relevant principles of the tort of deceit, also known as fraudulent misrepresentation, were set out by the judge in the first claim.

  1. It must be shown that representations were made to the claimants.
  2. It must be shown that the person making the representation intended the claimants to rely on those misrepresentations.  In the first claim, relating to the Building Regulations final certificates, the freeholder, Zagora, failed on this point - the judge found it impossible to conclude that the building inspector had intended them to rely upon his final certificate as they bought the freehold from the original freeholder over 3 years later.
  3. The person making the representation must know that the representations were false or be reckless as to whether they were true; this is the ‘classic test for dishonesty’ found in Derry v Peek (1889). On the facts of the first claim, they were. The building inspector had known that there were ongoing serious non-compliances with fire safety provisions, he must have known that they had not been addressed, and he must have known that at least some of the flats were already occupied even though the means of escape were not safe.  In other cases, proving dishonesty may not be easy. It requires the claimants to have information that is generally not available to them (without being on the path to litigation and seeking disclosure of documents). It may be deceit is only likely to be found where there was serious non-compliance that would be ‘obvious’ to an inspector (or warranty provider).  
  4. The claimants must have relied on those representations. As noted above, this is why the deceit claim against ZBC failed as reliance on the Building Regulations Final certificates had not been established on the particular facts. The case against ZI is, however, based on issue of the cover notes. In many cases insurance cover notes are issued to confirm that the new home warranty insurance is available and that the flat is completed, such that a mortgage provider will then be satisfied that they can lend. They therefore have significance within the conveyancing process. In the case of Zurich, the ‘system’ was designed to ensure that cover notes would be issued only after all defects were attended to, the final inspection was satisfactory and that there no fire safety issues. What emerged in the first claim was that there was a way for surveyors to ‘bypass this restriction’ as they held 'word' versions of cover notes. This meant cover notes could be issued even though serious defects remained and, indeed, had been notified to Zurich.

    Public domain image obtained from here

  5. It is necessary for the claimants to suffer loss. This may directly relate to the repair bills faced by leaseholders under the lease, but could potentially also include all other losses arising from the fraud, including diminution in value of the property.

For leaseholders wondering if they might claim using deceit, they should: i) seek inspection records (making a subject-data request); ii) ask the original developer or contractor for records in relation to the construction of the development; and iii) look at their conveyancing documents. Most importantly, leaseholders should come together. Insurers love disharmony. By making the same requests; asking the same questions and making the same points at the same time, leaseholders may well secure helpful answers, whereas any other approach is likely to play into the insurers' hands. 

It’s shocking that there can have been certification for flats not even yet built. The required elements to prove deceit and reliance will not be easily established but given the longer limitation period it offers some glimmer for accountability in some instances.

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How to cite this blog post (Harvard style) 

Bright, S. (2020). Reflecting on the systemic failures illustrated by the fire-safety crisis in blocks of flats. Available at: https://www.law.ox.ac.uk/housing-after-grenfell/blog/2020/02/false-certification (Accessed [date])