Zagora Management Ltd & Ors v Zurich Insurance Plc & Ors

Factual and Procedural Background

This case concerns a residential development of two blocks of flats in The City, collectively known as New Lawrence House. The claimants comprise the freeholder, Company A, and certain long leasehold owners of individual flats within the development. They allege serious defects in the construction, particularly major fire safety defects, leading to a prohibition notice issued by the local Fire Service. The defendants are: (1) Company B, trading as Building Guarantee, which issued 10-year structural defects insurance policies covering the development; (2) Building Control Services Ltd, which inspected and certified the development under Building Regulations; and (3) East West Insurance Company Limited, which Company B transferred its business to pursuant to a transfer scheme. The claimants seek damages and remediation costs from these defendants.

Company B and Building Control Services Ltd are separate entities but functionally integrated under the Building Guarantee name. The litigation involves complex issues including insurance coverage, building control certification, lease terms, and the role of a management company. A significant proportion of the flats were acquired by a limited liability partnership connected with the original developer, which discontinued its claim due to policy exclusions for connected parties. The financing arrangements and disputes over management control of the development further complicated the proceedings.

The claimants issued proceedings in 2015, which were stayed pending negotiations but revived in 2017. The case involved extensive factual and expert evidence across multiple disciplines and was vigorously contested at trial.

Legal Issues Presented

1. Whether the claimants are entitled to recover under the building warranty insurance policies issued by Company B (now East West Insurance Company Limited).
2. Whether the freeholder, Company A, is an insured under the insurance policies or otherwise entitled to claim.
3. The proper construction and effect of the leases governing the flats and common parts, including rights and obligations of the management company and tenants regarding repair and service charge contributions.
4. The interpretation of the insurance policies, including coverage, exclusions, maximum liability limits, excesses, and conditions precedent.
5. Whether an alleged agreement to rectify between Company A and Company B was legally binding and its scope.
6. The validity of the claim against Building Control Services Ltd for deceit arising from alleged false certification under Building Regulations.
7. Whether the individual leaseholder claimants and Company A relied on the building control certificates in purchasing their interests.
8. Limitation issues relating to the deceit claims against Building Control Services Ltd.
9. Whether the funding arrangements and involvement of third parties constitute maintenance or champerty.

Arguments of the Parties

Claimants' Arguments

• The individual leaseholder claimants are entitled to recover costs under the building warranty insurance policies for serious defects, including fire safety defects, with coverage extending to common parts without proportionate reduction.
• The freeholder, Company A, contends it is entitled to claim under an alleged agreement to rectify and/or as an insured under the policies by virtue of its freehold interest.
• The leases impose obligations on the management company to undertake repairs and recover costs via service charges from all tenants, including those connected to the developer.
• The insurance policies should be construed to provide effective cover for structural and fire safety defects, with exclusions and limitations to be narrowly interpreted.
• The alleged agreement to rectify with Company B was a concluded binding agreement to fund remedial works to the common parts on agreed terms.
• Building Control Services Ltd issued Bldg Regs final certificates knowing reasonable steps had not been taken, constituting deceit.
• Individual leaseholders and their conveyancing solicitors relied on the existence of building control certificates in completing purchases.
• Limitation does not bar the deceit claims as the fraud was not discovered and could not reasonably have been discovered earlier.
• The Bank and third party funders have a legitimate commercial interest in funding the claims and are not engaged in maintenance or champerty.

Defendants' Arguments

• Company B and East West Insurance contend that the freeholder, Company A, is not an insured under the policies and thus cannot claim.
• Company B submits that the insurance policies require actual or intended repair before indemnity arises and that the claimants are limited by maximum liability provisions to the declared purchase prices of individual flats, excluding flats owned by connected parties.
• The defendants argue that the alleged agreement to rectify was no more than an agreement in principle, not a binding contract.
• Building Control Services Ltd denies that the inspector, Mr Mather, was dishonest or intended Company A to rely on the certificates; individual leaseholders did not actually rely upon the certificates or their solicitors.
• Defendants contend that many individual leaseholders completed purchases without knowledge or reliance on the certificates and that no conveyancing solicitor advised otherwise.
• The limitation period bars many of the deceit claims.
• The funding arrangements are argued to constitute maintenance or champerty as the Bank lacks a legitimate interest in the claims.

Table of Precedents Cited

Court's Reasoning and Analysis

The court conducted a detailed and structured analysis of the factual and legal issues. It began by assessing the reliability and credibility of witnesses, noting the pressures on some witnesses and the partiality of others. The court carefully evaluated the evidence of the building warranty and building control functions, identifying significant failings in inspection and certification, particularly by the building control inspector, Mr Mather.

The court found that Mr Mather knowingly or recklessly issued Building Regulations final certificates despite clear knowledge of serious fire safety defects and inadequate inspections. It concluded that Mr Mather intended individual leaseholders to rely on those certificates but did not intend the freeholder to do so.

In relation to the leases, the court interpreted the terms as imposing obligations on the management company to undertake repair and maintenance of common parts, structural parts and retained parts, with costs recoverable by service charge from all tenants, including those connected with the developer. The court rejected arguments that the landlord or management company had no such obligations or that claims under the leases constituted alternative compensation excluding insurance cover.

The court construed the insurance policies by applying established principles of contract interpretation. It held that the policies provide cover for physical damage and major physical damage caused by failure to comply with the ZBG technical requirements and Building Regulations, including design defects. It rejected insurer arguments that indemnity arises only after repairs are undertaken or that claims should be limited to diminution in value. The court held that present or imminent danger cover is not subject to proportionate share limitations applying to major physical damage claims.

The court found that the alleged agreement to rectify was no more than an agreement in principle and not a binding contract. It was a step towards a pragmatic resolution, leaving many matters unresolved and subject to further investigation and agreement. The intervention of the connected party and ensuing litigation prevented progress.

The individual leaseholder claimants succeeded against the insurer on the basis that the building is seriously defective and requires major repairs falling within the insurance cover, but recovery is limited by the maximum liability provisions to the declared purchase prices of their flats.

The court rejected the claim by the freeholder under the insurance policies, holding that it was not an insured under the policies and could not claim as such. The freeholder’s claim under the alleged agreement to rectify also failed.

Regarding the claim against Building Control Services Ltd, the court held that the claimants proved deceit by Mr Mather in issuing false certificates with knowledge or recklessness as to their untruth. However, the claimants failed to prove reliance on the certificates by themselves or their conveyancing solicitors except for a minority of claimants, leading to failure of the deceit claims.

The court also addressed limitation issues, holding that the limitation period did not start to run until the claimants discovered the fraud or could with reasonable diligence have done so, which in most cases occurred after 2011.

The court rejected the defendants’ arguments that the funding arrangements constituted maintenance or champerty, finding the funder had a legitimate commercial interest and that the introduction of a third party funder altered any previous concerns.

In quantifying claims, the court accepted the claimants’ expert evidence on the nature and extent of defects and necessary remedial works, including fire protection of structural steelwork, roof replacement, cladding, compartmentation, and other fire safety and structural defects. The court rejected insurer arguments limiting costs based on alternative solutions or lesser remedial works where insufficient evidence was provided.

The court applied the maximum liability provisions strictly as a cap on total recovery, acknowledging this may produce harsh results but was consistent with the contractual bargain.

Holding and Implications

The court held:

• The freeholder, Company A, fails in its claims against the insurer, both under the alleged agreement to rectify and under the insurance policies.
• The individual leaseholder claimants succeed against the insurer (East West Insurance Company Limited) on the basis that the building is seriously defective and requires major repairs covered by the insurance policies, but recovery is limited by the policies’ maximum liability provisions to the declared purchase prices of their flats.
• Both Company A and the individual leaseholder claimants fail against Building Control Services Ltd. Although deceit was proved against the building control inspector, the claimants failed to prove reliance on the certificates issued.

Implications: The decision enforces strict contractual interpretation of complex insurance policies and lease arrangements, emphasizing the importance of clear reliance and evidential support in deceit claims against building control inspectors. The ruling limits recoveries by individual leaseholders to their purchase price sums under the insurance policies and rejects claims by the freeholder as not insured. No new precedent is set beyond the application of established principles to the facts of this case. The outcome underscores the risks posed by developer-connected ownership structures and the challenges of managing remediation funding in large developments.