Buyers beware – the financial cost of losing track of just one thread in a transaction can be high

A major housebuilder has fallen victim to an unfortunate lack of concentration when acquiring a development site in Wales, with expensive consequences, and its loss provides a stark warning to others to make sure that they dot every “i” and cross every “t” when doing their due diligence and entering into the documents on a transaction, the essence of which was the acquisition by BDW Trading of a brownfield site from a county council with the intention of carrying out a substantial residential development.

BDW Trading Ltd. vs. Integral Geotechnique (Wales) Ltd. 2018 EWHC 1915 (TCC)

To explain in simple terms what happened, Bridgend Council instructed IGL, an environmental consultant, to prepare an environmental report on the land that included an artificial ski slope in readiness for a sales and marketing campaign, and it was part of their contract that IGL would assign the benefit of its report or issue a letter of reliance to the eventual buyer. IGL produced its report having dug the agreed 9 trial pits around the site, mainly in its unbuilt areas, and made it available to Bridgend’s retained sales agents confirming that it was happy for the contents to be disclosed to prospective buyers. The report nonetheless limited IGL’s liability for any failings on its part and also contained a statement that it could not be relied on by a third party without its consent or a formal assignment. On top of that, the operation of the Contracts (Rights of Third Parties) Act 1999 was specifically excluded.

Owing to the limited nature of the investigation, the report unsurprisingly recommended further investigations once the site had been cleared of buildings, but otherwise gave the site a relatively clean bill of health on the basis of the analysis of the soil from the trial pits. BDW then completed its acquisition of the site without taking an assignment of the report or asking for IGL’s consent to rely on it, and then found asbestos around the site, mainly in and around the ski slope, costing it millions of pounds to clean up. It sued IGL for negligence and IGL denied liability.

The judge had four questions to answer: (1) did IGL owe a duty of care to BDW, (2) if it did, had it breached that duty, (3) if so, what damages were payable to BDW, and (4) if all the rulings went in BDW’s favour, how much should it lose owing to its contributory negligence?

BDW argued that IGL knew that its report was being made available to prospective buyers and that they would rely on its contents when assessing the site for development, but the judge ruled against it. IGL had indeed consented to its report being made available to prospective buyers, but had expressly limited its liability under its contract with Bridgend and had also clearly stated that the report was not to be relied on by a third party without an assignment or letter of reliance, which it would be happy to provide if asked. The judge ruled that, as BDW had for whatever reason not taken an assignment of the contract or asked for a letter of reliance, and IGL hadn’t given one, IGL had no duty of care to BDW for the contents of the report.

To add to BDW’s woes, the judge also ruled that, even if he had found that IGL owed it a duty of care, he would have found that IGL hadn’t breached it. First, it had been instructed to prepare the report to inform the design process, not as an exhaustive audit of any contamination to allow a prospective buyer to decide whether or not to buy the site or how much to pay for it – its duty had in that aspect been fully discharged. Secondly, it had reported reasonably accurately on the analysis of the 9 trial pits and advised that contamination might exist elsewhere on the site and that this should be investigated further once the buildings had been demolished. There was no evidence that asbestos contamination was widespread such that it needed to be highlighted in the report and, if BDW had read the report closely, it would have been clear to it that further investigation would be required to identify the full extent of contamination of the site that would need to be remediated to permit residential development, and it could not blame IGL for its failure to understand what the report was saying.

Turning next to the issue of quantum, all the evidence was that the site was highly desirable and that there was a lot of competition to acquire it – on that basis, the judge found that BDW would not have walked away from the site but negotiated a reduction in the price that it was prepared to pay. The intense competition would have reduced Bridgend’s need to accept an aggressive chip, instead requiring BDW to accept a lower profit margin than it would have done when desirable sites were more plentiful. The number isn’t important to the legal analysis, but the judge found that BDW would have negotiated a reduction in the price of £1 million, roughly half the cost of remediating the asbestos contamination.

Finally, to add salt to BDW’s wounds, the judge ruled that, if he had answered yes to the previous three questions, he would still have found it to be 30% contributorily negligent for having failed to take a formal assignment of the benefit of the report and for not reading it carefully enough to appreciate that it should have carried out its own environmental investigation prior to exchanging contracts to satisfy itself as to the cost of dealing with contamination issues on the site.

There is a lesson to be learned in this for all buyers and their advisers, which is to review all documents carefully, take nothing for granted, carry out a final check that everything that needs to be in place is in place, and create and use a checklist for all transactions that are complicated and/or likely to last a reasonable time.