The recent Court of Appeal decision in Building Design Partnership Ltd v Standard Life Assurance Ltd [2021] EWCA Civ 1793, concerned the use of sampling and extrapolation. This is the premise that, if a sample of the allegations is representative of the allegations as a whole, then the results of detailed investigation of the sample can be extrapolated into the result for the entire pool of those allegations.
Whilst the use of sampling at trial is common, certainly in the Technology and Construction Court, the question for the Court of Appeal was whether it was appropriate for the Claimant to plead its case at the outset on a sample and extrapolation basis.
Background
Standard Life were the developer of a substantial mixed retail and residential development in Newbury, Berkshire. The contract price was £77m, though the amount ultimately paid to the main contractor was double that.
Building Design Partnership Limited ("BDP") were the contract administrators and leaders of the design team. Standard Life blame BDP for what it alleges was unjustified overspend arising from variations to the building contract.
Standard Life analysed 167 variations out of a total of 3,604. They pleaded detailed claims for late, inadequate, incomplete and uncoordinated design information which they alleged gave rise to a liability on the part of BDP of around £13m.
The next step was the "extrapolated claim". Standard Life calculated that, on their analysis of the 167 variations, the design team were culpably responsible for 83.1% of them and, of those variations for which the design team bore responsibility , BDP was responsible for 81.71%. Applying these percentages to the remaining variations, Standard Life claimed over £20m by way of the extrapolated claim.
BDP's attempt to strike out the extrapolated claim failed. The Court of Appeal concluded that, as a matter of pleading, extrapolated claims are permissible in principle. Indeed, it was desirable, because it would be disproportionate to require Standard Life to plead out a case on each of the remaining 3,437 variations.
Other issues
The judgment also helpfully dealt with a number of related points.
First, BDP alleged that by pleading an extrapolated claim, Standard Life was reversing the burden of proof and obliging it to disprove the extrapolated claims, which had not been investigated. This was rejected. There is no need to interrogate all the individual variations, because Standard Life are entitled to ask the court to draw the inference that the same proportion of un-investigated variations were due to BDP's default. There would then arise an evidential burden on BDP to produce rebuttal evidence or suffer the inferences. If that evidential burden is not met, then Standard Life would have proven the claim.
Standard Life does still have the burden of proving that it is reasonable to draw the inference that the same problems identified in the detailed claim appeared in the remaining investigations and this will not be straightforward. The Court of Appeal highlighted two previous cases where an extrapolated claim was pleaded, but which failed on the evidence at trial.
Second, BDP argued that extrapolation could never be used in a professional negligence action, relying upon the case of Pantelli Associates Ltd v Corporate City Developments No2 Ltd [2010] EWHC 3189 (TCC), which requires that a claimant should have appropriate expert evidence to support a claim for professional negligence. In effect, this appears to have been an argument that the expert evidence would not support the extrapolated claim, because those variations had not been investigated. The Court of Appeal held that it was sufficient that Standard Life had the necessary expert evidence on which to base the detailed claim.
How does this affect insurers?
On the one hand, this is a negative development for insurers. It is worth noting the value of the claims: Standard Life focussed on 167 variations said to be worth c.£13m or £78,000 each. The remaining 3,437 variations were said to be worth £20m or £6,000 each. Whilst accepted this is a crude average, it is probably fair to observe that, if Standard Life had to prove a thousand or so variations worth less than £5,000 each, it probably would not have done so. The judgment confirms that it is permissible for claimants to extrapolate the findings to the remaining alleged defects, which will inevitably increase the value of claims pleaded.
However, there are a number of ways in which this approach could be said to be positive. In particular, claimants need to act proportionately. Had Standard Life investigated and pleaded out all 3,604 variations, the costs of the claim would have been vast, which would have put significant commercial pressure on the defendants to settle.
In light of this judgment, a defendant faced with a claimant threatening to incur substantial costs investigating every last issue can argue that such an approach is inappropriate and that sampling would be more cost-efficient.
Claims based on samples and extrapolation are likely to be difficult to prove. Standard Life's pleadings came under a sustained attack from the first instance judge and the Court of Appeal. In part, this reflected that such claims are difficult to plead with clarity and there will be risks throughout the process for the claimant.
When faced with a claim based on sampling and extrapolation, certainly where the process has not been agreed, defendants should consider whether the claimant's sample properly reflects the pool of allegations as a whole. The Court of Appeal gave the example of Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd (No. 2) [2017] EWHC 1763 (TCC), where sampling was used in order to support a claim for allegedly defective welding. The claim failed at trial because the claimant had analysed 412 welds out of a total of over 28,000, but the sample was not representative of all the welds. The sample was of those already identified by the claimant as being defective.
In seemingly sanctioning the streamlining of mounting claims, the Court of Appeal may have facilitated a new challenge for Insurers. However, the burden of proof remains with the Claimant and permitting a pragmatic approach to the identification of defects is consistent with the Civil Procedure overriding objective of cost effective determination of disputes.
