Breach of contract – Damages – Remoteness – Respondent settling claim against it for flood damage to building – Flood resulting from failure of ball valve in sprinkler system for which contractually responsible – Drains carrying away water overflow also blocked – Respondent seeking to recover settlement moneys from appellant subcontractor that installed sprinkler system – Whether settlement unreasonable in failing to take account of defences available to respondent – Whether damage too remote in view of unlikelihood of ball valve and drain failing at same time – Appeal dismissed
The respondent subcontractor was engaged to install a sprinkler system in a new office building. It subcontracted the work to the appellant. A nut-and-bolt connection on a ball valve in the sprinkler system subsequently failed, causing a storage tank to overflow; the water failed to run off through drains in the tank room floor owing to blockages, leading to a flood that damaged electrical equipment in the basement. The ensuing claims by the owner and occupiers of the building against the main contractor, and between the main contractor and various subcontractors, were the subject of mediation. As a result, the respondent settled all claims against it by parties further up the contractual chain for a total of £2.864m, but maintained its Part 20 claim against the appellant to recover that sum.
Allowing the claim, the judge found that the failure of the nut-and-bolt connection was probably caused by insufficient tightening when the ball valve was installed, which was the obligation of the appellant under its subcontract with the respondent. As to quantum, the judge awarded the full sum claimed by the respondent, rejecting the appellant’s contention that the sum paid by the respondent in settlement of the claims against it did not reasonably reflect the strength of the defences that were available to it.
On appeal, the appellant contended that the subcontract works did not, properly construed, include the installation of the ball valve and reiterated its contention that the settlement sum was unreasonable. It argued that the blocked the drains had been the effective cause of the flood or that the flood damage was too remote to have been recoverable from the respondent, since any overflowing water would ordinarily have flowed away through the drains in the tank room floor. The fact that it had not, owing to the blockage, was too unlikely an event as to attract liability.
Held: The appeal was dismissed.
(1) The judge had been entitled to find that the appellant was responsible for the installation of the ball valve under the subcontract. As regards the settlement of the claims, the judge did not have to decide what his assessment of the likely outcome of the settled litigation would have been, but whether that reached by the parties came within the range of what was deemed reasonable. He had correctly concluded that it was reasonable in the instant case. He had not erred in finding that the overflowing of the sprinkler tank resulting from the failure of the ball-valve connection was an effective cause of the flood. Only a rash lawyer would have advised the respondent that it was likely to succeed on the causation issue.
With regard to remoteness, the law in respect of claims for breach of contract was grounded in the policy that the loss recoverable by the victim should be limited to the loss from which the party in breach might reasonably be taken to have assumed a responsibility to protect the victim. Consequently, the question of remoteness could not be isolated from a consideration of the purpose of the contract and the scope of the contractual obligation. The ordinary rule was that a contract-breaker would be liable for damage of a kind that a reasonable person in his shoes would have regarded as being not unlikely to result from a breach. However, in some cases the court, on examining the contract and commercial background, might decide that the standard approach did not reflect the expectation or intention reasonably to be imputed to the parties. If, on the proper analysis of the contract against its commercial background, the loss came within the scope of the duty, it could not be regarded as being too remote even if it would not have occurred in ordinary circumstances: Hadley v Baxendale (1854) 9 Ex 341 considered; South Australia Asset Management Corporation v York Montague Ltd [1996] 2 EGLR 93; [1996] 27 EG 125 and Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48; [2009] 1 AC 61 applied.
In the instant case, both the ball valve and the drains were designed to control the flow of water involved in the operation of the sprinkler system. In a sophisticated engineering project such as a building, it was not uncommon to incorporate multiple safety devices in the reasonable expectation that the risk of their simultaneous failure would be minimal; however, that expectation depended on the party responsible for installing the devices having done what it ought to have done. If it had failed to do so, and the unlikely happened, it could not argue that the occurrence was unlikely, when it was responsible for ensuring that the failure did not arise. It would be a perverse result if the greater the number of precautionary measures, the lower the legal remedy available to the victim would be in the case of multiple failures. The respondent was responsible for supplying and installing the sprinkler system in such a way that the water used for the system was properly contained, and it therefore assumed a contractual responsibility to prevent its escape. Even if such flooding was unlikely, the respondent had a contractual duty to prevent it. Accordingly, the loss resulting from the flood was not too remote to have been recoverable against the respondent and it had not been unreasonable for the respondent to settle the claims in the way that it did.
Mark Cannon QC (instructed by Kennedys) appeared for the appellant; Tim Lord QC (instructed by Watmores) appeared for the respondent.
Sally Dobson, barrister
