Professional indemnity insurance – Collateral warranty – Exclusion clause – Claimant’s insurer seeking provision of collateral warranties from first defendant architect firm – Liquidator of first defendant seeking determination of court on extent of professional indemnity insurance coverage if warranties given – Whether first defendant entitled to claim contributory negligence by beneficiaries to warranties – Whether exclusion clause entitling insurers to decline to indemnify first defendant under warranties – Issues determined
Between August 2005 and January 2007 the claimant company converted a 19th century former cotton mill in Glossop, Derbyshire into 72 residential apartments over four storeys, with commercial units at ground floor level. The claimant appointed the first defendant as architects. The letter of appointment required the first defendant to enter into collateral warranties relating to the services it was to provide only in favour of any person or institution providing finance in connection with or secured upon the development and the first purchaser and the first tenant of leasehold interest and occupier of each part of the development.
The claimant, as employer, entered into a building contract with a construction company as contractor. In due course the first defendant’s appointment was novated to the contractor as required by the construction contact. The first defendant then entered into a collateral warranty with the claimant and the contractor. Following completion of the works, the apartments were let and occupied. Occupiers of the retail units had collateral warranties executed in their favour by the first defendant. No collateral warranties were executed in relation to the purchasers of leasehold interests in the residential apartments.
In April 2007, the property was largely destroyed by fire. In August 2009, the first defendant went into creditors’ voluntary liquidation and the second defendant liquidator was appointed. A letter of claim pursuant to the Pre-Action Protocol for Construction and Engineering Disputes was sent to the first defendant, care of the liquidator. The claimant and the residential lessees (“the beneficiaries”) alleged breaches by the first defendant of their design and inspection duties which had led to the fire and its rapid spread. The letter of claim had been prepared by solicitors acting on behalf of the building insurer of the property.
The insurer, which was subrogated to the rights of the claimant, called on the first defendant to execute collateral warranties in favour of the residential lessees. When no response was received, the claimant sought a court order compelling the first defendant to execute the collateral warranties. The liquidator was concerned whether, if the collateral warranties were issued, there would be professional indemnity insurance cover to meet any claims made under the warranties. The first defendant’s professional indemnity insurer (the third defendant) sought to rely on an exclusion clause in the professional indemnity insurance policy, which provided that the indemnity provided to the beneficiaries would apply to the collateral warranty provided that the benefit of such warranty or agreement was no greater or longer than that in the original contract to which it related.
Held: The issues were determined.
(1) In so far as the third defendant sought to rely on the beneficiaries being a party as joint employer, not to the original appointment but to the appointment as novated to the contractor, that was not the appropriate document. The definition in the draft warranty referred to the appointment in the original agreement and then stated that the appointment had been novated to the contractor by the novation agreement. The reference in the draft warranty was to the original appointment. The position would be no different even if the reference was to the appointment as novated since, under the deed of novation, both the first defendant and the contractor had agreed to be bound by and liable under the appointment as if named in the appointment as a party thereto in lieu of the employer.
The first defendant’s liability to the contractor would depend on whether it was in breach of the relevant terms and conditions of the appointment and would be contractual liability under the appointment as novated. The first defendant would have to assert that the contractor owed it a duty of care in carrying out the work under the contract between the claimant and the contractor. Whatever the difficulties of establishing, otherwise against the first defendant’s interest, an independent duty to the contractor and to the beneficiaries, the first defendant could not defend a claim by the beneficiaries so as to reduce the damages payable to the beneficiaries on the basis of contributory negligence by the contractor, even if the warranty were to be construed by reference to the appointment as novated: Vesta v Butcher [1989] 1 AC 852 applied.
(2) The reference in exclusion clause to the “original contract” was a reference to the appointment and not the appointment as novated. The reference to “the benefit of the warranty” was not a reference to the damages claimable under the warranty. The benefit of the warranty was the benefit in providing contractual liability by the first defendant to the beneficiaries. The purpose of the clause in the policy was to give insurance cover where there was an obligation on an architect under a collateral warranty or duty of care agreement by reference to obligations under the architect’s original contract. The damages which might have been recovered for breach of those obligations by the original party to that contract, the contractor, could not have been intended to define “the benefit of the warranty”, so as to limit the damages recoverable by the beneficiaries under the warranty who would not, in practical terms, be able to show what damages the original party might have suffered at what time. Such a conclusion would not be consistent with sound commercial principles and good business sense and would produce an unrealistic and generally unanticipated result.
The benefit of the warranty which had to be “no greater or longer lasting” than that in the appointment referred to the scope, extent and duration of the liability. Therefore, the fact that the first defendant could not rely on any contributory negligence of the contractor did not arise. The exclusion clause would not entitle the third defendant to decline to indemnify the first defendant for any liability which it might have to the beneficiaries to the warranties. It followed that, on the terms of the collateral warranties and the policy, there would be coverage under the policy in respect of liability arising under the collateral warranties which the first defendant had been called upon to execute in favour of the lessees of the residential apartments.
David Turner QC and Dermot Woolgar (instructed by DAC Beachcroft LLP) appeared for the claimant; Nicholas Briggs (instructed by Howes Percival LLP) appeared for the second defendant; Simon Hughes QC (instructed by CMS Cameron McKenna LLP) appeared for the third defendant.
Eileen O’Grady, barrister
Oakapple Homes (Glossop) Ltd v DTR (2009) Ltd (in liquidation) and others
Professional indemnity insurance – Collateral warranty – Exclusion clause – Claimant’s insurer seeking provision of collateral warranties from first defendant architect firm – Liquidator of first defendant seeking determination of court on extent of professional indemnity insurance coverage if warranties given – Whether first defendant entitled to claim contributory negligence by beneficiaries to warranties – Whether exclusion clause entitling insurers to decline to indemnify first defendant under warranties – Issues determinedBetween August 2005 and January 2007 the claimant company converted a 19th century former cotton mill in Glossop, Derbyshire into 72 residential apartments over four storeys, with commercial units at ground floor level. The claimant appointed the first defendant as architects. The letter of appointment required the first defendant to enter into collateral warranties relating to the services it was to provide only in favour of any person or institution providing finance in connection with or secured upon the development and the first purchaser and the first tenant of leasehold interest and occupier of each part of the development.The claimant, as employer, entered into a building contract with a construction company as contractor. In due course the first defendant’s appointment was novated to the contractor as required by the construction contact. The first defendant then entered into a collateral warranty with the claimant and the contractor. Following completion of the works, the apartments were let and occupied. Occupiers of the retail units had collateral warranties executed in their favour by the first defendant. No collateral warranties were executed in relation to the purchasers of leasehold interests in the residential apartments. In April 2007, the property was largely destroyed by fire. In August 2009, the first defendant went into creditors’ voluntary liquidation and the second defendant liquidator was appointed. A letter of claim pursuant to the Pre-Action Protocol for Construction and Engineering Disputes was sent to the first defendant, care of the liquidator. The claimant and the residential lessees (“the beneficiaries”) alleged breaches by the first defendant of their design and inspection duties which had led to the fire and its rapid spread. The letter of claim had been prepared by solicitors acting on behalf of the building insurer of the property.The insurer, which was subrogated to the rights of the claimant, called on the first defendant to execute collateral warranties in favour of the residential lessees. When no response was received, the claimant sought a court order compelling the first defendant to execute the collateral warranties. The liquidator was concerned whether, if the collateral warranties were issued, there would be professional indemnity insurance cover to meet any claims made under the warranties. The first defendant’s professional indemnity insurer (the third defendant) sought to rely on an exclusion clause in the professional indemnity insurance policy, which provided that the indemnity provided to the beneficiaries would apply to the collateral warranty provided that the benefit of such warranty or agreement was no greater or longer than that in the original contract to which it related. Held: The issues were determined.(1) In so far as the third defendant sought to rely on the beneficiaries being a party as joint employer, not to the original appointment but to the appointment as novated to the contractor, that was not the appropriate document. The definition in the draft warranty referred to the appointment in the original agreement and then stated that the appointment had been novated to the contractor by the novation agreement. The reference in the draft warranty was to the original appointment. The position would be no different even if the reference was to the appointment as novated since, under the deed of novation, both the first defendant and the contractor had agreed to be bound by and liable under the appointment as if named in the appointment as a party thereto in lieu of the employer.The first defendant’s liability to the contractor would depend on whether it was in breach of the relevant terms and conditions of the appointment and would be contractual liability under the appointment as novated. The first defendant would have to assert that the contractor owed it a duty of care in carrying out the work under the contract between the claimant and the contractor. Whatever the difficulties of establishing, otherwise against the first defendant’s interest, an independent duty to the contractor and to the beneficiaries, the first defendant could not defend a claim by the beneficiaries so as to reduce the damages payable to the beneficiaries on the basis of contributory negligence by the contractor, even if the warranty were to be construed by reference to the appointment as novated: Vesta v Butcher [1989] 1 AC 852 applied.(2) The reference in exclusion clause to the “original contract” was a reference to the appointment and not the appointment as novated. The reference to “the benefit of the warranty” was not a reference to the damages claimable under the warranty. The benefit of the warranty was the benefit in providing contractual liability by the first defendant to the beneficiaries. The purpose of the clause in the policy was to give insurance cover where there was an obligation on an architect under a collateral warranty or duty of care agreement by reference to obligations under the architect’s original contract. The damages which might have been recovered for breach of those obligations by the original party to that contract, the contractor, could not have been intended to define “the benefit of the warranty”, so as to limit the damages recoverable by the beneficiaries under the warranty who would not, in practical terms, be able to show what damages the original party might have suffered at what time. Such a conclusion would not be consistent with sound commercial principles and good business sense and would produce an unrealistic and generally unanticipated result.The benefit of the warranty which had to be “no greater or longer lasting” than that in the appointment referred to the scope, extent and duration of the liability. Therefore, the fact that the first defendant could not rely on any contributory negligence of the contractor did not arise. The exclusion clause would not entitle the third defendant to decline to indemnify the first defendant for any liability which it might have to the beneficiaries to the warranties. It followed that, on the terms of the collateral warranties and the policy, there would be coverage under the policy in respect of liability arising under the collateral warranties which the first defendant had been called upon to execute in favour of the lessees of the residential apartments.David Turner QC and Dermot Woolgar (instructed by DAC Beachcroft LLP) appeared for the claimant; Nicholas Briggs (instructed by Howes Percival LLP) appeared for the second defendant; Simon Hughes QC (instructed by CMS Cameron McKenna LLP) appeared for the third defendant.Eileen O’Grady, barrister