Standard-form
building contracts usually contain provisions dealing with the risk of damage
to the contract works and to other property, and usually then allocate the
burden of insuring against such risks between the client and the contractor. In
this context, one of the risks which is often placed upon the client is that of
damage to existing structures and to the works by fire, and a question which
has arisen on several occasions is whether this allocation effectively exempts
the contractor from liability when the fire in question is caused by his
negligence. In Scottish Special Housing Association v Wimpey
Construction UK Ltd [1986] 2 All ER 957, under the JCT 1963 form of
contract, the House of Lords ruled in favour of a contractor on precisely this
ground, and their decision was taken a giant step further by the Court of
Appeal in Norwich City Council v Harvey [1989] 2 All ER 1180,
where a similar risk-allocation clause in a main contract (again JCT
1963) was held to prevent the client from claiming in tort against a negligent subcontractor.
The latest
twist in this somewhat tortious tale comes with the decision of the Court of
Appeal in Dorsel County Council v Southern Felt Roofing Co Ltd
(1989) 6 Const LJ 37. That case concerned a contract under which the
defendants, a firm of building contractors, agreed to repair parts of a school
belonging to the council. During the course of the work the school caught fire,
causing serious damage to both the buildings and their contents, and it was
alleged by the council that this was in consequence of the negligence of the
defendants. For the purposes of the present proceedings, the defendants did not
dispute that they had been negligent; however, they argued that the contractual
conditions (which were the county council’s own standard terms, though bearing
some resemblance to JCT forms) operated to exempt them from liability.
Two
particular terms of the contract were regarded as relevant. Clause 1.7 provided
that the contractor should ‘indemnify the council against any liability, loss
claim or proceedings in respect of injury or death to persons or damage to
property . . .’, while clause 2.1 made it clear that the council should ‘bear
the risk of loss or damage . . . by fire, lightning, explosion, aircraft . . .’
etc. The trial judge ruled that the first of these provisions imposed liability
on the defendants for what had occurred and that the second was ineffective as
an exemption clause, whereupon the defendants appealed.
The Court of
Appeal disagreed with the trial judge on the first point, preferring to
interpret clause 1.7 as applicable only to the situation in which claims were
made against the council by third parties; the contractors would then
have to indemnify them against these claims. The clause did not, in the view of
the appeal court, create any direct liability for the defendants; the
responsibility which they undoubtedly had for setting fire to their clients’
property lay in tort.
So far so
good; indeed, one is tempted to add ‘So what?’
Well, according to the appeal court judges, this interpretation meant
that the Scottish Special Housing case mentioned above was totally
different from the present one and could safely be ignored. Clause 2.1 of the Dorset
conditions of contract thus fell to be treated as an exemption clause and, as
such, to be subjected to the strict rules of interpretation contained in such
cases as Canada Steamship Lines Ltd v The King [1952] AC 192.
And, since the clause did not specifically mention negligence, and there was an
area of potential liability other than negligence to which it could
meaningfully be held to apply, those rules meant that negligence was not
covered and that the contractors were liable.
The decision
seems immediately to beg two important questions. First, even if the previous
House of Lords’ ruling can be so easily side-stepped (and it is not altogether
apparent why the distinction between contractual and tortious liability should
make this difference), why was no account taken of the Norwich
case? The Court of Appeal there, in
denying a subcontractor’s liability in tort on the basis of terms in a contract
to which he was not a party, surely went even further than the present court
was asked to do. Second, in so far as clauses of this nature purport to remove
a contractor’s liability for negligence, why does no employer appear to think
it worthwhile to at least raise the Unfair Contract Terms Act 1977? The term might well be held a ‘fair and
reasonable’ one, but is the argument not even worth a try?
reviews: length of term
We have
previously (see ‘Legal Notes’ [1989] 43 EG 185 and [1990] 09 EG 81 discussed
two controversial decisions on the length of term to be assumed for the purpose
of review — Ritz Hotel (London) Ltd v Ritz Casino Ltd [1989] 46
EG 95 and Lynnthorpe Enterprises Ltd v Sidney Smith (Chelsea)
Ltd [1990] 08 EG 93. We return to the subject because the Court of Appeal
has recently considered the matter and decided to uphold the first instance
ruling in the second of these cases — see Lynnthorpe Enterprises Ltd v Sidney
Smith (Chelsea) Ltd [1990] 40 EG 130.
In Lynnthorpe
the term of the actual lease was defined as ‘fifteen years from the date
hereof’; the rent review clause defined the length of term for the purposes of
review as ‘for a term of years equivalent to the said term’. At the penultimate
review the parties were disputing the interpretation to be placed on this
latter phrase. Three possible meanings were canvassed in court: (i) a term of
15 years from the review date; (ii) the unexpired residue of a term of 15 years
from August 22 1978 (the date on which the actual term had commenced); or (iii)
a term equal to the unexpired residue at the review date. (The difference
between the last two would lie in the assumed length of any statutory renewal
under the 1954 Act.)
Rent review
clauses almost always deal expressly with the length of the hypothetical lease.
The vast majority of draftsmen opt either for a term equal in length to the
unexpired residue of the tenant’s actual lease (ie (iii) above), or for an
assumption that the lease on offer is one granted on the review date for a term
of the same length as that originally granted to the tenant (ie (i) above). In
the light of normal practice, it is hard to believe that the draftsman of the Lynnthorpe
lease intended anything other than the second of these two options and
that, equally, this was what the tenant had been prepared to accept. However,
the trial judge, and now the Court of Appeal, have concluded that the words
used have a very different effect.
It now
appears to be settled almost beyond argument that the phrase ‘for a term of
years equivalent to the said term’ will mean that the valuer is required to
assume that the lease on offer is one which is of the same overall length as
the tenant’s actual lease but that this hypothetical lease was granted on
the same date as the actual lease. In coming to this conclusion the Court
of Appeal has adopted the same broad approach as Warner J at first instance but
has altered the details of his actual declaration. Accordingly, say, for
example, that a tenant is occupying under a 25-year lease granted 10 years ago,
the valuer will be required to determine a new rent on the basis of a 25-year
lease granted 10 years ago. This is an assumption which is superficially
similar to one for a lease equal in length to the unexpired residue, in that
both produce, in the above example, a prospective term of 15 years. The
difference, of course, lies in the backdating of the lease under the Lynnthorpe
formula which alters the overall length of term, a factor which may prove
significant when evaluating the effect on rent of dilapidations, improvements
or the tenant’s prospects of renewal under the 1954 Act.
What led the
Court of Appeal to this conclusion?
Dillon LJ had no doubt that he was applying the ‘presumption of reality’
as laid down in cases such as British Gas Corporation v Universities
Superannuation Scheme Ltd [1986] 1 EGLR 120; (1986) 277 EG 980 and Basingstoke
and Deane Borough Council v Host Group Ltd [1987] 2 EGLR 147; (1987)
284 EG 1587. Furthermore, the court was also influenced by the fact that the
review provisions contained in the actual lease could not readily be included
in a new lease for 15 years, because the first review (which had taken place
nearly 10 years earlier) had been a fixed increase. Little attention appears to
have been paid to what the parties are likely to have intended by the wording
which they adopted.
There are
many rent review clauses in existing leases which contain provisions as to length
of term which are either the same as, or very similar to, those found in Lynnthorpe.
There is little doubt that, up to now, many in practice will have believed that
these produced an assumption of a new term at review date of the same length as
the original term. While it may be possible to argue that the Lynnthorpe
decision may not apply to a lease which contains a normal pattern of reviews to
current market rental levels, it seems more likely that the case will be
followed in such instances. If this is so, valuers will be left wishing that
the Court of Appeal had remembered that the rent review process is an
inherently hypothetical exercise and that to leave valuers trying to find
appropriate comparables for backdated leases may turn out to be a cock-eyed
form of realism.
