Construction – Building contract – Indemnity clause – Respondent sub-sub-contracted for design and installation of mechanical works in development of flats – Respondent employing appellant on labour-only sub-sub-sub-contract to install works – Flooding occurring from boosted mains water system – Whether caused by workmanship defects on part of appellant – Whether respondent entitled to indemnity from appellant in respect of damages liability to its own employer – Whether indemnity clause in appellant’s contract operating where respondent itself at fault – Appeal dismissed
A block of flats on the Greenwich peninsula in south London suffered extensive water damage as a result of water leaking from two of the cold water riser mains within the cores of the building. The eventual cost of remedial works and other losses was agreed at £4.75m. The building owner paid for the remedial works and, in some cases, arranged for leaseholder of individual flats to stay in hotels while the works were carried out. It then brought a successful claim to recover its losses from the mechanical and electrical sub-contractor responsible for the original design and construction of the building, who were held liable under their individual warranties.
One of those sub-contractors in turn sought to pass on liability to the respondent, to which it had sub-sub-contracted the design and installation of mechanical works, while the respondent itself claimed an indemnity from the appellant, which had carried out the labour element of the mechanical works under a sub-sub-sub-contract. The judge found that the allegations in relation to defective workmanship passed all the way down the contractual chain and rested with the appellant: see [2013] EWHC 3059 (TCC); [2014] PLSCS 8.
The appellant appealed. It challenged the judge’s findings of fact that a closed isolation valve and an inappropriately positioned “non-return valve”, which together had caused the flooding by preventing the proper functioning of a surge arrestor in the boosted mains cold water system, were both attributable to workmanship failures on the part of the appellant. It also contended that it was not obliged to indemnify the respondent in circumstances where the respondent had itself been at fault in certain respects.
The relevant clause in the appellant’s sub-sub-sub-contract required it to indemnify “against each and every liability which [the respondent] may incur to any other person or persons and further to indemnity [the respondent] in respect of any liability, loss, claim or proceedings of whatsoever nature such as shall arise by virtue of the breach or breaches of this Subcontract Agreement by, or act, default or negligence of the Subcontractor”.
Held: The appeal was dismissed.
(1) The judge’s findings of fact in relation to the isolation valve and non-return valve were open to him on the evidence. He had brought to bear the specialist experience of a Technology and Construction Court judge in piecing together the jigsaw and resolving the numerous conflicts of evidence and the appeal court should not interfere with his findings on those issues.
(2) There was a rule of general application that, if a party obtained an indemnity against the consequences of certain acts, the indemnity was not to be construed as including the consequences of that party’s own negligence unless those consequences were covered either expressly or by necessary implication, which would arise if there was no other subject matter on which the indemnity could operate: Canada Steamship Lines Ltd v The King [1952] AC 192 and Walters v Whessoe Ltd (1968) 6 BLR 23 considered. However, the Canada Steamship principle was a rule of construction not a rule of law and it depended on the presumed intention of the parties, in that it was presumed to be unlikely that one party would agree to indemnify another for the consequences of that other party’s own negligence. In applying the rule, the court had to have regard to the commercial context of the contract under consideration.
In the context of a chain of building contracts, it was not inherently unlikely that each party would agree to be liable for shortcomings in its own work, even if superior parties in the chain failed to detect those shortcomings. If a sub-contractor perpetrated defective workmanship, contractors and sub-contractors higher up the chain could be criticised for failing to notice the mistakes, but it would largely defeat the commercial purpose of the contractual chain if “failure to notice” prevented the indemnity clause from operating. The participants in building projects arranged their affairs and took out insurance cover on the basis that they were likely to be held liable for shortcomings in their own work. In the case of a construction contract, a failure by the indemnitee to spot defects perpetrated by its contractor or sub-contractor should not ordinarily defeat the operation of an indemnity clause, even if that clause failed expressly to encompass damage caused by the negligence of the indemnitee. Nor should the indemnity be confined in its scope to defects that could not be detected on a reasonably careful inspection, since that would substantially curtail the effect of the clause.
Accordingly, it was not appropriate to apply the Canada Steamship principle to the indemnity clause in the appellant’s contract since to do so would destroy the ability of parties to pass claims down the contractual chain, contrary to business common sense. Although the respondent should have detected the appellant’s workmanship breaches on making a reasonable inspection, the respondent’s failure to inspect properly did not shut out its claim under the indemnity clause. The clause was wide enough to encompass the two workmanship breaches of leaving the isolation valve closed and inserting the non-return valve. It could not be presumed that the parties intended to confine the indemnity clause to workmanship breaches by a labour-only sub-sub-sub-contractor that were invisible on reasonable inspection. The clause did not say that and it should not be so construed. It followed that the respondent was entitled to recover from the appellant under the indemnity clause.
Moreover, negligence by the indemnitee, even where it prevented the operation of an indemnity clause, would not necessarily shut out an alternative claim for breach of contract. The appellant’s workmanship failures were breaches of its sub-sub-sub-contract with the respondent and had caused the loss that the respondent suffered, namely its liability in damages and costs to its own employer. Accordingly, the respondent was entitled to recover that loss against the appellant as damages for breach of contract, so enabling it to pass liability down the contractual chain to the appellant, as the party whose breaches were the principal cause of the flood. Neither the design failures nor the inspection failures were sufficient to break the chain of causation at any stage. It was common ground that apportionment between the respondent and the appellant was not possible and that it was an all-or-nothing case.
Roger ter Haar QC and Alexander Macpherson (instructed by Fox Hartley Solicitors) appeared for the appellant; Simon Hargreaves QC and Karim Ghaly (instructed by Clyde & Co) appeared for the respondent.
Sally Dobson, barrister
