Relieving a contractor's liability in negligence under a construction contract: clarity is key

In a judgment handed down on 2 April 2008 in Tyco Fire & Integrated Solutions Ltd v Rolls-Royce Motor Cars Ltd [2008] EWCA Civ 286 the Court of Appeal overturned the first instance decision of Judge Gilliland QC [2007] EWHC 3159, and held that a contractor (Tyco) under a construction contract was, on a true construction, liable to indemnify its employer (Rolls-Royce) for damage to existing structures caused by Tyco's negligence, despite a contractual requirement for Rolls-Royce to maintain a joint names insurance for specified perils.

The facts

Rolls-Royce contracted Tyco to design and construct at its new assembly plant a fire protection system (the works), including a sprinkler system. During construction, a large quantity of water escaped from a supply pipe in the sprinkler system, causing damage to both the works and the existing structure of the building, including loss of goods and clean-up costs. Tyco repaired the works, but Rolls-Royce sought to recover losses arising from the damage to the existing structure. At adjudication, Tyco was directed to pay to Rolls-Royce approximately £393,000 in damages plus interest and costs, which it duly paid. Tyco subsequently sued for a declaration in the High Court that Rolls-Royce was not entitled to these sums and an order that they be repaid.

Rolls-Royce relied primarily upon an express indemnity under clause 2.3 of the contract, by which Tyco indemnified it (in unqualified terms) against damage arising out of, inter alia, Tyco's negligence. Tyco accepted (for this action only), among other things, that the escape of water was due to its (or its servants' or agents') negligence but contended that it was relieved of this liability because the parties had agreed to allocate such risk under a contractual insurance regime to a joint names insurance policy. By this regime Tyco was obliged to maintain its own public liability insurance cover and (optionally) its own professional indemnity cover. Rolls-Royce was required under clause 13.5 (upon which this case turns) to "maintain in the joint names of the Employer … and others including, but not limited to, contractors, insurance of existing structures, and in the name of the Employer …[and] the Contractor … insurance of the Works" against specified perils including burst pipes. Rolls-Royce failed to maintain these insurances but accepted it could not take advantage of its own breach, and that the contract had to be construed on the assumption that the insurance had been in force at the relevant time.

The first instance decision

Judge Gilliland QC accepted that if clause 2.3 was applicable, Tyco was liable to compensate Rolls-Royce for the damage to the existing structures, and turned to the insurance regime. He firstly rejected Rolls-Royce's contention that the joint names insurance of existing structures envisaged by clause 13.5 was not intended to cover Tyco, and held that (as "the Contractor") Tyco was within the scope of the (broad) words "others including, but not limited to, contractors" describing persons to be insured under the joint names policy in respect of the existing structures. He went on to endorse Tyco's case that, as a matter of construction of the contract, in the event of loss or damage to the works or the existing structures, the parties should look to the joint names insurance to the exclusion of the contractual indemnities. This "special regime" was illustrated by the fact that (also under clause 13.5) in the event of damage to the works (although not to the existing structures) caused by a specified peril, Tyco was required (if so instructed) to make good such damage, irrespective of who was at fault; this would be treated as a variation to the contract and Tyco would be paid from the proceeds of the insurance policy. The contract thus showed a clear intention that damage caused by specified perils was to be treated differently to other damage, and the indemnities in favour of Rolls-Royce should be read as subject to the special insurance regime. Rolls-Royce was therefore ordered to reimburse to Tyco the monies paid at the direction of the adjudicator.

Decision

The Court of Appeal unanimously reversed Judge Gilliland QC's decision. Rix LJ (who gave the leading judgment with which the Master of the Rolls and Keene LJ agreed) held that, as a matter of construction, Tyco was not within the scope of Rolls-Royce's obligation under clause 13.5 to insure the existing structure in the joint names of "others including, but not limited to, contractors". It was, he said, striking that the "the Contractor" (i.e. Tyco) was clearly named in relation to insurance of the works but not of the existing structures; moreover, the whole of the rest of clause 13.5 dealt only with insurance of the works. Rix LJ doubted whether Tyco even had an insurable interest in relation to the existing structure, for it appeared to have no property interest and (reading the contract as a whole) clause 13.5 was not intended to give it separate liability insurance. The words "others including, but not limited to, contractors" were merely intended to suggest that Rolls-Royce's policy insuring the existing structures embraced a series of joint names policies protecting "contractors" and "others". This would provide contractors with confidence that if a disaster struck the development, Rolls-Royce would have the resources to repair it and hence see to completion the contractors' works.

Accordingly, Rix LJ held there was nothing in the express language of the contract, unless it was to be found in the mere mention of joint names insurance, to suggest that there was a "special regime" in relation to existing structures which affected Tyco's other contractual obligations, in particular its obligation to indemnify Rolls-Royce for damage arising from its negligence (Cooperative Retail Services Ltd v Taylor Young Partnership Ltd [2002] 1 WLR 1419 and Scottish & Newcastle Plc v GD Construction (St Albans) Ltd [2003] BLR 131 distinguished). Rix LJ thought that the position might possibly be different in relation to damage to the works but preferred the view that the contract was structured such that Tyco's liability for negligence remained unaffected by clause 13.5 and Rolls-Royce was obliged to insure only against loss from specified perils in so far as not caused by negligence (Barking and Dagenham LBC v. Stamford Asphalt Co Ltd [1997] CLC 929 CA (Civ Div) and Surrey Heath BC v Lovell Construction Ltd 48 BLR 108 CA (Civ Div) considered). These conclusions were sufficient to dispose of the appeal.

The Court of Appeal also heard submissions on whether there is an overriding rule of law that co-insureds (under a construction contract) cannot sue one another (or an insurer sue by way of subrogation) in respect of damage within the scope of a joint names policy. Rix LJ held (cautiously, since the authorities were not fully considered, and strictly obiter), relying on observations in Cooperative Retail Services, that there is no such rule of law and the position must be determined on a true construction of the contract.

Rix LJ noted that the doctrine of circuity of action and the doctrine of an implied term in the insurance contract had been put forward to explain why it was impermissible for an insurer to sue by way of subrogation in the name of the co-assured to recoup sums paid out under the insurance from another co-assured. The circuity of action doctrine was no longer favoured following the Cooperative Retail Services case and the doctrine of the implied term in the insurance contract had been replaced by a doctrine of the true construction of the underlying contract for the provision of joint names insurance, which doctrine could itself operate with the assistance of an implied term that one co-insured could not sue another in relation to damage in respect of which they were jointly insured. There would be no difficulty where the contract clearly excluded the liability of the contractor to the employer to the extent of the regime for joint names insurance. The position was more difficult where the contract was not clear. While liability for specified perils may be influenced (perhaps strongly) by a provision for joint insurance and, indeed, a term may be implied to give effect to the 'rule', such term cannot withstand express contractual language to the contrary. Rix LJ thought that there was nothing in the doctrine of subrogation to prevent the insurer suing in the name of the employer to recover insurance paid out in the absence of a subrogation waiver.

Commentary

The Court of Appeal did not dispute that the parties to a construction contract are at liberty to allocate to a joint names insurance the risk of damage to the contract works or existing structures from specified perils regardless of who is at fault. But where insurance and indemnity provisions cover common risks, it is a question of proper construction of the contract whether the contractor is ultimately to be relieved of liability to its employer for negligence (or other contractual or common law duties or liabilities).

If liabilities are to be excluded to the extent that joint names insurance will respond to the loss, this special regime must be set out in the contract in clear and unambiguous terms. Accordingly, careful drafting is needed to ensure that the insurance and indemnity provisions cross-refer where there is scope for an overlap in liability, and the question of losses other than those covered by insurance should also be expressly addressed.

It should be noted that the comments of the Court of Appeal regarding the permissibility of claims between co-assureds within the scope of the co-insurance and/or subrogated claims brought by insurers against their co-assureds were strictly obiter. Rix LJ was at pains to emphasise that this area of the law is complex and that the Court in Tyco was not referred to a number of the well known authorities although these were explored in the judgment of Brooke LJ in the Court of Appeal in Cooperative Retail Services. This is a fertile area of jurisprudence, and Rix LJ's observations should not be regarded as the last word.

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