England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE 1993 No. ORB 551

Royal Courts of Justice

Strand

London WC2

Thursday 20th March 1997

B e f o r e:

LORD JUSTICE McCOWAN

LORD JUSTICE MILLETT

LORD JUSTICE AULD

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LONDON BOROUGH OF BARKING & DAGENHAM

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STAMFORD ASPHALT COMPANY LIMITED

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GENERAL ACCIDENT FIRE AND LIFE

ASSURANCE CORPORATION PLC

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MARTIN DANIELS

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(Handed Down Transcript of Smith Bernal Reporting Limited,

180 Fleet Street, London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR P DARLING (Instructed by Messrs Barlow, Lyde and Gilbert, London, EC3) appeared on behalf of the Plaintiff.

MR J STUART-SMITH (Instructed by Messrs Berrymans, London, EC2) appeared on behalf of the First Third Party.

MR G ANTHONY (Instructed by Messrs Finers, London, W1) appeared on behalf of the Defendant.

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J U D G M E N T

(As Approved by the Court )

Crown Copyright

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LORD JUSTICE AULD: This is an appeal by the Defendant, "the contractor", and the first third party, "the contractor's condition 6.2 insurer", against the ruling of Mr. Recorder Playford, Q.C., sitting as a Deputy Official Referee, on a preliminary issue concerning the construction of a building works contract between the Plaintiff, "the employer", and the contractor.

The employer instructed the contractor to do certain building work to its, the employer's, school in accordance with the standard form of agreement of the Joint Contracts Tribunal for minor building works, October 1988 revision. In the course of the works there was a fire. It was assumed for the purpose of determination of the preliminary issue that the contractor's sub-contractor negligently caused the fire and that it caused direct and consequential loss to the employer by damaging the building and its contents, for all of which the employer claims damages. The fire also damaged the contract works, but the employer does not and, as will appear, cannot claim for that; his remedy is simply to require the contractor to carry out and complete the works as provided by the agreement.

Condition 6 of the agreement made the contractor responsible for, and required it to insure against, loss caused by its default, including negligence (6.2). It also provided for insurance in the joint names of the employer and the contractor against certain specified perils, including fire, to the works, the insurance to be undertaken either by the contractor (6.3A) or the employer (6.3B). If the latter, the employer had also to include in the cover the building and its contents. The parties opted for the latter.

The contractor, as required by condition 6.2, insured its liability under that provision for negligent damage to the building and contents. The employer, in breach of condition 6.3B, did not effect the joint insurance cover of the building, contents and works required by it.

The employer claimed against the contractor under condition 6.2 for direct and consequential loss from damage to the building and its contents. In doing so it maintained that its failure to insure as required by condition 6.3B, although a breach of contract, had nothing to do with the contractor's liability under condition 6.2. The contractor maintained, by way of set-off and counterclaim, supported by its condition 6.2 insurer, that the employer's failure to insure had caused it a substantial loss corresponding to the damage to the building, contents and works for which condition 6.3B would have provided cover. It argued that the failure had deprived it of the protection that such insurance would have provided against much of the employer's claim against it under condition 6.2. More particularly, the contractor argued, and argues again on this appeal, that:

1. if such insurance had been effected the condition 6.3B insurers would have had no right of subrogation to sue it, the contractor, because they would have been covering the very risk; see Clarke, The Law of Insurance Contracts, 2nd ed. pp. 822-825 and Petrofina (U.K.) Limited v. Magnaload [1984] Q.B. 127, per Lloyd J. at 139C-140C, and Mark Rowlands v. Berni Inns Limited [1986] 1 Q.B. 211, CA;

and

2. if, for any reason, the employer would have sought to sue the contractor direct, the latter would have had the benefit of the joint insurance cover.

The Deputy Official Referee held that condition 6.2 expressly and clearly imposed liability on the contractor for fire caused by its negligence and that condition 6.3B, which was concerned with insurance, not liability, did not prevent the employer from enforcing such liability. He held that the agreement could not be construed so as to impose liability under condition 6.2 on the contractor for his negligent damage to the building and contents, and require it to insure against such risk, whilst at the same time effectively exempting it from such liability in respect of the condition 6.3B perils by means of the joint insurance to be effected by the employer under that condition.

He held, at pages 9B-E of the transcript of his judgment, that before the contractor could claim under a condition 6.3B insurance it would have to "demonstrate both an insurable interest and that the policy was intended to benefit him". As to insurable interest, which we are told was not argued in front of him, he said that condition 6.3B was intended, in the main, to cover a contractor's insurable interest in the works and that there was no material before him upon which he could find that this contractor had an insurable interest in the building or its contents. As to intention to benefit, he held that there can only have been an intention to benefit the contractor in respect of damage to the works. He then went on, at pages 12C-14E, to test and reject a contrary conclusion by examining various hypotheses.

Condition 6.2, headed "Injury or damage to property", provided:

"The Contractor shall be liable for, and shall indemnify the Employer against, any expense, liability, loss, claim or proceedings in respect of any injury or damage whatsoever to any property real or personal (other than injury or damage to the Works) insofar as such injury or damage arises out of or in the course of or by reason of the carrying out of the Works and to the extent that the same is due to any negligence, breach of statutory duty, omission or default of the Contractor upon or in connection with the Works or any part thereof, his servants or agents. Without prejudice to his obligation to indemnify the Employer the Contractor shall take out and maintain and shall cause any sub-contractor to take out and maintain insurance in respect of the liability referred to above in respect of injury or damage to any property real or personal other than the Works ..."

Condition 6.3B, headed "Insurance of the Works - Fire etc. -

Existing structures", provided:

" The Employer shall in the joint names of Employer and Contractor insure against loss or damage to the existing structures (together with the contents owned by him or for which he is responsible) and to the Works and all unfixed materials and goods intended for, delivered to, placed on or adjacent to the Works and intended therefor by fire, lightning, explosion, storm, tempest, flood, bursting or overflowing of water tanks, apparatus or pipes, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion

If any loss or damage as referred to in this clause occurs then the Architect/the Contract Administrator shall issue instructions for the reinstatement and making good of such loss or damage in accordance with clause 3.5 hereof and such instructions shall be valued under clause 3.6 [i.e. as variations]"

Before turning to the arguments on appeal, I pause to draw attention to certain distinguishing features of those two provisions and to condition 6.3A, the standard form's alternative to condition 6.3B.

First, condition 6.2 is primarily concerned with liability, that of the contractor, and requires it to insure in support of it. Condition 6.3B is concerned only with insurance, which it does not expressly relate to the existence or non-existence of any liability. It says nothing about liability. Neither condition refers to the other.

Second, condition 6.2 makes the contractor liable to the employer for direct and consequential loss from "any ... damage whatsoever" to the building or contents culpably caused by the contractor, but not for any loss from damage to the works, which are the contractor's responsibility and which, by condition 1.1 of the agreement, it is bound to complete. Condition 6.3B, requires the employer to insure in its and the contractor's joint names the building, contents and the works, but only against certain specified perils. Those perils are, in the main, of the "Act of God" variety, unlikely in most cases to be caused by either the contractor or the employer. For convenience, I repeat them:

"fire, lightning, explosion, storm, tempest, flood, bursting or over-flowing of water tanks, apparatus or pipes, earthquake, aircraft, and other aerial devices or articles dropped therefrom, riot and civil commotion".

Third, condition 6.3A, as an alternative to condition 6.3B, requires the contractor to insure it and the employer jointly against the same specified perils, but only in respect of the works and the cost of their reinstatement. Again, this condition says nothing about liability and does not relate the required insurance to the existence or non-existence of any liability.

Whichever option, 6.3A or 6.3B, the parties select, the clear object is to enable speedy reinstatement as necessary and resumption of the works after damage by any of the specified perils. Under condition 6.3A, they have the security of the insurance monies to enable the employer to instruct, and the contractor to obtain payment for, the reinstatement of the damaged works. Under condition 6.3B they have the additional security, in the event of damage to the building and/or its contents, of enabling the employer immediately to instruct and pay for the necessary reinstatement of the building and contents, as well as the works, so that in their respective interests the works may proceed.

Mr. Guy Anthony, on behalf of the contractor, and Mr. Jeremy Stuart-Smith, on behalf of the contractor's condition 6.2 insurer, accepted that the contractor could be liable to the employer under condition 6.2 for damage caused by its or its sub-contractor's negligence. They contended, however, that condition 6.3B required the employer to insure it against much of that damage in respect of certain specified risks, including fire. They maintained, therefore, that the recoverable damages under condition 6.2 should be reduced by the amount that would have been recoverable under the condition 6.3B insurance if it had been effected. They argued that:

- such cover, by virtue of the second paragraph of condition 6.3B, would have been applied to making good the damage to the building, contents and works, so the contractor would have been protected against any claim by the employer;

- the contractor had an insurable interest in the building, its contents and the works and, therefore, the condition 6.3B insurer would have had no subrogated right to sue the contractor in respect of the joint cover;

- the employer's breach of contract in failing to effect the condition 6.3B insurance should not put it in a better position than it would have been if it had complied with its obligation.

They also argued that the intention of the condition 6.3B insurance was to benefit the contractor as well as the employer by providing a fund for reinstatement recoverable irrespective of fault. They said that the Deputy Official Referee was wrong to reject that argument by recourse to the notion of insurable interest, namely that the interest of a contractor under a condition 6.3B insurance was likely to be limited to the works and not to extend to the building and its contents. They stressed that this was property insurance and referred to a number of bases upon which a person who is not an owner of property may yet have an insurable interest in it. These included:

1. where a person has a contractual entitlement or liability in connection with the property; see e.g. Stock v.Inglis (1883-1884) 12 QBD 564, CA; Mr, Anthony submitted that the contractor had such interest in the building and the contents by reason of its liability under condition 6.2 to pay for their reinstatement;

2. commercial convenience in effecting insurance and speedily providing a fund for reinstatement of a project involving a number of people regardless of their respective ownerships and responsibilities; see Petrofina (U.K.) Ltd v. Magnaload Ltd. [1984] 1 QB 127, per Lloyd J; this concept of convenience, it is said, justifies one of several participants having an insurable interest in the whole property, enforcing it partly on his own account and partly as agent or trustee for the others; see Hepburn v. Tomlinson (Hauliers) Ltd. [1966] AC 451, HL, per Lord Pearce at 477F-G;

3. dependence of an individual interest on that of another, e.g.: that of a leaseholder of part of a building in the preservation of the building; see e.g. Mark Rowlands Ltd. v. Berni Inns Ltd. [1986] 1 QB 211, CA; or that of a sub-contractor in the main contract works; see e.g. National Oilwell (U.K.) Ltd. v. Davy Offshore Ltd. [1993] 2 Ll. R. 582, Colman J.

Mr. Paul Darling, on behalf of the employer, submitted that the employer's obligation to insure provided by condition 6.3B does not displace the clear liability of the contractor imposed by condition 6.2. However, he acknowledged that, as the employer is in breach of his obligation to insure, the contractor is entitled to be put in the same position as if there were no breach. He maintained that the contractor could only rely upon that principle if and to the extent that it could show both that it would have had an insurable interest in the subject matter of the condition 6.3B insurance and that the cover was intended to benefit him.

In my judgment, the primary task is to construe the contract on its own terms rather than to speculate on the effect on it of some notional contract of insurance which the employer might have effected under condition 6.3B. As they arise in this case, questions of insurable interest and whether such notional insurance would have been for the benefit of the contractor depend on the nature of the insurance called for by the contract.

Although it is clear that condition 6.2 is concerned primarily with liability and condition 6.3B with insurance, the critical question is whether the two overlap by condition 6.3B requiring the employer to insure, in the specified instances, against damage for which the contractor is liable under condition 6.2. There is plainly no overlap in the following respects:

1. where the damage does not result from one of the specified perils in condition 6.3B;

2. the works - the contractor is not liable to the employer under condition 6.2 for damage to them, but the employer is required to include them in the specified cover in condition 6.3B;

3. as to consequential damages - the contractor is liable for them under condition 6.2, but the employer is not required to insure them under condition 6.3B.

That leaves as a possibility for overlap damage to the building and/or its contents from any of the specified perils in condition 6.3B for which the contractor might be liable under condition 6.2. In National Trust v. Haden Young ...... (unreported) Otton J. held at first instance that there was no overlap. On appeal to this Court, (1994) 41 Con. LR 112, Nourse LJ, with whom Russell and Henry LJJ agreed, considered that there was a potential for it, but on the facts and in upholding Otton J did not need to decide the matter.

The case concerned severe fire damage caused to Uppark House, a National Trust property, and its contents by the negligence of a building sub-contractor in the course of renewing the roof. There, as here, the employer, had not effected any insurance pursuant to condition 6.3B. It had, however, made other arrangements for the insurance of the house and its contents. The point that it may have been in breach of its contract with the main employer had not been pleaded or taken at the trial, but Mr. Kenneth Rokison, QC, for the sub-contractor, sought to argue it on appeal in support of the same argument advanced by the contractor in this case. However, the Court declined to consider the point saying that if it had been canvassed at the trial the employer might well have been able to show that the contractor had agreed to its substitute for the condition 6.3B insurance.

The Court in Haden Young, however, still had to consider and determine whether the contractor, and through it the sub-contractor, was liable under condition 6.2 for the fire damage or whether, by virtue of condition 6.3B, the employer had assumed the risk of such damage. Otton J had held that the sub-contractor's liability was unaffected by condition 6.3B. In doing so he had rejected any possible overlap between the two provisions. He had said, at pages 28-29 of the transcript of his judgment:

" The obligation under 6.3B relates to the damage or loss other than that caused by the negligence of the contractor or sub-contractor. In other words that caused by the specified perils. Thus reading these two clauses together and in this manner 6.2 and 6.3B provide a coherent and mutually supportive structure of obligations. On my construction, the employer and the contractor agreed that if there is loss or damage other than by negligence there will be insurance cover for the structure, contents, works and materials. Damage due to negligence is dealt with under 6.2. The liability is on the contractor. The liability covers everything ie structure, contents etc but excludes the works and separate insurance cover for this potential liability is required by the contractor. ... Read together in this way the language of 6.3B is not wide enough to include damage caused by fire, flood etc resulting from negligence."

As I have said, on appeal this Court upheld Otton J's ruling that condition 6.3B did not cut down the sub-contractor's liability under condition 6.2. However, it was prepared to concede a potential for some overlap between the two provisions. This is how Nourse LJ put it, at 117:

" If cl. 6.2 is read on its own, it is clear that MFB [the contractor] became liable to the National Trust [the employer] for the loss which it suffered in respect of the damage to the house (excluding the works themselves) and those of the contents which it owned. ...

It is said by Haden Young that the foregoing effect cannot be given to cl 6.2 because, when it is read with cl 6.3B, it is seen that the contractor is not intended to be liable for damage to the existing structures and their contents by fire, even if the fire is caused by the contractor's or a sub-contractor's own negligence. If regard is had only to the wording of the two provisions, that is an impossible construction of their effect. Cl 6.2 imposes liability on the contractor for damage caused to any real or personal property (other than the works themselves) by his own or a sub-contractor's negligence. The liability is unlimited and the requirement to insure against it ancillary. In contrast cl 6.3B requires the employer to insure specific property, namely the existing structures and their contents, the works and all unfixed materials and goods pertaining thereto, against specific risks. More significantly, it says nothing at all about liability, and the only basis on which it can be suggested that it was intended to limit that which has been declared to be unlimited is the probability that the employer's insurance would cover a fire caused negligently by the contractor or a sub-contractor. That is no basis for doing such violence to the terms of cl 6.2. It only means that the parties must be taken to have contemplated a potential overlap between the two provisions, with the employer's recoverable damages under cl 6.2 being liable to be reduced by the amount recoverable under the insurance or vice-versa. Further than that it does not go." [my emphasis]

Nourse LJ went on to deal with a number of other arguments

advanced on behalf of the sub-contractor to the effect that such

potential overlap could be sensibly and coherently avoided by

construing condition 6.3B as qualifying condition 6.2 so that the risk of damage through fire, however caused, is to rest with the

employer. He then continued, at 118:

"The essential fallacy in them is the assumption that an obligation to insure against loss can, without more, throw that loss on the insured when, by another provision of the contract, it is to be borne by the other party. It is misleading to speak of the apportionment or allocation of risk in this context. At the cost of repetition, I emphasise that Mr Rokison's submissions can only succeed if cl 6.3B limits not risk but liability. It would have to limit the contractor's liability which, by cl 6.2 is declared to be unlimited. It is obvious that it cannot have that effect. The necessary words are just not there.

...

Otton J. thought that the obligation to insure under cl. 6.3B did not relate to damage or loss through a fire caused by the negligence of the contractor or a sub-contractor. I have already made it clear that I do not accept that proposition. I think that the parties must be taken to have contemplated the probability that the insurance would cover a fire so caused. It is because I do not boggle at any resulting overlap that I nevertheless agree ... that ... MFB was liable to the National Trust for the whole of the loss which it suffered in respect of the damage to the house (excluding the works themselves) and those of the contents which it owned." [my emphasis]

It is clear from Nourse LJ's reasoning in those passages that he rejected the mere contemplation of the parties of the potential for overlap in the insurance when effected as a reason for cutting down the contractor's liability under condition 6.2. He did not hold that there was such an overlap in the sense of a contractual requirement or indeed that the parties' intention or understanding was that overlapping insurance was required to be effected. If he had had to consider the point in the sharper focus of the facts and arguments in this case it may be that he would not have been prepared even to concede the potential for overlap.

I respectfully disagree with Nourse LJ's expressed rejection of Otton J's reasoning on the point. In my judgment, the two provisions are concerned with entirely different types of damage, in addition to the distinctions to which I have already referred. Condition 6.2 governs liability for damage culpably caused by the contractor. Condition 6.3B and its alternative 6.3A require insurance for certain damage not culpably caused by it. My reasons for that conclusion are as follows:

Neither condition refers to or qualifies the other. Cf. James Archdale & Co. Ltd. v. Comservices Ltd. [1954] 1 WLR 459, CA; and Scottish Special Housing Association v. Wimpey Construction UK Ltd. [1986] 1 WLR 995, HL; and other cases on comparable but clearly inter-relating provisions in the JCT Standard Form of Building Contract discussed in Keating on Building Contracts, 6th ed. pp. 607-8. Condition 6.2 imposes an unqualified liability on the contractor. Condition 6.3B contains no words indicating that the employer must insure against the specified perils in such a way as to suggest that they include those caused by the contractor's negligence. For example, it does not require the employer to insure against loss or damage "howsoever caused" or "whether or not it is loss or damage for which the contractor is liable under condition 6.2". Equally, there are no words in condition 6.3B expressly excluding the risk of damage to the building or contents for which the contractor was liable under condition 6.2. But none is needed, given the different function of the two provisions and the clear contrary effect of condition 6.2, imposing on the contractor, not only liability for damage caused by its negligence, but also an obligation to insure in respect of it. It follows that, in my view, if the employer had effected a condition 6.3B insurance it could properly, and consistently with condition 6.2, have excluded from cover any loss or damage caused by the contractor's negligence.

Most of the specified perils for which insurance is required under condition 6.3B are of a type resulting only from natural phenomena - "Acts of God" - or are not normally the responsibility of either contracting party. In my view, that is how "fire" should be interpreted in that context. That is how Slade LJ interpreted it in Dorset County Council v. Southern Felt Roofing Company Ltd. (1989) 48 BLR 99, at 106, when considering a comparable brace of provisions, the latter clearly imposing on the employer the risk of a number of similar natural hazards, including fire:

"Now fire, no less than the impact of lightning, can occur without the negligence or fault of any human agency. If the draftsman chose to refer to a number of possible other causes of damage which involve no fault on the part of anyone, I do not see why, in referring to fire, he should not be taken to have similarly had in mind damage by fire occurring without negligence on the part of the Contractor."

The ruling of this Court in Mark Rowlands Ltd. v. Berni Inns Ltd that it is of the essence of fire insurance that it covers damage from fires caused by accident or negligence is to no point in this context. The Court is not here concerned with a contract of fire or other insurance; it is concerned with a building contract containing an obligation to insure against fire as one of a class of perils most of which ordinarily do not result from anyone's negligence.

If the condition 6.3B insurance were required to cover loss or damage caused by the specified perils, including fire, for which the contractor was liable, there would be unnecessary expense and duplication of insurance cover because the contractor is already bound to insure against it in respect of the building and contents under condition 6.2. In that instance both parties would be providing the same cover. If they had chosen the alternative provided by condition 6.3A, there would be double cover in respect of the works. Neither outcome can have been intended by the draftsman of these provisions.

More generally, it cannot sensibly have been the intention of the draftsman of the standard conditions, or of the parties when entering into the agreement, that the employer's condition 6.3B insurance would enure for the benefit of the contractor so as to enable him to escape liability for his own negligence imposed by condition 6.2 (and at common law). That is one of several features of this case which distinguishes it from Mark Rowlands Ltd. v. Berni Inns Ltd. and the Canadian authorities to which Kerr LJ referred at 229H-232A. The arguments to the contrary advanced by Mr. Anthony and Mr. Stuart-Smith, based on the contractor's supposed insurable interest in the building and contents for this purpose, are artificial and circular. They assume what they seek to establish, namely that the agreement, properly construed, provides the contractor with an insurable interest in effectively avoiding liability for his own negligence.

The contractor's contractual entitlement and obligations must first be determined to see what, if any, insurable interest they would support. If it is to be regarded as a matter of commercial convenience, as urged particularly by Mr. Stuart-Smith, what commercial convenience is there in entitling the contractor to recover the bulk of the cost of remedying the fire damage to the building and its contents in addition to that of reinstating his own works? As Lloyd J recognised in Petrofina, at 135, there is no basis for applying to a context such as this the historical and special rules applicable to bailees. In my view, there can be no sensible justification for treating the contractor as an agent or trustee for the employer in respect of the employer's cost of reinstating its own building and replacing its contents simply to enable the contractor to recover the cost of reinstatement of the works. The proposition is even less sensible when it is remembered that its effect here would be to enable the contractor to mount a set-off and counterclaim based on loss caused by its own negligence and for which condition 6.2 expressly makes it liable.

In my judgment, accordingly, the various arguments of Mr. Anthony and Mr. Stuart-Smith in support of the alleged insurable interest of the contractor and of the intended benefit to him of a condition 6.3B insurance, if effected, founder on the clear construction and intention of the contract. That is that the contractor should pay for its own default and that it and the employer should have insurance cover to ensure speedy reinstatement of the building, contents and works damaged by circumstances which are not the contractor's fault.

I would dismiss the appeal.

Millett LJ. I agree

McCowan LJ. I also agree

ORDER: Appeal Dismissed

Leave to Appeal to the House of Lords - Refused