England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LORD BRENNAN Q.C.
Sitting as a Deputy Judge of the High Court

		Royal Courts of Justice Strand, London, WC2A 2LL Friday 29th June 2001

LORD JUSTICE SCHIEMANN:

1. Permission to appeal is granted. This is an appeal from Lord Brennan Q.C. sitting as a Deputy Judge of the High Court. His judgment is reported in [2000] Building Law Reports 126. He had to decide preliminary issues as to whether the Defendant was liable for fire damage to the property of the claimants at which building works were being carried out by the first defendant and its sub-contractors. It was assumed for the purposes of the preliminary issues that the cause of the fire was the negligence of the first defendant.
2. The background to the case is not in dispute and is well set out by him in the judgment under appeal. In 1998 the claimants purchased Mascalls Farm in North Chailey, East Sussex, for £400,000. Having decided to renovate the farm, they contracted with the first defendant for the works. These included the renewal of the plumbing at the farm.
3. The first defendant had given quotations for the work which included a copy of their standard terms. It is admitted by the claimants that those terms were incorporated into the agreement for the works. The material terms provided:

(a) by clause 6:

"MATERIALS – the property in unfixed materials shall not pass until all materials shall have been paid for in full. All materials on the site fixed or unfixed are at the sole risk of the client and in the event of any of the same being damaged, destroyed or stolen, we shall be entitled to full payment therefore, and also for any work damaged, destroyed or lost, and the cost of replacing and of reinstating or restoring any such work shall be charged as an extra, provided that the client shall not be responsible for any loss occasioned solely by the negligence of our employees".

(b) clause 15:

"works covered by the this estimate, existing structures in which we shall be working, and unfixed materials shall be at the sole risk of the client as regards loss or damage by fire and the client shall maintain a proper policy of insurance against that risk in an adequate sum. If any loss or damage affecting the works is so occasioned by fire, the client shall pay to us the full value of all work and materials then executed and delivered".

(c) clause 16:

"The client shall indemnify us against all liability, loss, costs, claims or demands in respect of injury to persons and/or damage to property arising from any cause other than our negligence or that of our employees".

4. The claimants had obtained insurance for the farm to cover buildings, including cover against loss or damage caused by fire. This insurance was a condition of the mortgage on the farm granted to the claimants by the bank giving the loan.
5. The first defendant, without reference to the claimants, sub-contracted various parts of the works. On 16 April 1999, whilst plumbing works were being carried out, a fire occurred at the farm, giving rise to damage said to amount to £492,000. It appears that the claimants are underinsured due to an under-valuation by estate agents. This did not arise due to any fault of the first defendant.
6. The hearing before the judge involved only the claimants and the first defendant. For the purpose of the trial of these preliminary issues the first defendant accepts that the fire at the farm was caused by its negligence or that of its employees or sub-contractors. This is without prejudice to the denial of negligence contained within the first defendant's defence.
7. The first defendant submitted that clause 15 had the effect of excluding any liability for loss of damage arising out of the fire, including any caused by the negligence of the first defendant or its sub-contractors. The claimants contended that clause 15 upon its proper construction does not exempt the first defendant's liability for loss and damage if the fire arose as a result of the negligence of the first defendant or its sub-contractors.
8. The judge accepted the first defendant's submissions. He held that even if the fire which destroyed the works was caused by the negligence of the builders the employers could recover no damages and the builders could recover the cost of the work that had been destroyed by the fire. The employers appeal.
9. The law as such is not in dispute although there is said to be a tension between cases concerned with exemption clauses and cases concerned with parties each of whom is concerned with allocation of a risk intended to be covered by insurance.
10. Since the clause formed part of the first defendant's standard terms the contra proferentem rule applies so that any ambiguity in the clause will be resolved against that proferens: This is common ground.
11. So far as the law relating to exemption clauses is concerned the classical starting point is the speech of Lord Morton in Canada Steamship Lines v The King [1952] AC 192 at 208.

"(1). If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called "the proferens") from the consequence of the negligence of his own servants, effect must be given to that provision….

(2). If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against the proferens…

(3). If the words used are wide enough for the above purpose, the court must then consider whether "the head of damage may be based on some ground other than that of negligence"… The "other ground" must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it; subject to this qualification… the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants".

12. Thirty years later the law was usefully summarised by Stephenson LJ in

"The Raphael" [1982] 2 Lloyd's Law Reports 42 at pages 50 and 51

"There are certain considerations and principles to be kept in mind in interpreting all such clauses. As with all written contracts the court starts by trying to discover the intention of the parties from the language they have used in the particular clause, considered not in isolation but in the context of the whole contract. Common sense then tells the interpreter that –

… it is inherently improbable that one party to the contract should intend to absolve the other party from the consequences of the latter's own negligence… [as Lord Justice Buckley said in Gillespie Bros. & Co. Ltd. V Roy Bowles Transport Ltd. [1973] 1 Lloyd's Rep. 10; [1973] Q.B. 400 at pp 19 and 419 of these reports, with the approval of Viscount Dilhorne in Smith v South Wales Switchgear Co. Ltd., [1978] 1 WLR 165 at p. 168 of the report of that case]

So the party relying on such clauses needs plain words to cover his negligence and its consequences and that can be done either expressly, by using the word "negligence" or "negligent", or by necessary implication. These are the first two heads of the court's duty summarised by Lord Morton of Henryton in giving the judgment of the Privy Council in the Canada Steamship Lines case, [1952] 1 Lloyd's Rep 1; [1952] AC 192, as interpreted by the House of Lords in Smith v South Wales Switchgear Co. Ltd., [1978] 1 WLR 165.

The Courts are not often confronted with a clause so barefaced as to claim exemption for, or an indemnity against, a party's own negligence in express terms. The reason is no doubt that referred to by Lord Justice Salmon in Hollier v Rambler Motors (A.M.C.) Ltd. [1972] 2 QB 71, at p. 78 of the report, that merchants and others are "a little shy" of so bluntly warning their customers of a protection for one party so unattractive to the other. But what the parties to a contract contemplate is its performance, the performance of its primary and ancillary obligations, by parties competent to perform them, and one party will not necessarily refuse to accept the risk of the other's want of care and competence in performing those obligations. Accordingly, that risk may be accepted, and the reports supply instances of attempts to construe the language of such clauses as covering negligence by necessary implication.

When a party attempts that task, he shoulders the burden of proving that the language is plainly wide enough and that the implication is necessary. Even if the words are wide enough, the implication is not necessary and will not be made if there is a head of damage based on some ground other than that of the party's own negligence, which is not fanciful or remote but reasonably likely to have been contemplated by him as requiring that he should be protected against it. If there is another such likely head of damage, then on its true construction his clause will be taken to protect him against liability for that damage and not against damage resulting from his own negligence. If there is no such head of damage, the court is under no duty to seek out, or think up, remote and far-fetched possibilities in order to defeat the intention, which would otherwise be derived from the plain meaning of the clause, to protect the party relying on it from liability for negligence."

The Judge's reasoning

13. The Judge's reasoning is set out in paragraphs 37 and 38 of his Judgment

37. The composite purposes of clause 15 are to provide for the distribution of liability, insurance and consequential payments between the employer and the contractor. This is achieved by:

(a) identifying that the employer is to bear "the sole risk" of fire, so dealing with liability as to who would carry the risk for that hazard;

(b) allocating the obligation to insure against the employer, and to do so adequately;

(c) in the event of fire, obliging the employer to pay the contractor the full value of all work and materials then executed and delivered.

38. The proper construction of the words of clause 15 demonstrates that:

(a) The phrase "at the sole risk of" powerfully indicates, in particular by the emphatic adjective "sole" that the whole risk of fire is to be borne by the employer. The obligation is unqualified. It would be superfluous to add words such as "howsoever caused" to that which is already plain.

(b) Equally, the word "fire" is all-embracing. As Lord Keith indicated in Scottish Special Housing Association, "no differentiation is made between fire due to the negligence of the contractor and that due to other causes". None is necessary. Here the operative words are clear that the works "shall be at the sole risk of the client as regards loss or damage by fire…"

(c) The requirement to insure is part of the same sentence as that putting the sole risk on the client of loss or damage by fire. This is qualified, but only by way of reinforcement in requiring that the insurance to be maintained shall be "in an adequate sum". Thus sole risk and the obligation to insure are inextricably linked.

(d) It is self-evident that in the event of fire, clause 15 anticipates payment to the contractor by the employer of the sum due from, inter alia, the benefits of such adequate insurance. It is unnecessary that the clause should descend to detailed terms as to insurance benefit and distribution of insurance recovery. The clause provides that as the between the employer and the contractor it is for the employer to insure against fire for the benefit of them both.

(e) None of clauses 6, 16, or 15 refer one to the other, nor does any one qualify any other. Their terms reinforce the conclusion that, as clauses 6 and 16 expressly fix risk for those matters on the employer, except where the cause of any damage is the negligence of the contractor or its sub-contractor, then the unqualified allocation of risk to the employer in clause 15 is all the clearer.

(f) Clause 15 in fact stands apart from the other clauses and effect can clearly be given to it so as to put the risk of fire on the employer even where the cause is the negligence of the contractor or its sub-contractor. Clauses 6 and 16, if referred to, reinforce this construction.

The Appellant's submissions

14. The core of the submissions by Mr Ali Malek Q.C. was that a fire caused by a contractor can expose him to liability even in circumstances where there is no negligence on his part. For example, a fire can arise giving rise to a liability in nuisance. Furthermore if the contractor installed items into the building it would be liable for defects in the goods supplied whether it was negligent or not (for example, in respect of wiring or goods supplied). It therefore could not be said that the only liability that the first defendant could have where a fire was involved was in negligence. Applying the third test in Canada Steamship there is a possible head of damage other than negligence. This was fatal to reliance by the contractor on clause 15 as covering negligence. Nor could it be said that these examples where a fire is caused in circumstances not involving negligence are fanciful or remote. The work that was being done was hazardous (ie hot work). The contractor was supplying goods such as radiators and kitchen equipment (such as an oven, a dishwasher and fridge).
15. He elaborated his core submission as follows.

1. The contract with which we are concerned is a contract for goods and services which, absent contrary agreement, would be subject to the implied terms as to quality as to goods and as to care and skill as to services implied by the Supply of Goods and Services Act 1982.

2. A fire could be caused without provable negligence on the part of the builder. He instanced as possible causes acts by third parties, deliberate or accidental, such accidents as the rays of the sun causing a bottle to act as a magnifying glass causing combustion and defective goods or tools.

3. Under the common law if one of these causes resulted in a fire which damaged but did not destroy the works then the builder would be left with the responsibility of making good the damage and could not claim the extra cost : Hudson's Building and Engineering Contracts (11^th. Edition) para 4-004, 4-428.

4. There was therefore ample reason for the builder to have clause 15 as one of his standard conditions of contract. It would enable him to recover from the employer in such circumstances.

5. Such an arrangement would seem quite reasonable to an employer whereas an employer would not expect to pay the builder for putting right that which had been caused by the builder's negligence unless this had been made crystal clear in the contract between the employer and the builder.

6. Approaching this contract in the manner suggested in the passages quoted above from Lord Morton and Stephenson LJ, and bearing in mind that there was ample scope for the operation of clause 15 quite apart from cases involving negligence by the builder, it would not be right to construe clause 15 in the manner adopted by the Judge.

7. Under clause 6 the employer is expressly relieved from responsibility to the builder for any loss (including by implication loss by fire) caused to unfixed material by the builder's negligence. He submitted that the construction of clause 15 adopted by the judge resulted in the employer having such responsibility. The only way these two clauses could be read so as to give the same result was to construe clause 15 as excluding liability for damage caused by fires resulting from the builders' negligence.

The Respondent's submissions

16. In riposte to those submissions, Michael Douglas Q.C. for the builders submitted that the judge had arrived at the right conclusion for the right reasons. If one looked at clause 15 on its own its effect was clear. The parties had made express provision against the eventuality of loss caused by fire. One could assume that they had realised that such a loss might be more than either party could bear unaided by insurance; that they had decided that the insurance should be taken out by the employer and that the employer and that the proceeds of the insurance would enable the employer to pay the builder for the loss caused by the fire.
17. He submitted that the chances of the fire being caused by anything other than builders' negligence were fanciful and remote and that therefore, even applying the threefold approach in the Canada Steamship case the judge was justified in the conclusion to which he came.
18. He submitted that in any event the threefold approach should not be rigidly applied especially in cases which the parties had made express provision for insurance. Such insurance should in principle ensure that everyone was fully compensated for the disaster. Although the cost of the premium fell on one side it could be assumed that, notionally at any rate, that factor had been taken into account in the price structure of the contract.
19. He submitted that if one looked beyond clause 15 at clause 6 one saw that the phrase "at the sole risk of the client" occurred there also. In the context of clause 6 it was plain that it proceeded on the basis that these words on their face included loss caused by the builders' negligence and that this was why the concluding words (removing responsibility for any loss occasioned solely by the builder's negligence) had been added. He submitted that in clause 15 the words "at the sole risk of the client" should bear the same meaning as they bore in clause 6; had the parties wished to add to clause 15 concluding words such as those found at the end of clause 6 they could have done so. They had not.
20. He, however, accepted that clause 15 could not be read as providing that the employer must bear the risk of deliberate acts of vandalism by, for instance, disgruntled employees of the builder. This concession, understandably made, inevitably reduced the force of his submission that the words must be given their plain meaning.

Conclusion

21. It is inherently improbable that a private person engaging a builder would wish to exempt him from his own negligence, although I would accept that, if the private person is obliged under the contract to take out a contract of insurance, this can sometimes diminish the force of this point. It is for the negligent person who is seeking to rely on the contract to excuse himself from the consequence of his own negligence. If he wishes to do this he must do it clearly so that the point is brought to the attention of the other contracting party.
22. The crucial question is whether the words of clause 15 construed in context can not sensibly be construed other than as exempting the builder from liability for his own negligence. The judge held that this was so. There is force in the matters to which he referred and there is force is the respondent's contentions. However, after some hesitation, I have come to the conclusion that I disagree with the Judge. The clause is not phrased as a clause exempting from liability. The interrelation of clauses 6 and 15 is such that their effect can only be reconciled either by construing clause 15 in the way contended for by the claimants or by inserting words in clause 6 so as to add at the end after "any loss" some such words as " other than a loss caused by fire". Given that tension and resolving any doubt against the builder (whose clause it is) I do not regard the contract as expressly exempting him from the consequences of negligently causing a loss by fire.
23. Moving on to stage 2 of Lord Morton's test, I accept that the words of clause 15 are wide enough to cover the consequences of the builder's negligence.
24. This takes us to stage 3. There are indeed a number of far from fanciful examples in which, without negligence, a builder might be held liable for a fire resulting from goods supplied and work done by him. The application of the third of Lord Morton's tests is fatal to the builder's contentions.
25. While I accept that those tests are not to be applied as though they were contained in a statute they do still embody the approach of the law and I do not regard the fact that in the present case there was an insurance aspect to the case as making them inapposite. Insurance provisions are primarily in a contract in order to provide a fund in the event of the risk eventuating. They are not there primarily for defining the obligations of one party to the other.
26. There are in the present case several realistic reasons why the builder might wish to ensure that the employer had a fund available in the event of a fire not caused by the builder's negligence. Thus the clause has a perfectly good commercial purpose even if it does not have the effect of exempting the builder from the consequences of his own negligence.
27. I would therefore allow the appeal on the basis that clause 15 does not exempt the builder from liability. In those circumstances it is unnecessary for me to deal with the submission, rejected by the Judge, that the clause could not survive the application of the Unfair Contract Terms Act 1977.

SEDLEY L.J:

28. One of the dubious wares in which lawyers deal is the plain meaning of words. Words often have a meaning which linguistically is perfectly straightforward but which makes no sense, or unacceptable sense, when it is applied to particular facts. Interpretation, moreover, only happens when words are applied to facts. The example beloved of law teachers is the proposal to put a World War II tank on a plinth in a park regulated by a by-law which bans motor vehicles. Contracts, a form of law made for themselves by private parties, are no more immune to this fate than are statutes, of which Stair remarked more than three centuries ago:

"….the lawgiver must at once balance the conveniences and inconveniences; wherein he may and often doth fall short….".

29. In the present case, as in most cases on the interpretation of contracts which reach this court, the words fall short of the facts. It may be axiomatic that we are to deduce the parties' intention from the words they have used, but the intention itself is in most such cases a fiction. Occasionally, it is true, something which has been agreed on has just been poorly expressed and can be elucidated; but far more often the parties have simply and understandably not even thought about the event which has now caused a problem. No more than a legislature can they be expected to anticipate every eventuality; but when the unexpected happens, as it regularly does, they and the courts have only the now insufficient words on the page to fall back on.
30. What is the court then to do? It may not simply make the contract which it believes the parties would have made if they had thought about the issue. It must keep in focus those agreed purposes which are evident. It must give what effect it can to the words on the page. But since, ex hypothesi, the words on the page do not fit the facts, the court has to work creatively; and consistency requires it to do so by adopting and observing principles – in lawyers' language, rules of construction. Of the several useful summaries we have looked at, the principles can be found conveniently set out in the judgment of Stephenson LJ in The Raphael [1982] 2 Lloyd's Rep. 42, 501, cited by Schiemann LJ in paragraph 12 above. Subject to the caveat I have entered about the parties' intentions, this seems to me to contain all the relevant pointers. Where do they take us?
31. I think that they take us to the point of allowing the appeal on the grounds given by Schiemann LJ. To this extent we are unavoidably intervening in the contract made by the parties, because the process of reasoning has in the end to go something like this: the words on the page make perfectly good sense in the defendant builder's favour; but if you apply them to his own negligent – or for that matter deliberate – acts they seem less sensible; so you ask whether the parties meant to go that far; before answering, you remind yourself that A does not ordinarily agree to absolve B from the consequences of the B's own neglect or malice; you therefore look for words which make such absolution plain; and, finding none, you conclude that the words on the page do not mean what they say.
32. "Construction" has two meanings, one derived form the verb to construe, the other from the verb to construct. It may be as well to admit that under the guise of the first, the courts in cases like this are doing the second. We mitigate the uncovenanted effects of literalism not by nakedly writing a new contract for the parties but by construing the words according to principles which enable the contract, in effect, to be reconstructed. It is a very reasonable stopping place on the road that runs between second-guessing parties who have simply contracted incautiously and leaving a party at the mercy of unconsidered words.
33. It might be no more than a recognition of human fallibility if we were to acknowledge that all contractual and legislative provision can usefully be subjected to a "What if?" test, and that its response to the test may legitimately affect the meaning the courts accord it. The question can be asked hypothetically and in advance of events – as happens in the committee stage of Bills – or practically when the unexpected happens, as here. Either way, the outcome may have to be a revision of the ostensible meaning or words to obviate extravagance in their effect. Seen as interpretation, it is more nearly that of the concert artiste than that of the linguist. But I see no embarrassment in saying that it is how the courts creatively find a just outcome in a contractual or legislative impasse, and that this is what the courts are there for.
34. Here, then, we have in effect to ask "What if the builder's own workmen negligently or even deliberately cause the fire? Does clause 15 really exempt him from liability?" I have been persuaded by Mr. Malek that the answer should be no for essentially these reasons. First the clause is not framed as an exemption clause at all but as an insurance clause. Secondly, clauses 6 and 16 expressly deny the builder such exemption in related contexts. Thirdly, Mr. Douglas himself, by drawing a necessary line between negligent and deliberate damage when both are ostensibly within the exclusion, has forfeited his hold on the literal meaning of the clause. Fourthly, the fact that the purpose of clause 15 is simply to require the client to insure both parties against fire damage, while powerful, is not sufficient to overcome the law's disinclination to let people contract out of the consequences of their own neglect. This is not a case where the client has manifestly assented to such an exemption, and on principle nothing less will do.
35. Accordingly I too would allow the appeal.

SIR MURRAY STUART-SMITH: I agree.

ORDER: Appeal allowed; costs below and in Appeal to be subject to detailed assessment. Permission to appeal to the House of Lords refused. (Order does not form part of approved Judgment)