England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
(His Honour Judge Lloyd QC)

		Royal Courts of Justice Strand London WC2 Wednesday, 18th July 2001

1. LORD JUSTICE POTTER: This appeal concerns the construction of the terms of an insurance policy entered into by the respondents, Forest Giles, in relation to subcontract works carried out by them for the appellants, Longley, in the construction of a new building at the University of Surrey Research Park. The relevant policy was entitled "Builders Contractors and Allied Trades Combined Policy". It was issued by the New Zealand Insurance Plc. The cover with which the court is concerned is that provided under section 3 headed "Public Liability".
2. Both Forest Giles and Longley are now in receivership. The issues are canvassed between them because Longley accepts that, if it is successful in its claims against Forest Giles arising out of the development, the only money available to meet its claims would be the moneys (if any) due to Forest Giles under the policy.
3. By a judgment dated 2nd April 2001 in the Technology and Construction Court, given in relation to a number of agreed issues, His Honour Judge Lloyd QC decided in favour of the position advanced by Forest Giles, that sub-issues 1.1 and 2.1 be answered in the negative, the effect of which was that any liability of Forest Giles for the cost of certain remedial works claimed by Longley from Forest Giles, in the sum of £68,394.88, and a further claim by Longley for loss and damage in respect of sums paid by Longley to the developer, were held to be outside the terms of section 3 of the policy. The judge refused permission to appeal. However, permission was granted by Longmore LJ on 25th May 2001.
4. The background to the claims is sufficiently set out in the agreed statement of facts, which are stated to be agreed simply for the purposes of the Part 8 claim. The development was carried out by Research Park Developments ("Research Park") pursuant to a development agreement dated 4th November 1992, made with Borax for the construction of its new headquarters and research unit.
5. I will read with numbering the relevant paragraphs of the statement of facts because it will assist later in relation to references for the purposes of the judgment:

"2. Relevant terms of the development agreement included:

'6.7.14 at Practical Completion [Research Park shall use its best endeavours to ensure] the site is left in full repair and in good and clean condition cleared of all unused building materials plant and equipment used in the works and temporary structure.

22. Research Park shall pay or allow Borax the sum of £40,000 per week or part thereof for any delay in Practical Completion (as extended (if at all) in accordance with Clause 6.4 of the Agreement').

3. The claimant ('James Longley') was a main contractor employed by Research Park to construct the buildings.

4. The main contract between James Longley and Research Park was entered into on or about the 22nd March 1993 and was substantially in the standard JCT form of building contract 1980 private edition with quantities incorporating amendments 1, 2 and 4 to 11 ('the main contract'). The main contract included the usual indemnity provisions of clause 20 JCT 80.

5. The date for completion of the main contract works, as extended by the architect pursuant to section 24 of the main contract, was the 17th June 1994.

6. The target date for completion under the development agreement was extended to the 13th June 1994, with a revised handover date of the 4th July 1994.

7. The Respondent ('Forest Giles') was a sub contractor specialising in, amongst other things, the laying of vinyl floors.

8. By a sub-contract in writing made on or about the 28th July 1993, James Longley appointed Forest Giles to supply and deliver materials and to carry out vinyl flooring as part of the main contract works, as more particularly described in the sub-contract and the specification attached thereto.

9. ...

10. Forest Giles took out a policy of insurance... to cover it against, amongst other things, its potential public liability arising out of the sub-contract works. The period of insurance was from 7th July 1992 to 18th October 1994....

11. The specified flooring finish for the floors of the laboratory areas on the ground and first floors of the building was Altro Designer 25 heavy duty safety flooring, which is a type of vinyl sheet flooring.

12. Forest Giles laid the vinyl sheet on a thin layer of latex screeding, over a 200mm thick Lytag screed vapour barrier and a 200mm concrete floor plank.

13. Forest Giles laid the screeding to the ground floor of the building between the 6th and the 24th September 1993.

14. Forest Giles laid the screeding to the first floor of the building between the 3rd and the 25th October 1993.

15. On or before the 17th June 1994, the architect observed a wrinkled and/or rippled effect over the heavy-duty vinyl flooring laid by Forest Giles. Thereafter, sections of the flooring were cut, revealing that the adhesive used by Forest Giles had not adequately cured, because of excessive moisture contained within the Lytag screed....

16. As a result of the bubbling effect substantial remedial works were required to be carried out by or on behalf of James Longley, which works, amongst other matters, involved:

16.1 The removal of the original vinyl sheet flooring laid by Forest Giles;

16.2 Cleaning off the levelling screed laid by Forest Giles;

16.3 Removing the Lytag screed surface laid by Forest Giles.

16.4 Reapplying the levelling screed and the vinyl sheet flooring.

17. The cost of these remedial works was £68,394.88 which was incurred by James Longley.

18. The remedial works were completed on the 19th August 1994.

19. By reason of the remedial works, the handover date under the development agreement of the 4th July 1994 could not be achieved.

20. Pursuant to clause 22 of the development agreement, Research Park potentially became liable to Borax in respect of liquidated damages at the rate of £40,000 per week for at least seven weeks, making a total of £280,000;alternatively Research Park potentially became liable to pay damages to Borax for breach of clause 6.7.14 of the development agreement.

21. In or about November 1994, Research Park settled the claim with Borax for the total sum of £317,644. Of the sum of £317,644 Research Park informed James Longley that £260,000 related to 'compensation payment made to Borax.'The balance was in respect of legal and other professional fees, interest, security costs for extended protection of the building and extended building insurance cover.

22. On the 23rd November 1994, Research Park commenced arbitration proceedings against James Longley, claiming a total of £520,000 for the recovery of its losses which had arisen by reason of the bubbling effect, which pleaded losses included the following:

22.1 The sum of £260,000 claimed as actual damages paid by Research Park to Borax.

22.2 Liquidated damages from the 17th June to the 12th September 1994 at a total of £40,000.

23. On the 17th June 1994, the architect under the main contract issued a certificate of practical completion.

24. On the 15th November 1996, the arbitrator in the Research Park/James Longley arbitration published a consent award, pursuant to which James Longley was obliged to pay the total sum of £160,000 to Research Park, which sum was subsequently paid.

25. Prior to the Consent Award James Longley had been advised by its solicitors, Winward Fearon, that:-

25.1 Research Park had no liability to Borax for liquidated damages.

25.2 James Longley had no liability to pay liquidated damages to Research Park.

25.3 There was a potential liability of James Longley to pay general damages to Research Park.

26. James Longley has paid the sum of £160,000 to Research Park..."

6. As a result of agreement reached between the parties immediately before the commencement of the trial of a list of issues, the judge only had to deal with sub- issues 1.1 and 2.1 which read:

"Did all or any of the remedial works described in paragraph 11 of the points of claim in the subcontract arbitration, and paragraph 17 [that should be 16] of the Statement of Agreed Facts, arise from 'damage to property' for the purposes of section 3(b) of the insurance policy?

2.1 Did the loss and damage or liability of £160,000 described in paragraphs 18 and 19 of the points of claim in the subcontract arbitration and paragraphs 24 and 26 of the statement of agreed facts arise from 'damage to property' for the purposes of paragraph 3(b) of the insurance policy?"

7. The first issue related to whether Forest Giles "is liable as a matter of principle to indemnify Longley for all or any of the costs of the remedial works", and the second related to the question: if Forest Giles was liable for the payment by Longley, was that sum recoverable under the policy? Both turned on whether there was damage to property and whether the insurer was otherwise exempt.
8. As already indicated, the policy concerned is a "combined policy". It consists of an introduction followed by a "general definition" and then "general exceptions", after which there follow three sections which provide different categories of insurance: section 1 "All Risks"; section 2 "Employers Liability" and section 3 "Public Liability". The introduction reads:

"The insured has by a proposal which is the basis of and forms part of this contract and carrying on the Business described in the schedule applied to The New Zealand Insurance plc (hereinafter called the Company) for this Insurance and has paid or agreed to pay the premium for the period of insurance or any subsequent period.

The Company will, subject to the terms of this Policy, indemnify the Insured as defined in any Section to which the policy applies."

9. So far as the sections are concerned, Forest Giles did not take out cover under section 1, the "All Risks" section. It is not known whether it took out cover under the "Employers Liability" section. We are concerned only with the cover provided under section 3, "Public Liability". In any event, the second sentence of the introduction quoted makes clear that each section is self-contained so far as the definition of the cover is concerned.
10. Section 3, headed "Public Liability" begins:

"All sums for which the Insured shall be liable at law for damages in respect of

a) Bodily injury to any person

b) Damage to property

c) Obstruction loss of amenities trespass or nuisance

occurring during the period of Insurance and arising in connection with the Business."

11. Under the general definitions section of the policy there were the following relevant definitions:

"Damage Damage shall include loss.

Product Product supplied shall mean any product (including containers and packaging) sold supplied constructed erected repaired serviced tested or processed altered treated or installed by the Insured in the course of the Business in or from the United Kingdom the Channel Islands or the Isle of Man.

WorksThe Works shall include property which forms part of or is to be incorporated in the temporary or permanent works to be executed by the Insured.

PrincipalPrincipal shall mean any Company Firm Partnership Public Authority or Individual with whom the Insured enters into a contract or agreement."

12. Under the heading "Exceptions to Section 3" the following appears:

"The company shall not be liable in respect of. . . .

Insured's Property3. Liability in respect of Damage to property belonging to the Insured.

Defective Products4. Damage to the defective part of any Product Supplied or Contract Works or the costs or expenses incurred in repairing replacing recalling or making any refund in respect of the defective part of any Product Supplied or Contract Works other than

a) Damage caused during repair or servicing work carried out under a separate contract

b) Damage caused to any Product Supplied by a Product Supplied under a separate contract.

Contractual Liability7. Liability assumed under agreement unless such liability would have attached in the absence of such agreement."

13. Under the heading "Extensions", the policy provided for certain extensions to be operable if so stated in the schedule, subject to the terms, exceptions and conditions of the policy. In this case extension 3 was an operable extension. Under the heading "Contractual Liability and Indemnity to Principal" it provides:

"Notwithstanding Exception 7 to section 3 the Company will indemnify under Sections 2 and 3 of this Policy in respect of liability for Bodily Injury and Damage to property as defined herein

a) the Insured in respect of any liability assumed under agreement or contract with any Principal

b) the Principal in like manner to the Insured in respect of the liability of the Principal

arising out of the performance by the Insured of such contract or agreement

Provided that

...

c) the indemnity shall not apply to liability in respect of liquidated damages..."

14. This extension was plainly necessary if any meaningful cover was to be provided in the light of exception 7 to section 3 because the only type of liability which the insured would be likely to incur would arise in the course of a business which involves entering into contracts in connection with which the insured's exposure to third party claims is likely to arise.
15. The judge had little difficulty in concluding that, neither the rectification costs incurred by Longley nor the claim for damages in respect of the sums paid to Research Park under the consent award in the subcontract arbitration, were covered by the policy. He accepted the argument for Forest Giles that, since the policy was in respect of public liability, the term "damage to property" in section 3 referred to damage to the property of third parties for which the insured would be liable at law for damages; it was quite clear, particularly when it was read with the exceptions and the extension, that it did not extend to damage caused to the insured's own property. More specifically, in the light of exception 4, it did not extend to the product supplied or contract works effected by the insured.
16. Turning specifically to the exceptions, exception 3 excluded "liability in respect of damage to property belonging to the insured". If, on a correct reading of the facts, at the time of the decision to lay the floor on a wet screed, the flooring was the property of Forest Giles, then the exception plainly applied. If that was not the position, however, exception 4 certainly applied, because it expressly included "the costs or expenses incurred in replacing recalling or making any refund in respect of the defective part of any product supplied or contract works". This was plainly apt to apply to the claim for rectification of the contract works (£68,000 odd). It was also apt to apply to the claim for damages in respect of the £160,000 paid to the developer, since the undertaking to indemnify in extension 3 was premised upon proof of damage to property as defined in the policy at large. In this case there had been no such damage to property. The damage was within the product supplied and works performed by Forest Giles, and no damage had been caused to other property belonging to a third party, including Longley.
17. Despite the arguments for the appellant to which I shall shortly turn, I consider that the judge was correct in the conclusion to which he came. The form of insurance contract in question, called a "combined policy", was a composite contract covering a wide range of events or kinds of loss of the kind usually encountered by contractors, namely all risks (section 1), employers liability, (section 2) and public liability, (section 3). In this case, however, Forest Giles had not sought cover under section 1. We do not know if section 2 applied. It is therefore necessary to concentrate upon the terms of section 3, while bearing in mind that it is not the usual intention, in a contractor's public liability insurance, to give cover in respect of defective workmanship which requires rectification but does not cause physical damage to the personal property of a third party or interference with a third party's property rights, as opposed to their purely economic interests.
18. In this case the defendants were engaged in the supply and installation of vinyl flooring with associated preparatory works, including the laying of a screed. They laid the vinyl flooring prematurely before the screed had sufficiently dried out, and this gave the finish a contractually unacceptable bubbling effect and remedial work was carried out, which consisted of removing that defective vinyl, relaying the underlying screed and laying fresh vinyl. In that connection no physical damage is alleged to have been caused to any adjacent or underlying works or any property of the developer. It was simply the position that the works performed by Forest Giles were defective and had to be redone. There was therefore no damage to property for the purposes of section 3. Even if it could be said that there was relevant damage to property, it was only to the vinyl surface and possibly the screed itself. That was, on any analysis, either a product supplied by Forest Giles or which formed part of their contract works. Since the damage extended no further than the defective part of the works, any resultant loss would be excluded from cover by exception 4. Equally, the remedial costs could not be said to have been incurred other than in repairing or replacing the vinyl and/or screed, which costs are again excluded from cover.
19. It thus seems to be clear, subject to a point raised by the appellant to which I will shortly turn, that the sum of £68,000-odd spent in rectifying the defective works, is outside the cover provided by the policy. As far as concerns the sum of £160,000 in respect of Longley's liability to Research Park is concerned, it does not seem to me that the position is any different. It is asserted by Longley that the sum was paid by way of general damages rather than in respect of the claim for liquidated damages made by Research Park. It is not impossible to determine objectively, or from the statement of facts, whether that is correct. If and insofar as the sum was in respect of liquidated damages, it would be expressly excluded under proviso (c) to extension 3. Insofar as it is not expressly so included, it is in any event a claim for damages which is not based on damage to property as contemplated by the policy. If it were, it would be within extension 3(b), but it is not.
20. The argument of Mr Acton-Davies for Longley on the appeal has been made in two parts. First, he submits that the judge erred in ignoring the definition of damage in the policy, namely "damage shall include loss". He submits that it means that, in the context of "damage to property", the phrase should be read in effect as damage to property 'or any loss in connection therewith'. In this respect he relies upon a passage in Clarke on the Law of Insurance Contracts, 3rd edition, at paragraph 16-2A, where, in a section of the chapter on the nature of cover and loss, it states, under the heading "Financial Loss":

"The more common and wider meaning of loss is any loss, damage or deprivation suffered by the insured as a consequence of an event insured against and which leaves him financially poorer than he was before."

21. Based on that passage, Mr. Acton-Davies submits that, given the fact that damage includes loss, the construction found by the judge, that the cover did not relate to damage within the employers property, cannot be correct. He submits that there has clearly been loss to the employer's property, in the sense of the cost of remedying the defective floor and the direct losses arising from this. The employer was thus left financially poorer than he was before, in the sense not only of the remedial costs but also the financial consequences of letting out the property later than would otherwise have been the case.
22. It is perhaps right to read on from the general observation made in the sentence which I have quoted from Clarke. The two subsequent sentences read as follows:

"That is the sense in the case of indemnity insurance on which the insured must prove loss to found a claim. However, in the context of insurance covering 'all risks of loss or damage to the subject matter insured', it has been confirmed that it applies only to physical loss or damage."

23. The author does not refer to the position in relation to public liability insurance. However, it seems clear to me, in the context of this insurance, that the definition in relation to damage to property is intended to do no more than indicate that loss of property, as well as damage to property, is covered, so that in effect the insurance is against 'loss of or damage to' the property of another.
24. The second point argued by Mr. Acton-Davies, which is in part associated with the first but may be regarded as self-standing, is that there was indeed physical damage to the property of Longley, in the sense that the structure and contents of the building were affected, to the extent that the remedial works extended beyond what was done by the subcontractor (in respect of which some £25,738 was spent by way of rectification works), and a roughly equal sum was incurred by other contractors who, consequent upon the need for rectification works, had to remove and store equipment and fittings put in place before the defects had been discovered. Their costs, Mr Acton-Davies submits, are recoverable out of the £68,000 total claimed in any event.
25. In this respect Mr. Acton-Davies relies on certain observations of Sir Ralph Gibson in Cementation Piling and Foundations Ltd v Aegon Insurance Co Ltd and Commercial Union Insurance Co Plc [1995] 1 LLR 97, 102, where, in a somewhat different context, he observed, when considering an indemnity "in respect of physical damage to the property", as follows:

"The concept is that the insured has suffered loss arising from loss of or physical damage to the property insured, and is entitled to indemnity in respect of that loss. It is possible, I think, to regard the cost of rectifying a defect which caused the physical damage as cost incurred 'in respect of physical damage', although the defect is not itself physical damage and although therefore the indemnity would not extend to the cost of rectifying that defect save for its connection with the physical damage. The nature of the connection which is required by the words 'in respect of' is not, in my view, clear without the assistance of the context.

It is possible also, I think, to regard the cost of rectifying a defect which caused the physical damage, as cost not incurred 'in respect of physical damage', even if it is clear that rectification of the defect is necessary for effective repair of the physical damage."

26. A little later he observed:

"There is an obvious distinction between physical damage to the works and a defective condition of part of the works which has suffered no separate damage."

27. The submission of Mr. Acton-Davies is that costs associated solely and directly with removal and replacement in relation to the flooring and screed are not recoverable, but that all other costs are costs arising out of the basic damage to property underlying those remedial works. While I do not in any way demur from the observations of Sir Ralph Gibson quoted above, I do not regard them as of great assistance in this case. I do not accept that the subdivision argued for by Mr Acton- Davies is realistic in this context. In my view, it is neither realistic nor sensible to treat the expenses of other contractors as outside the intent and wording of paragraph 4 of the exceptions to section 3 and therefore excluded from cover.
28. Mr. Acton-Davies has also argued that damage to property having been proved to the extent mentioned, the claim for £160,000 paid to the developer should be recoverable under extension 3(b). I reject that submission also. The fact that Longley was liable for such sums to the developer cannot place it in a better position than Forest Giles in relation to a claim under the policy. The obligation to indemnify both Forest Giles and Longley is dependent upon proof that the risk or event insured against, namely damage to property, has in fact occurred. I have stated my view that the judge was right to find that it had not, and accordingly I would dismiss the appeal.
29. LORD JUSTICE LATHAM: I agree.
30. LORD MUSTILL: I agree.
Order: Appeal dismissed with costs summarily assessed in the sum of £6,431. (Order not part of the judgment of the court)