England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM TECHNOLOGY & CONSTRUCTION COURT
HHJ HAVERY QC

		Royal Courts of Justice Strand, London, WC2A 2LL Wednesday 13th March 2002

Lord Justice Latham:

1. This is an appeal from a decision on two preliminary issues by HHJ Richard Havery, QC of the 25^th May 2001. They relate to the proper construction of a contract made in April 1997 between the appellant and the respondent whereby the respondent agreed to design, manage the construction of and construct a wood chipboard factory for the appellants at Auchinleck, Strathclyde.
2. The issues arise out of defects in the floor slab of the warehouse of the factory which cracked and broke up during the course of construction when subjected to the weight of loaded vehicles driving over it. It is also said to have curled and crazed even in areas not subjected to heavy loads. The appellant in its counter claim in the main action claims damages as a result due to defective design, inadequate materials, or poor workmanship. For the purposes of the determination of the preliminary issues, which are set out later in the judgment, both parties are agreed that it is to be assumed that the floor slab was defective in the manner and to the extent alleged by the appellant, and that the resulting damage to the floor slab was caused or contributed to by breaches of contract by the respondent. The preliminary issues in essence raise the question as to whether or not the appellant was obliged pursuant to the terms of the contract to obtain insurance in the name of the appellant and the respondent against loss resulting from such damage. The appellant in fact obtained insurance which excluded such damage from cover; and the question is therefore whether it was in breach of contract.
3. The contract was a guaranteed maximum price contract, and was a tailor made contract for the design and construction of the factory. The relevant terms are as follows:

"2(1) The contractor shall ... carry out and complete by Sections the Works ...and ... shall carry out and complete the design for the Works including the selection of any specifications for any kinds and standards of the materials and goods and workmanship to be used in the construction of the Works...

(7) (a) .... the contractor shall have in respect of any defect or insufficiency in any such design the like liability to the employer ... as would an architect or ... other appropriate professional designer...

(11) The Contractor shall procure and ensure that all Sub-Contractors carry out and complete their obligations ... in respect of the quality and standards of design, materials and workmanship ... strictly in the manner required in the terms of such sub-contracts..."

4. Clause 7 of the contract set out the standards to be met by the respondent in relation to work, materials and goods, and provided that if, during the course of carrying out the work, any work materials or goods were not in accordance with the contract the appellant was entitled to issue instructions requiring the respondent to carry out whatever was necessary to make good the breach of contract, without any addition to the guaranteed maximum price. By Clause 16A, any "defects, shrinkages or any other faults which shall appear .... within the defects liability period ... due to failure of the contractor to comply with his obligations under this contract...." were to be made good by the respondent on notice from the appellant "entirely at his own cost".
5. Clause 20 of the contract provided:

"(2) 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 in so far as such injury or damages arises out of or in the course of or by reason of the carrying out of the Works, and provided also that the same is due to any negligence, omission or default of the Contractor ... or of any Trade Sub-Contractor ....

(3) Not withstanding the foregoing sub-clause 20(2) the existing structures (together with the contents thereof) owned by the Employer shall be at the sole risk of the Employer as regards loss or damage by fire, lightning, explosion, storm, tempest, flood ... earthquake, aircraft, ... and riot and civil commotion, including where such loss or damage is caused by the sole or concurrent negligence of the Contractor his servants, agents or Sub-Contractors and including any loss of production ... These risks shall be insured during the contract by the employer and that insurance endorsed to waive in respect of these risks the insurers rights of recourse against the Contractor and his ... sub-contractors. ....."

6. The clause which gives rise to the two preliminary issues is Clause 22, which provided:

"(1) (a) The Contractor shall take full responsibility for the care of the Works (which shall include all unfixed materials, and goods delivered to, placed on or adjacent to the Works and intended for incorporation therein) from the Date of Possession until Completion Date. Provided further that the Contractor shall take full responsibility for the care of any outstanding work which he shall have undertaken to finish during the Defects Liability Period until such outstanding work is complete.

(b) In case any damage, loss or injury from any cause whatsoever [save certain excepted risks] shall happen to the Works or any part thereof while the Contractor shall be responsible for the care thereof the Contractor shall at his own cost repair and make good the same so that at completion the Work shall be in good order and condition and in conformity in every respect with the requirements of the Contract. To the extent that any such damage, loss or injury arises from any of the [excepted] risks, the Contractor shall if required by the Employer repair and make good the same as aforesaid at the expense of the Employer. The Contractor shall also be liable for any damages to the Works occasioned by him in due course of any operations carried out by him for the purpose of competing any outstanding work or of complying with his obligations under the Defects Liability clause of his Contract.

......

(d) The Contractor shall indemnify and hold the Employer harmless from and against all and any damage to or loss, or loss of use of equipment or other property owned, hired or borrowed by the Contractor ... regardless of the cause of or reason for the said damage, loss or loss of use, and regardless of whether the same may arise from or as a result of the sole or concurrent negligence of the Employer. The Contractor hereby agrees that any insurance policy covering said equipment or property will be suitably endorsed to provide for this waiver of right of recovery against the Employer.

(2) (a) Without limiting the contractor's obligations and responsibilities under Clause 22(1):

(i) The employer will insure in the joint names of the Employer and the Contractor and his sub-contractors, the Works ...;

(ii) The Contractor will insure in the joint names of the Employer and the Contractor the Construction Plant .....;

against all loss or damage from whatever cause arising for which the Contractor is responsible under the terms of the Contract, and in such manner [that] the Employer and the Contractor are covered for the period stipulated in Clause 22(1) and are also covered for loss or damage arising during the Defects Liability Period from such cause occurring prior to the commencement of the Defects Liability Period and for any loss or damage occasioned by the Contractor in the course of any operation carried out by him for the purpose of complying with his obligations under the Defects Liability clauses of this Contract.

(b) Such insurances shall be effected with an insurer and in terms approved by the Employer in the case of Clause 22(2)(a)(ii) and by the Contractor in the case of Clause 22(2)(a)(i) which approval shall not be unreasonably withheld.....

(c) The insurance provided by the Employer in accordance with clause [22(2)(a)(i)] shall be subject to the terms and conditions of the policy, and the contractor shall bear any risk in respect of the sums not recovered under these policies in accordance with the indemnities provided by him in clause 22(1) including the deductible which shall be £2,500 each claim"

7. The policy effected by the appellant pursuant to this contractual obligation was with Eagle Star and provided indemnity in respect of loss or damage to property on the site of the contract subject to the following relevant exception:

"Loss or damage caused by:

(1) Defects, error or omission in design, workmanship, material plan or specification of the permanent works.

(2) Wear and tear or gradual deterioration but this exception shall be limited to that part of the property insured immediately effected and shall not apply to parts lost or damaged as a consequence."

8. The relevant floor slab was completed by the end of October 1997. Shortly thereafter cracks were noticed. Temporary repairs to the slab were made between October 1997 and November 1998, by which time it was clear, according to the appellant, that the slab would have to be completely replaced. In its amended Part 20 counter claim, the appellant asserted that the floor slab was defective in a significant number of respects, caused by breaches of contract on the part of the respondent, the main thrust of the particulars of breach of contract related to a failure to ensure that the concrete was cured properly. We have been told that the damages counter claimed exceed £1 million.
9. The two preliminary issues arising out of the facts and the contractual terms to which I have referred were defined as follows:

"1. Did clause 22 of the Contract oblige Egger [the appellants] to procure a joint names insurance policy which provided an indemnity in favour of Skanska (Kvaerner) [the respondent] which extended to and included any liability on the part of Skanska to pay to Egger damages for the cost of repair or rectification of the warehouse floor slab where the need for such repair or rectification has been caused (or materially contributed to) by a breach or breaches on the part of Skanska of one or more of the obligations under the contract as alleged by Egger in paragraph 14 of its amended Part 20 Counterclaim.

2. It being admitted and agreed that the policy of insurance procured by Egger in purport of performance of its obligation under Clause 22 excluded loss or damage caused by defects, errors or omissions in design, workmanship, material, plan or specification or the permanent Works, was Egger thereby in breach of its contractual obligation under that clause."

10. In addition to legal argument, the judge heard evidence relating to the availability of insurance policies at the relevant time from a Mr Towler for the respondent, and a Mr Williams for the appellant. The judge accepted the evidence of Mr Towler. His evidence was that joint names policies were available in 1997 covering damage to insured property caused by defective design, plan, specification, materials or workmanship of insured property, save for the cost of additional work resulting from and the additional costs to the original design and save for damage caused to enable replacement repair or rectification of defective property insured. He was of the view that the damage to the floor would be covered by such a policy. Such a policy was readily available on the market with a deductible of £100,000 in respect of loss or damage due to defects in design, materials and workmanship and a deductible of £2,500 in respect of all other loss and damage. He considered that such a policy with a deductible of £50,000 might have been obtainable by the appellant but only at a substantially higher premium. Such a policy was described as DE5. The judge concluded that the policy in fact provided, which excluded damage due to a defect in design, plan, specification, materials or workmanship was known as DE3 and would exclude cover for the damage to the floor. Typically, as was the case in relation to the insurance in fact effected by the appellants, a deductible of £2,500 would be provided for in the latter type of policy.
11. The judge held that the wording of Clause 22(2)(a) was clear. The phrase "from whatever cause arising" was apt to include defects in design or workmanship; and the word "responsible" included "liable" so that the obligation to insure included the obligation to insure against loss and damage which was caused or materially contributed to by any breach on the part of the respondent of any obligation under the Contract. He considered, however, that the phrase "loss and damage" could not extend to rectification of defects in themselves; he accordingly answered the two preliminary issues in the affirmative, with the exclusion of the words "or rectification" wherever they appeared.
12. The respondents were concerned about the consequence of the deletion of the words "or rectification" bearing in mind the fact that the damages counter claimed by the appellant were essentially to replace the floor slab. They accordingly invited the judge to clarify his original order, which he did after argument, on the 6^th July 2001, by adding a rider to the following effect:

""Repair" means repair of damage whether caused by defective design or workmanship or otherwise and whether spontaneous or otherwise.

"Repair" does not extend to rectification of defective design or workmanship.

In so far as any repairs to such damage includes an element of improvement to the design or workmanship the cost of such repair to that extent is not covered by Clause 22(2)(a)."

13. The appellants first and main submission is that its obligation under Clause 22(2)(a) was limited to providing insurance for the events envisaged in Clause 22(1)(a) and (b). These sub-clauses were intended to provide a mechanism for dealing with events occurring during construction which caused loss and damage for the stipulated periods, and provided for an indemnity to be available for the costs of so doing from the insurance provided at the expense of the appellant. The type of loss and damage envisaged was to be governed by the primary responsibility undertaken under Clause 22, which is defined in Clause 22(1). It was not intended to relieve the respondent by way of an indemnity from its duties to meet contractual specifications regarding design, construction or materials under Clauses 2, 7, and 16A of the contract. Clear and unambiguous words would have to be used for the court to be able to conclude that the parties had evinced an intention that the insurance required by Section 22(2)(a) was to relieve the respondent of such obligations.
14. It is submitted that the wider construction contended for by the respondent will produce the absurdity that if, in relation to the floor slab in question, it had been appreciated, before the defect had been made manifest by cracking, whether by reason of the passage of heavy loads or otherwise, that the floor was indeed defective, no event would have occurred amounting to loss and damage. As a result the floor would have to be made good at the respondents expense under clause 7 or 16A without any such indemnity. Further, it is submitted that the judge was right to conclude that he was entitled to have regard to the insurance evidence as material which was available to the parties when concluding the contract. It follows that, as no insurance of the type contended for by the respondent was available for a deductible such as that envisaged by Clause 22(2)(c), whereas insurance was available with such a deductible to cover loss and damage as contended for by the appellant, the parties must be taken to have envisaged cover of the type and extent which was in fact obtained.
15. The respondent submits that the phrase "all loss or damage from whatever cause arising for which the contractor is responsible under the terms of the contract" cannot be construed so restrictively. The word "responsible" is of wide ambit, and includes liability of any sort undertaken pursuant to the contract. The clause, so construed, does not absolve the respondent from its primary liabilities. It merely provides for a limited period of indemnity extending only for the stipulated period, and has a proper commercial purpose in encouraging the respondent to carry out all works of reparation within that period, and thereby encouraging the respondent to ensure that the work is completed properly and on time. It also provided comfort for the appellant in the event of the respondents liquidation or other financial difficulties. It in no way absolved the respondent from, or provided indemnity for, the consequences of any breaches of its primary obligations after the end of the stipulated period.
16. By a respondents notice the respondent submits that the judge was wrong to remove the words "or rectification" from his answers to the preliminary issues. If works of rectification are required to make good any "loss or damage", then the cost of carrying out such rectification must be included within the insurance envisaged by the contract. The expert evidence showed that such insurance was available, albeit at a substantially higher deductible than provided for in Clause 22(2)(c); but the fact that the parties stipulated a lower deductible cannot detract from what, it is submitted, is the plain meaning of the words of the insurance obligation.
17. In my judgment, the appellants contention is correct. It seems to me that the contract makes a clear distinction between the respondents obligations to perform the contract in accordance with the requirements of Clause 2 and the other technical requirements in the contract, and loss and damage which is sustained during the carrying out of the works, and to the works. The regime for dealing with the former is set out in Clauses 7 and 16A of the contract. The latter are governed by Clauses 20 and 22. It is not entirely easy to reconcile the provisions of Clauses 20 and 22 with each other. But Clause 22, which is the one with which we are directly concerned, is clear in its purpose and intent.
18. The clue to the proper scope of the Clause is contained in the phrase "the contractor shall take full responsibility for the care of the work....". It is intended to deal with the accidents and mishaps which might occur on site and to provide a mechanism for their consequences to be put right by the respondent whether or not it or any sub-contractor was at fault, and to enable the respondent (and the appellant if necessary) to have recourse to insurance for an indemnity in respect of such costs. It is to be noted that the only extension to the respondents responsibility beyond the period of its actual involvement on site is the limited extension for damage becoming manifest during the defects liability period in respect of events occurring prior to completion date. This essentially custodial responsibility is worded in a way which is wholly inapt if it was intended to cover the manifestation of defects arising as a result of breaches of the respondents primary obligations as to design and construction.
19. The respondents understandable reliance upon the wide words used in the phrase "all loss or damage from whatever cause arising" in Clause 22(2)(a) is in my view misplaced. These words are qualified by the phrase "for which the contractor is responsible under the terms of the contract". Although the word "responsible" can be given a wide meaning, its use in the contract is confined to and seems to me to be clearly referable only to the "responsibility" which the contractor has undertaken in Clause 22(1)(a). In other words, it is restricted to the concept of responsibility to which I have already referred. I do not consider that the respondent is assisted by the fact that Clause 22(1)(b) includes the phrase "shall also be liable for any damages" as if that in some way widens the concept of responsibility. The liability there referred to is the liability arising out of the scope of the obligation undertaken under Clause 22(1)(a). The respondent further sought to obtain support for its contention that the word "responsibility" included defects in design and construction by reference to the extended liability for damage becoming manifest after the completion date by reason of events occurring before the completion date. It is suggested that this in some way shows that the clause was intended to cover latent defects. In my view, it is entirely neutral. It begs the question as to what event gives rise to such damage; it does not in itself provide any answer. In my judgment "loss and damage" does not include the manifestation of defective design or workmanship.
20. In coming to this conclusion, I have not myself derived any assistance from the evidence relating to the scope of insurance available on the market, nor the express provision as to the amount of the deductible in Clause 22(2)(c). There was no evidence that the parties were aware of, let alone took into account, the available insurance market at the time of the drawing of the contract.
21. It follows that I would allow this appeal, and answer the question posed by the first preliminary issue in the negative. In these circumstances, it is not necessary to answer the question posed by the second preliminary issue raising, as it does, an issue of construction as to the terms of the policy with Eagle Star as to which we have, in any event, heard no argument from the insurance company itself.

Mance LJ:

22. I agree with the way in which Latham LJ proposes that we should answer the two questions, and with his reasoning subject to the following supplementary observations.
23. Clause 22 must be construed in the context of the contract as a whole. The employer's obligation under clause 22(2)(a) is to insure the Works to their full reinstatement value "against all loss or damage from whatever cause for which the Contractor is responsible under the terms of the Contract". The Works are defined in the contract as "the works briefly described in the First Recital …. including any changes to those works in accordance with this Contract". The First Recital refers to "the design and construction of a Chipboard Manufacturing Facility" as "the Works". However, in the context of clause 22(2)(a) it is plainly the physical manufacturing facility that is to be insured, by a property insurance.
24. The sub-clause goes on to provide that such insurance cover is to be (i) for the period stipulated in clause 22(1) (i.e. until the Completion Date and, as regards outstanding work which the contractor shall have undertaken to complete during the Defects Liability Period until such outstanding work is complete), (ii) for loss or damage occurring during the Defects Liability Period from any cause arising prior to the commencement of such Defects Liability Period and (iii) for loss or damage occasioned by the contractor in the course of any operation carried out by him to comply with his obligations under the Defects Liability clauses of the contract.
25. The Defects Liability Period extends for 12 months from Practical Completion. The reference to the contractual Defects Liability clauses is to the provisions of clause 16A, from which Latham LJ has quoted. Clause 16A contains on the face of it an extensive code, whereby the appellant could be required to make good, entirely at its own cost, any defects, shrinkage or other faults appearing in any section of the Works within the Defects Liability Period due to the appellant's failure to comply with its contractual obligations or to frost. The reference to contractual obligations refers to clause 2, dealing with "the design for the Works, including the specifications for any kinds and standards of the materials and goods and workmanship to be used" and clause 7, dealing further with the standards of work, workmanship, materials and goods. Clause 7 contains further provisions whereby the contractor may be required to remove from site or rectify all or any of the works, materials or goods and make good defects in workmanship.
26. The obligation under clause 22(2)(a) is, as I read it, to insure the physical works "against loss or damage …. arising for which the Contractor is responsible under the terms of the Contract". I agree that the most obvious responsibility to which clause 22(2)(a) refers is that provided under clause 22(1)(a) and (b).
27. Clause 22(1)(b) imposes on the contractor an obligation at its own costs to repair and make good any damage, loss or injury from any cause whatsover (save rare excepted risks, such as ionising radiations) happening to "the Works or any part thereof" while the contractor shall be "responsible for the care thereof". Clause 22(1)(a) states, as I have already indicated, that the contractor's responsibility for the care thereof extends from the Date of Possession to the Completion Date and thereafter, as regards outstanding work which the contractor shall have undertaken to finish during the Defects Liability Period, until such work is complete.
28. Loss or damage for which the contractor is responsible under the terms of the Contract thus embraces loss or damage, in relation to which the contractor might in no way be at fault. It includes for example some entirely external and accidental peril damaging the physical works. The rationale of the insurance required under clause 22(2) is no doubt that the completion of the Works and of the contract should not be held up by any such event.
29. It seems to me unnecessary to decide, and I prefer not to, whether the words in clause 22(2)(a) "responsible under the terms of the Contract" could refer to any term other than clause 22(1). Whether it can or not, the contractor's responsibility for loss or damage under clause 22(1) appears, on the face of it, wide enough to embrace loss or damage, regardless of whether or not it originated in a breach of another term of the contract.
30. However, physical loss or damage of the kind which must be insured against under clause 22(2)(a) is in my judgment clearly to be distinguished under this contract from the defects in design, work, workmanship, materials or goods, for which the contractor is expressly responsible under clauses 2 and 7. All that has happened in the present case is that the floor slab was (allegedly) badly designed and/or constructed, and that the alleged defects in design and/or construction manifested themselves in cracking, curling, spalling and crazing and lifting of parts of the slab under ordinary usage. Had the defective design and/or construction been observed before any usage, the appellants would have had under clauses 2, 7 and 16A to make good or replace the defective slab as necessary. The position is no different now that these defects have manifested themselves. Indeed, clause 16A expressly obliges the contractor to make good "any defects, shrinkages or other faults". In this contractual scheme, the mere manifestation of a defect under ordinary usage, which the contractor is anyway obliged to make good under the contractual scheme relating to defects, cannot in my judgment constitute loss or damage to the slab for the purposes of the insurance requirement under clause 22(2). The counterclaim made by the appellant building owner in these proceedings was for failure by the respondent as contractor to perform its contractual duties to make good the defective floor slab, the defects in which had manifested themselves in the curling, spalling and crazing and lifting to which I have referred.
31. The insurance requirement remains inapplicable to the making good of manifest defects which the contractor is obliged to make good, even if such defects happen also to lead by some accidental process (such as a fall or collapse) to something which might properly be described as loss or damage to another part of the Works, as opposed the simple manifestation of a defect which anyway required making good . The only question in such a case would be whether the physical loss or damage to the other part of the Works should be covered by insurance under clause 22(2). The original defect and its manifestation would still not be.
32. Mr Davies QC for the appellant was, by the conclusion of the hearing before us, prepared to accept that physical loss or damage to one part of the Works caused by a fall or collapse of another, distinct part of the Works due to defective design, workmanship or materials would be within the insurance requirement under clause 22(2). That has, however, nothing to do with this case. This case is concerned with one ascertainable part of the Works manifesting itself as defective, and nothing more. It is not suggested that the cracking, etc of the floor slab caused loss or damage to any other part of the Works, and so it is unnecessary (save in one respect to which I come in the next paragraph) to consider what, if anything, might in the context of this construction project be properly described as another part of the Works, for this purpose.
33. It was, faintly, argued, before us for the first time, that one of the respondents' pleaded particulars of causation would lend itself to an argument that one part of the Works collapsed and damaged another. The point proceeds entirely on the basis of the pleadings. The argument relates to one plea, among a whole list of other causes related unequivocally to the floor slab, of failure by the appellants "to sufficiently compact the sub-base material underneath the slab with the sub-base having a typical air voids content greater than 15%". It was suggested, on that basis, that one part (the sub-base) collapsed and damaged another part (the slab above it). That argument was not only not raised below, it attempts to divide the indivisible. Earlier in the same pleading, the respondents identified an amended design of the floor slab as having been sent to them by the appellant and accepted by them, in the form of a drawing indicating that it included "all fill below floor slab to be removed and original ground level to be regraded to formation level". The appellants in their defence admitted that this drawing showed "an amended design of the floor slab". I see no prospect of any court accepting that the sub-base "damaged" the [rest of the] slab above it within the meaning of clause 22(2).

ALDOUS LJ:

35. I agree with the judgment of Latham LJ.
36. Order: Appeal allowed; the answer to the preliminary issue no. 1 is going to be in the negative; the court will order that there is no need to make an order on the second issue; permission to appeal be granted; the orders of His Honour Judge Harvey QC made on 25^th May 2000 and 6^th July be set aside; the respondent to pay the appellant the costs of and occasioned by the appeal and the cross-appeal and the costs of and occasioned by preliminary issue trial before the judge; all such costs to be on the standard basis and to be subject of detailed assessment if not agreed.
37. (Order does not form part of the approved judgment)