England and Wales Court of Appeal (Civil Division) Decisions

COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Ramsey J
HT 07-177, HT 07-178

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/01/2010

Lord Justice Toulson:

1. The circumstances giving rise to the dispute between the appellant (Supershield) and the respondent (Siemens) are set out with admirable clarity and succinctness in the opening paragraphs of the judgment of Ramsey J which I reproduce:

"Introduction

1. On 9 October 2001 a nut and bolt connection on a float valve failed and water from a storage tank overflowed into the basement of a new office building for Slaughter and May in the City of London. The water caused a flood which led to extensive damage to the electrical equipment in the basement.

2. Originally proceedings were brought by claim forms dated 14 June 2007 against the Contractor, Skanska Construction Ltd ("Skanska") formerly known as Kvaerner Construction Ltd, by three parties: Trucidator Ltd, the lessee of the premises and Slaughter and May, the occupiers, by claim form in case HT-07-177 and Deka Immobilien Investment GMBH ("Deka"), the freeholder/lessor, by claim form in case HT-07-178.

3. Skanska had constructed the new office building under a building contract dated 28 May 1999 ("the Building Contract") entered into with a developer, Helical Bar (Chiswell Street) Ltd. They had also provided warranties to Trucidator Ltd, Slaughter and May and Deka, who I shall refer to, together, as the claiming parties.

4. Skanska joined the mechanical and electrical subcontractor, Haden Young Ltd ("Haden Young") into the proceedings. They had been retained by Skanska to install the sprinkler system as part of the mechanical and electrical works. In turn Haden Young joined Siemens Building Technologies FE Ltd, formerly Preussag Fire Protection Ltd ("Siemens"), into the proceedings. They had entered into a sub-contract with Haden Young to supply and install the sprinkler system.

5. Siemens likewise then joined Supershield Ltd ("Supershield") into the proceedings. They had a sub-contract with Siemens to install the sprinkler system.

6. There was a mediation in June 2008 attended by all parties. This led to two Tomlin Orders by which Siemens settled the claims with the parties up the contractual chain but maintained its Part 20 claim against Supershield …

The Flood

7. There is little in issue between the parties as to the sequence of events that led to the flood.

8. The water storage tank for the sprinkler system was located in the basement of the premises. It stored water which, in the event of the operation of sprinkler system in the building, would be pumped through the pipework serving the sprinklers. The tank was divided into two parts and the mains water supply was connected to each part of the tank. When the level of the water in one part of the tank dropped, a float valve would operate to refill the water tank. This float valve was an industrial version of the ball valve typically found in domestic water supply tanks. The float device is connected to a lever arm which operates the valve lever which turns the water on and off. The lever arm was attached at one end to the float and at the other end to the valve lever. The connection to the float was by two nuts and bolts some centimetres apart. It was one of these connections which failed in the following circumstances, causing water to overflow.

9. At about 5:00pm on 9 October 2001 a sprinkler pump was activated, the precise cause for this being uncertain. When a sprinkler pump operates it causes water to be drawn from and returned to the tank. In doing so, the float causes the valve to operate. In this case when one of two float valves operated in this way a nut and bolt connection failed and the bolt fell out. This meant that the valve was in the open position letting water into the tank. Without any fixed connection to the float at the end of the lever arm, the valve did not shut down when the tank reached the required level but continued to fill up.

10. The water from the tank overflowed into a bunded area which contained a 600 mm high wall designed to retain any overflowing water. There were drains in the tank room floor within the bunded area but these became blocked or partially blocked by packaging, insulating or other material on the tank room floor.

11. Water then overflowed the bund, passed over the door threshold to outside the tank room. The water reached electrical equipment in the basement which then suffered substantial damage. The Building Management System ("BMS") was in the process of being installed and received a number of signals indicating conditions arising from the incident. Those would have been displayed as a signal on the panel and might have given an audible warning. However, at that time the BMS was not being monitored 24 hours a day."

2. The judge found that the probable cause of failure of the nut and bolt connection between the lever arm and the ball valve was a lack of sufficient tightening when the ball valve was installed and that, under the Supershield subcontract, Supershield had an obligation both to install the ball valve and lever arm and to carry out any adjustments which were necessary to ensure that the ball valve was operating correctly. Those findings were sufficient for the purposes of establishing liability between Supershield and Siemens, but he also found on the balance of probability that Supershield had in fact installed the ball valve.
3. On the issue of damages, Supershield disputed Siemens' claim that the sum for which Siemens had settled the claims made against it reasonably reflected the strength of the defences available to it. The judge found that overall the settlement was reasonable. He therefore gave judgment for Siemens on its part 20 claim against Supershield for the amount of the settlement (£2,864,080.00) and interest.
4. Supershield appeals against the judgment on three grounds. These are :

1. The judge misconstrued the subcontract. On its proper construction, the subcontract works did not include the installation of the ball valve.

2. The judge was wrong to find as a fact that Supershield installed the ball valve.

3. The judge was wrong to find that the figure for which Siemens agreed to settle the claims against it was reasonable.

5. The second issue is only live if Supershield succeeds on the first issue. The third issue is only live if the judge was right to find in favour of Siemens on the issue of liability (i.e. if Supershield fails on either the first or second point).

Construction of the subcontract

6. In the subcontract between Haden Young and Siemens the subcontract works undertaken by Siemens were described as:

"Supply and installation of fire protection sprinkler system inclusive of incoming fire main from point of connection, sprinkler tank, skid mounted pump set, and all associated design works. "

7. There is no doubt that the sprinkler tank and the float valve were part of the sprinkler system which Siemens agreed to supply and install.
8. The subcontract between Siemens and Supershield purported to set out the works which Siemens had contracted to do in schedule 1 and to set out details of the works to be done by Supershield in schedule 2. However, the schedules were sloppily completed. Schedule 2 included matters which it was agreed were never intended to be part of Supershield's responsibility. The judge found (and there is no dispute about this) that the subcontract works which Supershield had to perform were more appropriately described in schedule 1. This showed as "details of the prime contract" (but in reality details of the subcontract):

"TO SUPPLY SITE OPERTIVES (sic) FOR THE INSTALLATION OF THE SPRINKLER SYSTEM COMPLETE WITH ALL SPRINKLER CONTROL VALVES, PUMPS AND ASSOSIATED (sic) PIPEWORK, VALVES STARTER & CONTROLERS (sic). FLOOR ZONE VALVES WITH ALL EQUIPMENT AND RISERS."

9. Schedule 4 to the subcontract listed a number of documents which were to be incorporated into the contract including a list of contract drawings.
10. Drawing 68246-001 showed the tank with a number of pipes and valves connected to it, including the ball valve. The drawing also bore the words:

"180 m³ capacity water storage tank 1000 x 6000 x 3000 manufactured & installed by AC Plastic Industries Limited."

11. Siemens had a separate contract with AC Plastics for the supply and installation of the water tank but not the ball valves. Siemens had a further contract with a company called Lansdale Viking Limited for the supply, but not installation, of the ball valve assemblies.
12. Siemens' case was that this drawing had the effect of excluding from the subcontract the installation of the sprinkler tank itself, but not the installation of the associated pipework and valves.
13. Supershield's case was that the tank installed by AC Plastics was to be taken as including the ball valve and that Supershield's contractual responsibilities excluded any work inside the tank.
14. The ball valve was held in place against the side of the sprinkler tank by nuts and bolts which also held in place a "stool piece". The stool piece was a piece of pipe work on the outer face of the tank (and was shown on the relevant contract drawing). As the judge explained in his judgment:

"The ball valve is connected to the incoming water main and supplies water to fill up the tank and to that extent is part of the complete sprinkler system…To complete the pipe work for the mains water the stool piece must be connected by bolting it …from one side onto the ball valve on the other side of the [ball valve box plate]. In other words the final connection between the stool piece and the tank is also the necessary connection between the tank and the ball valve."

15. The judge concluded that the stool piece and the ball valve were therefore both part of the complete sprinkler system which Supershield had to install.
16. In reaching the conclusion that this formed part of the subcontract works, the judge relied on the words of schedule 1 "…the installation of the sprinkler system complete with all…associated pipework, valves…" He also considered that this was consistent with the relevant contract drawing, which showed the tank with a number of pipes and valves connected to it.
17. Mr Cannon QC's principal attack on the judge's reasoning was that he had distorted the true meaning of the contract by reading the words "associated pipework, valves" as meaning associated with the "installation of the sprinkler system".
18. The full text of the description of the works in schedule 1 has three references to valves – "sprinkler control valves", "pumps and associated pipe work, valves,…" and "floor zone valves". Mr Cannon submitted that the reference to "associated pipework, valves" meant associated with pumps and not associated with the sprinkler system, for otherwise the other two references to valves were otiose. He submitted in his skeleton argument that the parties had set out with some precision what Supershield was to do, and that the proper way of reading the description of the works was as follows:

"To supply site operatives for the installation of

(1) the sprinkler system complete with all sprinkler control valves,

(2) pumps and associated pipework, valves, starter and controllers.

(3) floor zone valves with all equipment and

(4) risers."

19. Mr Cannon candidly accepted that this way of reading the contract was never put to the judge and that it occurred to him only after reading the way in which the judge had linked "associated pipework, valves" with "the sprinkler system".
20. It is clear that Siemens had relied at the trial on the words "all associated…valves" because Mr Cannon addressed this in his closing written submissions as follows:

"Siemens seek to make something of the words "all associated…valves" pointing out that the ball valves are valves. But it all depends on whether they are valves associated with "the complete sprinkler system"."

21. It seems to me that he was perfectly right to identify the issue in that way and I am not persuaded by his later attempt to read the contract in a different sense.
22. My reason is not principally that this argument has been late to emerge, although Mr Lord QC made the legitimate forensic point that if it had been the natural and plain meaning of the words one would have expected it to have been advanced at an earlier stage. The more fundamental problem to my mind is that I do not believe that the words of schedule 1 lend themselves to the textual examination to which Mr Cannon invited us to subject them. It seems to me to be far from the case that the parties set out with precision what Supershield was to do. Indeed, the more closely the words were examined during the course of argument, the more that Mr Cannon was constrained to say, correctly in my view, that the words were not carefully selected and put together.
23. The point can be illustrated by reference to pipework. Mr Cannon sought to read the words "associated pipework, valves" as meaning associated with pumps. But on examination it became clear that there was a good deal of pipework which Supershield undoubtedly was responsible for installing but which was not associated with pumps. So either the words "associated pipework" were meant to include all the pipework associated with the sprinkler system or, if not, there was other pipework which was nevertheless to be regarded as part of the sprinkler system. Understandably Mr Cannon opted for the latter. But by the same token the question would then arise whether the ball valve was not equally part of the sprinkler system. On a commonsense view I am in agreement with the judge that the ball valve was part of the complete sprinkler system. In this respect it was no different from the stool piece to which it was attached and which Supershield accepted it was responsible for installing.
24. That brings me back to what I see as the key question on the construction issue, namely whether the proper interpretation of the relevant contract drawing, with its reference to the tank being installed by AC Plastics, had the effect of excluding the installation of the ball valve from the scope of the subcontract works. It is a short point and a matter of impression, but I am not persuaded that the judge with his particular knowledge and expertise in this area was wrong. There is a difference between the tank itself and the tank with valves and pipework attached to it, internally and externally, and the proper connection and adjustment of the ball float valve, lever arm and pipework were an integral part of the proper installation of the sprinkler system.
25. Despite the attractive way in which Mr Cannon argued the matter, I am not persuaded that the judge's construction was wrong. In support of his construction the judge also relied on certain other matters but they were subsidiary points and I do not consider it necessary to refer to them.
26. In view of my conclusion on the construction issue, the second issue falls away.

Reasonableness of settlement, causation and remoteness

27. Mr Cannon submitted that Siemens had straightforward and complete defences to the claims made against it arising from the flood, and that its settlement of those claims for just under 50% did not represent a reasonable attempt to mitigate the potential loss resulting from its exposure to the claims.
28. Megarry J once described the law reports as charts of the wrecks of unsinkable cases. Because of its uncertainty and expense, prudent parties usually try to avoid litigation where possible. It has to be borne in mind that the "settlement value" of a claim is not an objective fact (or something which can be assessed by reference to an available market) but a matter of subjective opinion, taking account of all relevant variables. Often parties may have widely different perceptions of what would be a fair settlement figure without either being unreasonable. The object of mediation or negotiation is then to close the gap to a point which each finds acceptable. When a judge is considering the reasonableness of a settlement he will have in mind these factors and another: that he is likely to have a less complete understanding of the relative strengths of the settling parties than they had themselves (unless he is to embark on a disproportionately detailed investigation), and especially so in complex litigation. The issue which the judge has to decide is not what assessment he would have made of the likely outcome of the settled litigation, but whether the settlement was within the range of what was reasonable. If he decides that it was, an appellate court will not interfere with his decision unless persuaded that he erred in principle or (which is intrinsically unlikely) that his decision was incapable of justification on any reasonable view.
29. Ramsey J considered the principles to be applied where a party settles a claim made against it and seeks to recover its outlay from a third party, and he cited a number of authorities including the well known case of Biggin v Permanite [1951] 2 KB 314. Mr Cannon did not suggest that he misdirected himself, but submitted that he erred when he came to examine the strength of Siemens' causation and remoteness defences.
30. As the judge found in paragraph 10 of his judgment, there was a 600mm high wall inside the tank room designed to retain any overflowing water from the tank and there were drains within the bunded area, but the drains had become blocked. The experts had agreed:

"…The intention was that the overflowing water would be carried away via the drains in the tank room floor.

The escaping water flowed from the floor into drain openings in the tank room floor. There were three drain openings in total. From the drain openings the water flowed by gravity into a sump and from there was pumped to sewer.

…

The building was designed so that, as long as the pumps in the sump continued to operate, the drains would have been able to carry the escaping water indefinitely. The pumps were more than capable of pumping water at the maximum rate at which it would have flowed into, and therefore overflowed from, the tank."

31. Mr Cannon submitted that on any reasonable view the effective cause of water escaping from the tank room was the blockage of the drains or, if the overflow of the tank was a partial cause, that the escape was too remote a consequence for Siemens to have been liable to Haden Young on a proper application of the rule in Hadley v Baxendale (1854) 9 Ex 341. At the trial and in his skeleton argument on this appeal, Mr Cannon relied also on the lack of monitoring of the building management system and failure to attend to the alarm signals referred to by the judge in paragraph 11 of his judgment, but in his oral argument he sensibly concentrated on the drains and I shall do the same. Mr Cannon did not suggest that Siemens' causation and remoteness defences were so strong that it should have refused to enter any settlement, but he submitted that their strength was not reasonably reflected in the settlement which was reached.
32. On the question of causation, Ramsey J considered that the overflowing of water from the sprinkler tank which resulted from the failure of the connection between the ball valve and lever arm was an effective cause of the flood. The blockage of the drains did not take away the potency of the overflow to cause damage, but rather failed to reduce it.
33. I see no error in that approach. On the contrary, it would have been a rash lawyer who would have advised Siemens that it was likely to succeed on the causation issue, let alone that it could be confident of doing so.
34. The remoteness issue raised a more interesting point. The starting point is Alderson B's classic statement in Hadley v Baxendale (at 354) that:

"…where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract is such as may fairly and reasonably be considered either arising naturally, ie according to the usual course of things, from such breach of the contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."

35. Ramsey J said:

"In this case I consider that the probable result of a breach of contract in failing properly to install the nut and bolt would be that there would be an escape of water through the overflow which would, according to the usual course of things, cause a flood and lead to water damage. I do not consider that any imputed knowledge of the existence of the drains, alarms or maintenance could reduce what would otherwise be recoverable under the first limb of Hadley v Baxendale."

36. Mr Cannon submitted that this was a wrong approach. It was not a matter of imputing knowledge of the existence of the drains in order to reduce what was otherwise recoverable under the first limb of Hadley v Baxendale. Rather, it was a fact that the tank room was designed and constructed with drains, and the usual or natural course of any water which overflowed from the sprinkler tank would have been to run away via the drains into a sewer. The blockage of all the drains was a most unfortunate and unlikely occurrence, which prevented the water from running away as it would have done in the normal course of things.
37. Much has been written about the degree of likelihood required in order for the damage not to be regarded as too remote. The leading case is Czarnikow v Koufos (The Heron 11) [1969] 1 AC 350. Mr Cannon relied on it and particularly on the speech of Lord Reid After observing that many different interpretations of the rule in Hadley v Baxendale had been adopted by judges at different times, Lord Reid said (at page 385):

"I do not think that it was intended that there were to be two rules or that two different standards or tests were to be applied. ...

I am satisfied that the Court did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally i.e. in the usual course of things or be supposed to have been in the contemplation of the parties. Indeed the decision makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which on the knowledge available to the defendant would appear to him as only likely to occur in a small minority of cases.

In cases like Hadley v. Baxendale or the present case it is not enough that in fact the plaintiff's loss was directly caused by the defendant's breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation."

38. Lord Reid went on to formulate the test as whether the loss was of a kind which the defendant at the time of the contract ought to have realised was "not unlikely" to result from the breach, the words "not unlikely" denoting "a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable". Lords Morris, Pearce and Upjohn used the words "a serious possibility" and "real danger" as conveying the appropriate shade of meaning.
39. Mr Cannon also cited the speech of Lord Hope in Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48, [2009] 1 AC 61, at 36, where he said:

"The policy of the law is that effect should be given to the presumed intention of the parties. That is why the damages that are recoverable for breach of contract are limited to what happens in ordinary circumstances – in the great multitude of cases, as Alderson B put it in Hadley v Baxendale – where an assumption of responsibility can be presumed, or what arises from special circumstances known to or communicated to the party who is in breach at the time of entering into the contract which, because he knew about, he can be expected to provide for. This is a principle of general application."

40. The law on remoteness of damage in relation to claims for breach of contract is grounded on the policy that the loss recoverable by the victim should be limited to loss from which the party in breach may reasonably be taken to have assumed a responsibility to protect the victim. It follows that the question of remoteness cannot be isolated from consideration of the purpose of the contract and the scope of the contractual obligation. The underlying policy is implicit in Lord Reid's speech in Czarnikow v Koufos, where he referred to what the parties may be supposed to have contemplated as grounds for the recovery of damages and linked this to the question whether the loss was sufficiently likely to result from the breach to make it proper to hold that loss of that kind should have been in the contract breaker's contemplation. It has been made more explicit in the decisions of the House of Lords in South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, 212 and Transfield Shipping.
41. In South Australia negligent surveyors overvalued a property which was to be security for a loan and the lender's loss was exacerbated by a fall of the market. It could not be said that downward movement of the market was unlikely, but loss from the market fall was held not to be loss of a kind in respect of which the surveyors owed a duty to the lender. This conclusion was reached by considering the purpose of the contract and the degree of responsibility which the lender was reasonably entitled to expect of the valuer.
42. In Transfield Shipping the lateness of charterers in the redelivery of a vessel resulted in the owner having to re-negotiate a follow-on charter to its detriment. Arbitrators found that loss of such a kind was not unlikely. The House of Lords held that the damages recoverable by the owners were limited to the period of overrun and should not include any subsequent loss. Lord Rodger and Baroness Hale reached that conclusion on the ground that the subsequent loss was not an ordinary consequence of the breach, applying the rule in Hadley v Baxendale. Lords Hoffmann and Hope took a broader approach. Developing the theme of his speech in South Australia, Lord Hoffmann said (at 24-25) that the rule in Hadley v Baxendale, as explained in Czarnikow v Koufos, is not inflexible; it is intended to give effect to the presumed intention of the parties and not to contradict them. Although the arbitrators had found as a fact that the owner's loss after redelivery was foreseeable, the question whether that loss was one for which the charterer assumed contractual responsibility involved the interpretation of the contract as a whole against its commercial background. Similarly, Lord Hope said (at 31) that assumption of responsibility forms the basis of the law of remoteness of damage in contract, and that this is determined by more than what at the time of the contract was reasonably foreseeable. Lord Walker said (at 69) that it may be that the rather precise formulation of the notion of "assumption of responsibility" applies (if at all) to cases within the second limb of Hadley v Baxendale, but that the underlying idea - what was the common basis on which the parties were contracting? – applies to the rule as a whole. He also said (at 78) that Czarnikow v Koufos shows that the question is not simply one of probability, but of what the contracting parties must be taken to have had in mind, having regard to the nature and object of their business transaction, and he expressed agreement (at 87) with the reasons given by Lords Hoffmann, Hope and Rodger.
43. Hadley v Baxendale remains a standard rule but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contract breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. However, South Australia and Transfield Shipping are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties. In those two instances the effect was exclusionary; the contract breaker was held not to be liable for loss which resulted from its breach although some loss of the kind was not unlikely. But logically the same principle may have an inclusionary effect. If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances.
44. The distinctive feature of the present case is that the ball valve and the drains were both designed to control the flow of water involved in the operation of the sprinkler system. None of the cases cited to us had any comparable feature (i.e. simultaneous failure of separate protection measures) and, surprisingly as it may seem, counsel were not able to find any. It is not uncommon in the case of a sophisticated engineering project (whether an aircraft, a car, a tunnel or a building) for the designer to incorporate multiple safety devices in the reasonable expectation that the risk of simultaneous failure of both or all the protection devices will be minimal. But the fulfilment of that expectation will depend on those responsible for the protection devices doing as they ought. If those responsible fail to do so, and the unlikely happens, it should be no answer for one of them to say that the occurrence was unlikely, when it was that party's responsibility to see that it did not occur. As Mr Lord observed, the reason for having a number of precautionary measures is for them to serve as a mutual back up, and it would be a perverse result if the greater the number of precautionary measures, the less the legal remedy available to the victim in the case of multiple failures.
45. Mr Cannon may be right in his submission that a failure of the connection between the ball valve and lever arm was very unlikely to result in a flood, because the probability was that the water would escape through the drains, but I do not accept that this made the loss resulting from the flood too remote to have been recoverable by Haden Young from Siemens. Siemens was responsible to Haden Young for supplying and installing the sprinkler system in such a way that the water used for the system was properly contained, and it therefore assumed a contractual responsibility to prevent its escape. The ball valve was the first means of protection against water causing damage to other parts of the building and it failed. It was always possible that the second means of protection, the drains, might also fail. As the judge observed, drains do block, drain pumps malfunction, building management systems do not always operate and maintenance is not always effective. I would conclude that the flood which resulted from the escape of water from the sprinkler tank, even if it was unlikely, was within the scope of Siemens' contractual duty to prevent. But that is to go further than is strictly necessary. Siemens had only to show that it was reasonable to settle the claims made against it as it did. I see no proper reason for overturning the judge's conclusion that it was reasonable.
46. I would dismiss the appeal.

Lord Justice Richards:

47. I agree.

Lord Justice Mummery:

48. I also agree.