England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		31/07/2013

Mr Justice Ramsey:

Introduction

1. In these proceedings the Claimant ("Oakapple Homes") seeks an order compelling the First Defendant ("DTR"), an architectural practice in creditors' voluntary liquidation, to execute certain collateral warranties under the hand of its liquidator, the Second Defendant ("the Liquidator").
2. The Liquidator is concerned whether, if those warranties were issued, there would be professional indemnity insurance cover to meet any claims made under them. In correspondence with the solicitors for the Third Defendant ("Catlin") various insurance coverage questions were raised by Catlin in relation to DTR's professional indemnity insurance. As a result at a directions hearing Catlin were joined as a party to these proceedings to resolve those issues.
3. This led to the formulation of an issue to be determined in this judgment in these terms:

"Whether in the light of Exclusion 5.9 of the policy there would be coverage under the policy issued by the Insurers for the period of insurance from June 2008 to June 2009 in respect of liability arising under the collateral warranties which the First Defendant has been called upon to execute in favour of the lessees of the 71 residential apartments at Wren Nest Mill, Glossop."

4. This issue was developed by the parties and, as developed, essentially raised the following two issues:

(1) Would DTR be entitled to defend claims by Beneficiaries to the warranties (if executed) on the basis of Oakapple Construction's "contributory" negligence as the contractor?

(2) If not, would Exclusion 5.9 entitle Insurers to decline to indemnify DTR for any liability which it might have to the Beneficiaries to the warranties?

Background

5. Wren Nest Mill is a nineteenth century former cotton mill in Glossop, Derbyshire. Between August 2005 and January 2007 the property was converted by Oakapple Homes into 72 residential apartments over four storeys, with commercial units at ground floor level.
6. Oakapple Homes appointed DTR as architects by a letter of appointment dated 10 May 2004 ("the Appointment").
7. Clause 4 of the Appointment provided as follows in relation to DTR's obligation:

"You will be required to enter into collateral warranties relating to the Services only in favour of any person or institution providing finance in connection with or secured upon the Development or any part of it and the first purchaser and the first tenant of leasehold interest and occupier of each and every part of the Development (and to anyone providing finance to such .first purchaser and/or first tenant) ("the Third Parties") and it is a specific requirement of this letter that you do so within 14 days of our written request. The forms of collateral warranty are attached to this letter and we will specify at the time which form of warranty is appropriate for each particular recipient...."

8. There were two forms of collateral warranty attached to the Appointment. The first was a consultant/fund/employer warranty and the second was a consultant/purchaser/tenant warranty. It is the second form of warranty which is relevant to these proceedings.
9. On 22 July 2004 Oakapple Homes, as employer, entered into a building contract ("the Contract") with Oakapple Construction Limited "(Oakapple Construction") as contractor. Under that Contract the employer's agent was Rex Procter and Partners ("RPP").
10. Clause 13.1 of the Appointment provided an obligation upon DTR in the following terms:

"You will when requested by us enter into a novation agreement with us and the Contractor in the form of the draft novation agreement attached to this letter. If we continue to have any legal or equitable interest in the Development after the execution of the novation agreement you shall promptly after a request to do so execute and deliver a deed of warranty in favour of us in the form of the draft warranty attached to this letter."

11. There was a draft Deed of Novation of Architects' Appointment attached to the Appointment. In addition, it was intended to attach the relevant deed of warranty in favour of Oakapple Homes but an incorrect draft seems to have been attached to the Appointment, but nothing turns on this. In due course DTR's appointment was duly novated to Oakapple Construction by a Deed of Novation dated 11 August 2004 and shortly afterwards on 22 September 2004 DTR entered into a collateral warranty with Oakapple Homes and Oakapple Construction ("the Oakapple Homes Collateral Warranty").
12. By Clause 10 of the Oakapple Homes Collateral Warranty it was provided as follows, Oakapple Homes being the Beneficiary and DTR being the Consultant:

"Following a written request from the Beneficiary, the Consultant will (unless it has already done so) and/or procure that its sub-consultants execute a deed of collateral warranty in the relevant form specified in the Appointment in favour of any person in whose favour the Appointment obliged the Consultant to give or procure the giving of such a warranty."

13. Following completion of the works Zurich Assurance Limited ("Zurich Assurance") acquired the freehold of the property and Oakapple Homes became the head lessee. All or nearly all of the 72 residential apartments were let and occupied. Zurich Assurance had acquired the leasehold interest immediately superior to the tenancies of the occupiers of the retail units and those occupiers of the retail units had collateral warranties executed in their favour by DTR. However collateral warranties had not been executed by DTR in relation to the purchasers of the leasehold interests in the residential apartments.
14. On 6 April 2007 the property was largely destroyed by fire. On 19 August 2009 DTR went into creditor's voluntary liquidation and the Liquidator was appointed. A letter of claim pursuant to the Pre-Action Protocol for Construction and Engineering Disputes was sent to DTR, care of the Liquidator, on 9 June 2011. In that letter of claim Oakapple Homes and the residential leases alleged that there were many breaches by DTR of their design and inspection duties which had led to the fire and its rapid spread through the property. The letter of claim had been prepared by solicitors acting on behalf of Zurich Insurance PLC ("Zurich Insurance"), the building insurers of the property. A letter of response was sent on 7 October 2011 and the pre-action protocol meeting took place on 26 March 2012.
15. In the letter of claim Zurich Insurance, who were subrogated to the rights of Oakapple Homes, called on DTR to execute collateral warranties in favour of those identified as the residential lessees of the property. That request under Clause 4 of the Appointment was ignored by DTR and was then repeated on 30 December 2011, pursuant to clause 10 of the Oakapple Homes Collateral Warranty. Correspondence was then exchanged between solicitors acting on behalf of Zurich Insurance and solicitors acting on behalf of Catlin. The Liquidator was also involved in the correspondence.
16. On 29 February 2012 the Liquidator filed a Notice of Disclaimer with the Companies Court claiming to disclaim "all my interest in the letter of appointment for architect dated 10th May 2004 between Dempster Thrussell and Rae Limited (Now DTR (2009) Limited) and [Oakapple Homes]."
17. The Notice was returned to the Liquidator for service by him on 1 March 2012 but was not served within 7 business days as required under Rule 4.188(1) of the Insolvency Rules 1986. On 9 March 2012 the Liquidator made an application to the Companies Court under section 112 of the Insolvency Act 1986.
18. Following the directions hearing, solicitors for the Liquidator stated that after the resolution of the current insurance issues they would be asking the Court whether the Liquidator should issue and serve a Notice of Disclaimer whether that would be a new notice or the existing one. At the hearing of these insurance issues the Liquidator took a neutral position but raised various matters which would arise either if Oakapple Homes were successful or if they were not.
19. I now consider the insurance issues raised in these proceedings. It is first convenient to set out the terms of DTR's insurance policy.

DTR's Insurance Policy

20. DTR's Insurance Policy ("the Policy") is in a standard form, the RIBA Insurance Agency APIA-RIBA 2005 wording, with certain endorsements. The Policy includes the following relevant terms:

(1) By Clause 2.1:

"Insurers will indemnify the Assured against any claim first made against them during the Period of Insurance in respect of any civil liability together with claimant's costs, fees and expenses in accordance with any judgment, award or settlement made within the Geographical limits in consequence of:

(a) Any breach of the professional duty of care owed by the Assured to the claimant...."

(2) In relation to Section 5, General Exclusions, it was provided that:

"The Policy shall not indemnify the Assured in respect of:

...

Warranties, Penalties and Collateral Warranties

5.9 Any claim arising out of any performance warranty (including but not limited to fitness for purpose warranties) guarantee, penalty clause or liquidated damages clause unless the liability of the Assured to the claimant would have existed in the absence of such warranty, guarantee or clauses.

Except that, notwithstanding anything stated immediately above, the indemnity provided to the Assured under this Policy will apply to a claim arising from the performance by the Assured of obligations agreed to be performed by them under a Collateral Warranty, Duty of Care Agreement or similar Agreement, provided that:

(a) the benefit of such Warranty or Agreement is no greater or longer lasting than that in the original contract to which it relates

(b) no Indemnity will be given for:

(i) any guarantee or warrant of fitness for purpose, satisfaction of performance specification or period of project works, or

(ii) any financial penalty or liquidated damages

The above exclusions will not apply where the liability of the Assured would have arisen in the absence of such Warranty or Agreement in any event.

The indemnity provided under this Clause will be extended to apply where the Warranty or Agreement has been assigned to a tenant, purchaser, funder or other third party and is subject otherwise to Policy terms and conditions."

Principles of construction

21. In construing the Appointment, the draft warranty and the Policy, I bear in mind the general principle of construction of agreements as set out in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 at 912 and Chartbrook Limited v Persimmon Homes Limited [2009] 1 AC 1101.
22. As Lord Steyn said in Sirius International Insurance Company v FAI Insurance Company [2004] 1 WLR 3251 at 3257 to 3258:

"the enquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual scene."

23. I was also referred to Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and to the passage in the judgment of Lord Clarke, with whom the other members of the Supreme Court agreed, at [21] when he said:

"The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other."

24. I was also referred to the judgment of Lord Mance in the Trigger Litigation [2012] UKSC 14 at [19] with which, on this issue, the other members of the Supreme Court agreed. He said this:

"19. To resolve these questions it is necessary to avoid over-concentration on the meaning of single words or phrases viewed in isolation, and to look at the insurance contracts more broadly. As Lord Mustill observed in Charter Reinsurance Co Ltd v Fagan [1977] AC 313, 384, all such words "must be set in the landscape of the instrument as a whole" and, at p 381, any "instinctive response" to their meaning "must be verified by studying the other terms of the contract, placed in the context of the factual and commercial background of the transaction". The present case has given rise to considerable argument about what constitutes and is admissible as part of the commercial background to the insurances, which may shape their meaning. But in my opinion, considerable insight into the scope, purpose and proper interpretation of each of these insurances is to be gained from a study of its language, read in its entirety. So, for the moment, I concentrate on the assistance to be gained in that connection."

25. Finally I was referred to a passage in MacGillivray on Insurance Law (11th Edition) at paragraph 11-007 where the authors state:

"Businesslike interpretation. It is an accepted canon of construction that a commercial document, such as an insurance policy, should be construed in accordance with sound commercial principles and good business sense, so that its provisions receive a fair and sensible application. Several consequences flow from this principle. The literal meaning of words must not be permitted to prevail where it would produce an unrealistic and generally unanticipated result, as, for example, where it would unwarrantably reduce the cover which it was the purpose of the policy to afford."

26. I now turn to consider the two individual issues raised in this case.

Contributory Negligence

27. On behalf of Catlin, Mr Simon Hughes QC refers to Clause 1.2 of the draft warranty which provides as follows:

"The Consultant has no liability hereunder which is greater or of longer duration than it would have had if the Beneficiary had been a party to the Appointment as joint employer PROVIDED THAT the Consultant shall not be entitled to raise under this Deed any set-off or counterclaim in respect of sums due under the Appointment."

28. He submits that the wording of Clause 1.2 of the draft warranty closely corresponds to the wording of Exclusion 5.9 in the Policy, which applies the indemnity under the Policy to a collateral warranty "...provided that (a) the benefit of such Warranty or Agreement is no greater or longer lasting than that in the original contract to which it relates…."
29. He submits that Clause 1.2 of the draft warranty seeks to limit the liability of DTR to the position which would have pertained under the Appointment where the relevant beneficiary was "joint employer" and DTR could not raise any set-off or counterclaim in respect of fees as a defence to a claim under the draft warranty. He submits that the situation where Oakapple Homes is both the "beneficiary" and joint employer permits DTR to raise and rely upon defences based upon Oakapple Homes being responsible for any defaults of its contractor, Oakapple Construction. He submits that DTR was always able to deploy the negligence of Oakapple Construction as a defence of contributory negligence against Oakapple Homes given the relationship of the two Oakapple Companies in relation to the Development.
30. He says that there was no restriction on the entitlement of DTR to raise contributory negligence in the Appointment which was novated to Oakapple Construction. He further submits there is nothing in the draft warranty which in clear terms diminishes or excludes the ability of DTR to rely on contributory negligence. He submits that, to the contrary, Clause 1.2 of the draft warranty indicates that all defences save for those based on set-off and counterclaim referable to fees, are preserved and available to DTR. This, he submits, would include allegations such as those pleaded in paragraph 16(iii) of the Defence where it is stated that Oakapple Construction departed from DTR's design and/or redesigned DTR's design, making Oakapple Construction the designer of the relevant parts of the works.
31. On behalf of Oakapple Homes Mr David Turner QC points to the fact that contributory negligence under the Law Reform (Contributory Negligence) Act 1947 no longer operates as a complete defence but operates as a partial defence to the level of damages recoverable by a claimant. He submits, relying on Vesta v Butcher [1989] 1 AC 852 at 860 E to F, that apportionment of damages in a contractual context is not permissible where a defendant is only liable under a contractual duty to take care and where there is no corresponding duty of care at common law. He submits that contributory negligence apportionment is only permissible where the defendant's contractual liability is the same as liability in negligence and a duty of care at common law arises independently of any contract.
32. It follows, in his submission, that a plea of contributory negligence could not be advanced to meet a contractual claim unless the plea could also be advanced to meet a claim made in tort.
33. In relation to the submissions based upon Oakapple Homes and Oakapple Construction being joint employers by virtue of Clause 1.2 of the draft warranty and therefore jointly and severally liable for Oakapple Construction's contributory negligence, Mr Turner QC submits that this misunderstands the position. He says that a beneficiary is to be treated as a joint employer to the original Appointment which was made by Oakapple Homes and provides no basis for contending that any carelessness on Oakapple Construction's part as contractor should be imputed to the same beneficiary.
34. He submits that any party which had been an employer of DTR jointly with Oakapple Homes could not be argued to become vicariously liable to any third party which had sustained loss as a result of the negligence of Oakapple Construction under the Contract. He referred to the article by Andrew Bartlett QC, Attribution of Contributory Negligence: Agents, Company Directors and Fraudsters [1998] 114 LQR 460 at 464 and 466. He submits that, because the beneficiaries should be treated as a joint employer under the original Appointment, this does not mean that the measure of their recovery should assume that the beneficiaries were joint contractors.
35. Mr Turner QC also referred to Clause 3.4 of the Appointment and submitted that, if DTR were right, there would, contrary to that provision, be a limitation or modification of the secondary obligation to pay damages. He also referred to Moschi v Lep Air Services Limited [1973] AC 331 at 350 D to E to support that argument. I am not persuaded that Clause 3.4 has any effect on this issue. It applies to specific circumstances which are not relevant here.
36. The starting point for an analysis of this issue is the wording of Clause 1.2 of the draft warranty. Under that clause the liability of DTR to the Beneficiary would be no greater or of longer duration than it would have had if the Beneficiary had been a party to the Appointment as joint employer. The Appointment is the agreement of 10 May 2004 between DTR as consultant and Oakapple Homes as the employer. The liability therefore has to be considered in the context of DTR's liability to Oakapple Homes. On that basis, would DTR's liability to Oakapple Homes be affected by any "contributory negligence" of Oakapple Construction?
37. Whilst Oakapple Homes and Oakapple Construction may be connected companies, they are separate legal entities who entered into the Contract for the construction of the Development. In this case DTR states in paragraph 16(iii) of the Defence that it would wish to allege "contributory negligence" by Oakapple Construction in departing from DTR's design or carrying out its own design. In a claim by Oakapple Homes against DTR for defective design, if the above allegation were to be made, it would be as a defence by DTR saying that Oakapple Construction did not carry out the work in accordance with DTR's design or carried out their own design for which DTR is not responsible. DTR could not assert as against Oakapple Homes that the damages due to Oakapple Homes fell to be reduced to take account of contributory negligence by Oakapple Construction. An employer under a construction contract is not liable, vicariously or otherwise, for the negligence of the contractor. In this case there is no basis for saying that the connected company relationship between Oakapple Homes and Oakapple Construction alters that position.
38. In so far as Mr Hughes QC seeks to rely on the Beneficiary being a party as joint employer, not to the original Appointment but to the Appointment as novated to Oakapple Construction, I do not consider that that is the appropriate document. The definition in the draft warranty refers to the Appointment as the agreement of 10 May 2004 and then states that the Appointment has been novated to Oakapple Construction by the novation agreement. The reference in Clause 1.2 of the draft warranty is to the appointment not the Appointment as novated.
39. If that were not correct and the reference was to the Appointment as novated then I do not consider that the position is different. Under Clauses 2 and 4 of the Deed of Novation both DTR and Oakapple Construction agreed to be bound by and liable under the Appointment as if named in the Appointment "as a party thereto ab initio in lieu of the Employer."
40. First, DTR's liability to Oakapple Construction would depend on whether DTR were in breach of the relevant terms and conditions of the Appointment. If, for example, DTR negligently designed the way in which walls were carried up to the roof and Oakapple Construction were also negligent in that respect, then that would still mean that DTR was liable to Oakapple Construction as employer under the Appointment, as novated. That liability would not be reduced as under s.1 of the Law Reform (Contributory Negligence) Act 1947, the fault of Oakapple Construction would not defeat the claim, that is go to liability, it would reduce the damages recoverable by Oakapple Construction "to such extent as the court thinks just and equitable having regard to the claimant's share in the responsibility for the damage". The liability of DTR to the employer would not be affected but the damages recoverable by Oakapple Construction for that liability would be reduced.
41. Secondly, DTR's liability to Oakapple Construction would be contractual liability under the Appointment as novated. DTR would have to assert that Oakapple Construction owed DTR a duty of care in carrying out their work under the Contract between Oakapple Homes and Oakapple Construction. In Vesta v Butcher [1989] 1 AC 852 at 860 to 867, 875 and 879 the Court of Appeal adopted the analysis of Hobhouse J at first instance where he analysed contributory negligence in terms of contractual liability as follows at [1986] 2 All ER 488 at 508:

"The question whether the 1945 Act applies to claims brought in contract can arise in a number of classes of case. Three categories can conveniently be identified. (1) Where the defendant's liability arises from some contractual provision which does not depend on negligence on the part of the defendant. (2) Where the defendant's liability arises from a contractual obligation which is expressed in terms of taking care (or its equivalent) but does not correspond to a common law duty to take care which would exist in the given case independently of contract. (3) Where the defendant's liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract."

42. The Court of Appeal agreed with the analysis of Hobhouse J that the facts in that case came within category (3) where the defendant's liability in contract is the same as liability in negligence so that the negligence of the claimant party can give rise to apportionment under the 1945 Act. Otherwise the Court of Appeal held that the 1945 Act would not allow apportionment under categories (1) or (2), as summarised by the authors of Chitty on Contracts (31^st Edition) at 26-075.
43. In this case we are concerned with the question whether, in respect of a claim by Oakapple Construction against DTR under the Appointment as novated, DTR could contend that there should be apportionment based on negligence by Oakapple Construction in the performance of the Contract between Oakapple Homes and Oakapple Construction. DTR's relevant liability would be under the Appointment as novated. Under that relationship there would be no possibility of apportionment in category (2) and the only possibility would be if DTR could establish independent liability to Oakapple Construction in tort to bring itself within category (3). However, that would not be a defence to the contractual claim simpliciter.
44. The issue here is whether DTR would be entitled to defend claims by Beneficiaries to the warranties (if executed) on the basis of Oakapple Construction's "contributory" negligence as the contractor. For DTR to be able to raise a defence to claims by the beneficiaries based on Oakapple Construction's contributory negligence they would have to show:

(1) That DTR owed Oakapple Construction a duty of care in tort independently of the existence of the contractual duty under the Appointment as novated.

(2) That DTR were entitled to reduce the damages payable to Oakapple Construction based on Oakapple's negligent performance of the Contract.

(3) That DTR owed the Beneficiaries a duty of care in tort independently of the existence of the contractual duty under the warranty based on the Appointment as novated.

(4) That DTR were entitled to reduce the damages payable to the Beneficiaries based on Oakapple's negligent performance of the Contract.

45. Whatever the difficulties of establishing, otherwise against DTR's interest, an independent duty to Oakapple Construction and to the Beneficiaries, the position breaks down at the final stage. DTR simply could not defend a claim by the Beneficiaries so as to reduce the damages payable to the Beneficiaries on the basis of contributory negligence by Oakapple Construction.
46. On that basis, even if the warranty were to be construed by reference to the Appointment as novated, I do not consider that DTR would be entitled to defend claims by Beneficiaries on the basis of Oakapple Construction's contributory negligence.
47. Accordingly, on the first issue, I find that DTR would not be entitled to defend claims by Beneficiaries to the warranties (if executed) on the basis of Oakapple Construction's "contributory" negligence as the contractor. I therefore turn to the second issue which now arises. That issue raises the question whether Exclusion 5.9 entitles Insurers to decline to indemnify DTR for any liability which it might have to the Beneficiaries to the warranties.

The Policy

48. Mr Hughes QC relies on the wording within Exclusion 5.9 of the Policy which states that the indemnity provided to the assured will apply to the collateral warranty provided that "the benefit of such Warranty or Agreement is no greater or longer lasting than that in the original contract to which it relates". He submits that, if Catlin is wrong in relation to the issue of contributory negligence, then such liability as may ultimately established under the draft warranty comes within exclusion 5.9(a) of the Policy. He submits that, in those circumstances, Oakapple Homes/the Beneficiaries would enjoy a greater benefit under the draft warranty than is enjoyed by Oakapple Construction under the Appointment as novated, which he submits is the "contract to which it", that is the draft warranty, "relates".
49. Mr Turner QC submits that Exclusion 5.9 is worded so as to match the insurance cover to the liabilities arising from the Appointment. In particular, he submits that the provision that "the indemnity provided under this Clause will be extended to apply where the Warranty or Agreement has been assigned to a tenant, purchaser, funder or other third party" expressly recognises the need to provide cover for liabilities arising from a breach of the obligation of reasonable care and skill not merely to the original client but to additional parties such as funders or purchasers under warranties in like terms, that is terms which are no more onerous.
50. He submits that the quantum of damages payable may differ significantly according to the identity of the particular claimant. In particular, loss suffered by a beneficiary under a warranty could be greater that any loss which may be suffered by the original contracting party. He therefore submits that the phrase "the benefit of such warranties… is no greater… than that in the original contract" cannot be referring to the amount of the damages recoverable by the beneficiary and is properly to be construed as a reference to the nature of the rights conferred by the warranty, in particular, to have the works completed with reasonable skill and care.
51. He submits that any other construction of the policy which applied Exclusion 5.9(a) to the quantum of damages under the Appointment as novated would also fail and would, in any event, defy commercial business common sense. Thus he submits that for the Insurers to assert that the Policy does not respond to a claim because DTR could claim contributory negligence against the novated party, Oakapple Construction, but not against the Beneficiaries would make a nonsense of common schemes under which the architect's appointment is novated.
52. The issue in this case depends on what is meant by the Policy covering DTR's liability under collateral warranties provided that "the benefit of such Warranty... is no greater or longer lasting than that in the original contract to which it relates." I accept that this wording is reflected in the wording of the warranty which provides that DTR has no liability under the warranty "which is greater or of longer duration than it would have had if the Beneficiary had been a party to the Appointment as joint employer."
53. In my judgment, the reference in Exclusion 5.9 to the "original contract" is a reference to the Appointment and not the Appointment as novated. Whilst, as Mr Hughes QC observes, the Deed of Novation says that Oakapple Construction is to treated in terms of rights and obligations as if Oakapple Construction "had been named in [the Appointment] as a party thereto ab initio in lieu of [Oakapple Homes]," that does not alter the terms of the original Appointment. It merely creates a fiction by treating Oakapple Construction as if it had been named because it was not named as the employer in the original Appointment. The Appointment as a document does not change. On that basis, the liability of DTR to the Beneficiaries is no greater or longer than in the original Appointment.
54. I accept the submission of Mr Turner QC that the reference to "the benefit of the warranty" in Exclusion 5.9 is not a reference to the damages claimable under the warranty. The benefit of the warranty is the benefit in providing contractual liability by DTR to the Beneficiaries. It cannot be a reference to the quantum of damages. The purpose of the clause in the Policy is to give insurance cover where there is an obligation on an architect under a collateral warranty or duty of care agreement by reference to obligations under the architect's original contract. The damages which might have been recovered for breach of those obligations by the original party to that contract, Oakapple Homes, could not have been intended to define "the benefit of the warranty", so as to limit the damages recoverable by the Beneficiaries under the warranty. The Beneficiaries to the warranty would not, in practical terms, be able to show what damages the original party might have suffered at what time. Such a conclusion, to use phrases from MacGillivray would not be consistent with sound commercial principles and good business sense and would produce an unrealistic and generally unanticipated result.
55. As stated above, it is the benefit under the Appointment and not under the Appointment as novated which has to be considered. The benefit of the warranty which has to be "no greater or longer lasting" than that in the Appointment refers to the scope, extent and duration of the liability and therefore the fact that DTR cannot rely on any contributory negligence of Oakapple Construction does not arise. The position would, however, be no different if the "original contract" were to be the Appointment as novated. The impact of apportionment under the 1945 Act, assuming DTR to be able to establish a category (3) case under Vesta v Butcher, would be to reduce the damages recoverable from Oakapple Construction not to change the scope, extent or duration of liability under the Appointment as novated.
56. For those reasons, I do not consider that Exclusion 5.9 would entitle Insurers to decline to indemnify DTR for any liability which it might have to the Beneficiaries to the warranties.

Summary and conclusion

57. As a result, my answers to the two issues raised by Catlin as Insurers of DTR are as follows:

(1) DTR would not be entitled to defend claims by Beneficiaries to the warranties (if executed) on the basis of Oakapple Construction's "contributory" negligence as the contractor.

(2) Exclusion 5.9 would not entitle Insurers to decline to indemnify DTR for any liability which it might have to the Beneficiaries to the warranties.

58. It follows that on the terms of the draft collateral warranties and the Policy there would be coverage under the Policy (issued by the Insurers for the period of insurance from June 2008 to June 2009) in respect of liability arising under those collateral warranties which the First Defendant has been called upon to execute in favour of the lessees of the 71 residential apartments at Wren Nest Mill, Glossop.
59. At the request of the parties, who were in settlement discussions, this judgment, prepared in draft, has only been handed down now that the settlement discussions have achieved a satisfactory conclusion.