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Royal Insurance (UK) Ltd v. Amec Construction Scotland Ltd & Ors [2005] ScotCS CSOH_162 (25 November 2005)

OUTER HOUSE, COURT OF SESSION

[2005] CSOH 162

A2381/02

OPINION OF LORD EMSLIE

in the cause

ROYAL INSURANCE (UK) LIMITED

Pursuers;

against

AMEC CONSTRUCTION SCOTLAND LIMITED AND OTHERS

Defenders:

________________

Pursuers: McNeill, Q.C., McLean; DLA

First Defenders: Howie, Q.C., Borland; MacRoberts

Third Defenders: MacColl; Bishops

25 November 2005

Introduction
[1] In this action the pursuers, who are tenants of a substantial office building in Glasgow, claim sums totalling approximately £10 million from three sets of defenders, namely the main contractors, architects and engineers who were involved in a major redevelopment of the building in the late 1980s. The owners of the building at that time, and the employers for the purposes of the redevelopment works, were the Scottish Provident Institution. However the pursuers, as prospective purchasers of the building after redevelopment, sought and obtained collateral warranties from all three defenders in the form of broadly similar Deeds of Undertaking. When the works were completed the pursuers duly purchased the building, but they later sold it on to another company, Sterling Estates Limited, who leased it back to them on a full repairing and insuring basis.

[2] As regards the first and third defenders, at whose instance a procedure roll debate has now taken place before me, the pursuers' claim is based on (i) alleged breaches of warranty and (ii) associated obligations of indemnity, all by reference to these defenders' respective Deeds of Undertaking. According to the pursuers, seriously unsuitable fill material was used in the course of the redevelopment works which, over time, has expanded in contact with groundwater and caused severe damage to the lower parts of the building. Necessary investigations have been followed by extensive remedial works, coinciding with the relocation of all of the pursuers' staff to different premises. In essence, the pursuers' claim comprises the cost of these measures.

[3] The parties' detailed pleadings run to over 120 pages, but for present purposes the issue can be quite shortly stated. Throughout the Closed Record the pursuers are repeatedly identified as the party directly responsible for repair, renewal, rebuilding and reinstatement under the lease; as the party by whom all investigations and remedial measures were instituted following the emergence of damage; as the party whose staff were relocated while the remedial works were carried out; and as the party whose various losses in connection with the damage to the building are now sought to be recovered from the defenders. Averments along such lines appear in most of the articles of condescendence, especially article 9 which concerns the quantum of the claim, and to a certain degree the first defenders' admissions and averments follow suit. However, after listing multiple quantified heads of claim between pages 89 and 91 of the Closed Record, the pursuers go on to aver as follows:

"In some cases said costs have been initially invoiced to, and payment has been initially made by, other companies within the pursuers' group of companies or agents acting for the pursuers, namely said D J Orchard & Associates. A Schedule identifying said companies and agents and the categories of costs they have respectively met on behalf of the pursuers to 23 March 2005 is produced, referred to for its terms and held as incorporated herein brevitatis causa. Said Schedule will be updated as the remedial works are carried forward. However, the pursuers will have to reimburse all their said group companies and agents in relation to all costs incurred on their behalf arising from the defenders' said breaches. They will have to do so because said costs are being incurred on the pursuers' behalf to fulfil the liabilities and obligations of the pursuers under and connected with the pursuers' said Lease, and responsibility for said costs ultimately lies therefore with the pursuers. All said losses have flowed directly and in the ordinary course of events from the said breaches of said warranties. They were in any event reasonably foreseeable at the time when the said warranties were given as being likely to result from the said breaches."

[4] The relative Schedule (No.6/30 of Process) sets out 21 numbered "categories of costs", which appear to coincide with most, but not all, of the averred heads of claim. Opposite each category in the Schedule is a box identifying the party by whom the relevant cost has been met, and the significant feature for present purposes is that only box 7 (relative to the remedial works undertaken by the main contractors "Skanska") contains any reference to the pursuers or to their alleged agents. Almost all of the parties names in the other boxes appear to be companies within the group to which the pursuers belong.

Submissions for the defenders
[5] Against that background, senior counsel for the first defenders maintained that, as illustrated by cases such as Edgar v Lord Advocate 1965 SC 67 and P&O Developments v Guy's & St. Thomas' Hospitals Trust 1999 BLR 3, and confirmed by the House of Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd 1994 1 AC 85 and Alfred McAlpine Construction Ltd v Panatown Ltd 2001 1 AC 518 (esp. per Lord Browne Wilkinson in the former case at p.114-5, and Lord Clyde in the latter at pp.532 and 536), the general rule of the common law was that a wrongdoer could only be held liable in respect of losses actually sustained by the pursuer himself. Accordingly, if costs were voluntarily met, or services provided, by third parties to the pursuer's advantage, such costs or services would prima facie cease to be claimable by the pursuer from the wrongdoer concerned. Only if a pursuer was in some way legally liable to pay or reimburse a third party "benefactor" could the relevant loss be said to remain with him as a legitimate head of claim.

[6] In the circumstances of the present case, counsel submitted, the pursuers' averred claims for breach of warranty were fundamentally irrelevant, in that the payments allegedly made by third parties were not plainly and unambiguously averred to be the subject of a legal liability of reimbursement on the part of the pursuers. The pursuers could maintain no valid claim against the defenders for alleged losses of which they had effectively been relieved by the voluntary intervention of others. A fortiori, in the context of the claimed indemnity, the pursuers had failed to aver themselves into the protection of the term "liabilities". In these respects, the pursuers had no answer to the first defenders' preliminary plea, and there were no other principles of law behind which they could now shelter. In particular, the well-known "black hole" authorities on which the pursuers sought to found were readily distinguishable on their facts, in respect that they were largely concerned with situations in which the subject matter of a claim, such as damaged property, was transferred into the ownership of a third party. Accordingly they could not assist the pursuers in the circumstances of this case, where no such transfer was involved and where, in any event, the first defenders' Deed of Undertaking expressly limited the scope of their potential liability to two parties. Moreover, the presumption against donation could not relieve the pursuers of the onus of averring relevant losses, and the obiter remarks of Lord Griffiths in Linden Gardens and Panatown could not readily be reconciled with the established general rule.

[7] In counsel's submission, the real problem for the pursuers was that although they had tabled averments at p.92 asserting that they would "... require to reimburse all their said group companies and agents ...", (apparently with the intention of bringing themselves within the general rule discussed above), the explanation which immediately followed was an obvious non sequitur and called into question the substance and validity of the primary assertion. Whatever might be the nature and extent of the pursuers' obligations under the lease, their existence could in no way define the relationships between the pursuers and the various parties by whom different "categories of costs" had been met. Over and above that, the dates on which alleged obligations to reimburse arose were not stated, and in counsel's submission this was critical: unless a given obligation of reimbursement was in place before any relevant expenditure by a third party, the claim was extinguished and could not be revived. To make matters worse, the whole circumstances in which the relevant invoicing and payment occurred were left to speculation; box 7 of the Schedule introduced further confusion by inexplicably including the pursuers' alleged agents as a paying party in their own right; and in six other boxes the pursuers' insurers appeared as paying parties. These features further called into question the existence and validity of any alleged obligation to reimburse. While admittedly junior counsel for the pursuers had, in the course of the debate, volunteered suggestions as to the possible source of funds "channelled" through such third parties, this did not alter the fact that the disputed averments remained self-contradictory and irrelevant.

[8] On the whole matter, counsel submitted that I should hold irrelevant, and exclude from probation, the pursuers' disputed averments at pp.91-92, along with all of the heads of loss within the list at pp.89-91 which appeared to correspond with boxes 1-6 and 8-21 of the Schedule No.6/30 of Process.

[9] For his part, counsel for the third defenders drew my attention to the slightly different terms of the Deed of Undertaking which his clients had granted, but submitted that for all practical purposes the third defenders' position, mutatis mutandis, was identical to that of the first defenders. He therefore adopted the arguments advanced on the first defenders' behalf, and associated himself with their motion to exclude the disputed averments from probation.

Submissions for the pursuers
[10] The pursuers' response, articulated through both junior and senior counsel, was that the averments at p.91-92 of the Closed Record were relevant and sufficiently specific as they stood to entitle the pursuers to further inquiry. The defenders' criticisms were unduly technical; they conflicted with the legal presumption against donation or other gratuitous conduct; they ignored the true extent to which, on Record, the pursuers (and the first defenders) had identified the pursuers as the affected party at all material stages; and they also ignored the pursuers' clear averments (i) that the various third party payments were "initially" made "on the pursuers' behalf", and (ii) that the pursuers would in the circumstances "... require to reimburse all their said group companies and agents in relation to all costs incurred ...". Significantly, the second defenders had now agreed a proof before answer on all of the disputed averments.

[11] So far as the law was concerned, the cases of Edgar and P&O relied on by the defenders were clearly distinguishable. P&O in particular was a case which concerned the setting up, in proceedings for relief, of settlements made by a wrongdoer in favour of third parties who had pursued claims against him. The legal requirements in that context were quite different from those applicable in a case such as the present, where the pursuers merely sought to assert that particular costs and expenses truly remained recoverable in their hands. The court there had in any event required evidence on the issue of reasonableness. In addition, even acknowledging the need for indemnity clauses to be strictly construed contra proferentem, the clauses relied on in this case had no special features which impacted adversely on the pursuers' position. In particular the pursuers did not, as had been suggested, require to bring themselves within the term "liabilities" in order to succeed. "Costs", "expenses", "losses" and "demands" were all further terms to which the pursuers could legitimately look for satisfaction. The operation of the clauses concerned was in no way excluded in a situation where bills were temporarily met by third parties on the pursuers' behalf.

[12] On the positive side it was submitted that in a case of this kind, where there was no doubt as to the pursuers' rights of action under the Deeds of Undertaking, the precise identity of the company within the group which had met individual items of cost should not be of any legitimate concern to the defenders. In recent times the law had set its face against "legal black holes", in the sense of purely technical grounds on which apparently deserving claims against contract-breakers or other wrongdoers might unwittingly be lost in the course of ordinary commercial or personal activities. Although, as observed by Lord Clyde in the Panatown case, the general rule was still that a party could only claim in respect of losses which he himself had sustained, there were now certain well-recognised exceptions to that rule. One of these was that, by virtue of the "narrower ground" in The Albazero 1977 AC 774, the innocent party pursuing a claim for breach of contract could include costs and expenses actually sustained by third parties so long as he was liable to account to such third parties out of any damages recovered. Another exception was illustrated by the decision of the House of Lords in GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SC HL 157, where an inter-group transfer of damaged property to a third party, and away from the original owner having title to sue the wrongdoer, was held not to preclude a claim for the full amount of the loss. A further case in the same category was McLaren, Murdoch & Hamilton v Abercromby Motor Group Ltd 2003 SCLR 323, where the relevant authorities were reviewed by Lord Drummond Young.

[13] Of particular significance, however, was the decision of the House of Lords in the Linden Gardens case, where Lord Griffiths made the following general observations at p.97-98:-

"... in my view who actually pays for the repairs is no concern of the defendant who broke the contract. Authority for this is to be found in Jones v Stroud District Council 1986 1 WLR 1141. The case in fact was one in tort and not contract, but the principle of whether or not it is a defence if someone else has paid for work for which the defendant would otherwise be liable must apply to both tort and contract. The claim was for damages to a building which had suffered damage as a result of the defenders' negligence. In giving judgment Neill LJ said, at p.1150:

'... there is no evidence that the plaintiffs have paid or are liable to pay any sum to Marlothian in respect of (the repair works). It was submitted on behalf of the plaintiffs, however, that if the repairs were necessary and were carried out it was not to the point that the plaintiffs had not proved that they had paid for the repairs themselves. Our attention was drawn to The Endeavour 1890 6 Asp. M.C. 511, where repairs to a vessel were carried out but before paying for them the plaintiff had gone bankrupt. It was there argued that the plaintiff could not claim the cost of the repairs because the sums recovered would only go to swell the creditors' funds. This argument was rejected and it was said, at p.512: "If somebody out of kindness were to repair the injury and made no charge for it, the wrongdoer would not be entitled to refuse to pay as part of the damages the cost of the repairs to the owner. In my judgement, on the facts of this case, this submission is correct."

'There are many cases where a tortfeasor's liability has been temporarily discharged by payment by a third party on behalf of the plaintiff. A very common example occurs in personal injury cases where the cost of medical treatment is borne by a relative; but that has never been seen as a reason why that sum should not ultimately be paid by the defendant if he is found liable for the injuries. The law regards who actually paid for the work necessary as a result of the defenders' breach of contract as a matter which is res inter alios acta so far as the defendant is concerned.'"

[14] In the circumstances of that case Lord Griffiths' remarks were strictly obiter, but they reflected an approach which had found judicial favour in admiralty and other contexts since the nineteenth century. GUS and other "transferred loss" cases were recent illustrations of that approach, and indeed Lord Griffiths had expressed similar views in Panatown at pp.533 and 535-6. In a similar vein, it was well settled that insurance payments, however distributed, were res inter alios acta so far as a wrongdoer was concerned, although it was acknowledged that insurance contracts had special features, such as the insurers' right of subrogation, which clearly did not apply elsewhere. Loans were also commonly made in the form of direct payment to creditors of the borrower, rather than to the borrower himself. Again, the precise mode chosen would be res inter alios acta as far as any wrongdoer was concerned. On the other hand, since a loan would prima facie be repayable, it would readily bring the borrower within the scope of the ordinary general rule.

[15] In the circumstances of this case, however, while such considerations were generally supportive of the pursuers' position, the pursuers did not need to rely on them to their fullest extent. This was because the disputed averments in fact brought them within the scope of the ordinary rule whereby an injured party could always claim in respect of costs and expenses initially met by third parties so long as there was an obligation to reimburse, or to account to, such third parties out of any award of damages. The critical averments were those at p.92 regarding a requirement to reimburse the relevant third parties. The pursuers were thereby offering to prove that the payments by the other companies were not gratuitous. In a commercial context, the presumption against donation would be relatively strong, and it should also be borne in mind that such payments would be shown in the group accounts as loans to the pursuers. In this context, it did not matter whether the relevant obligation of reimbursement or accounting arose before or after the relevant payments were made. It was enough that the pursuers offered to prove that such an obligation existed, and there was no basis on which, as a matter of relevancy, the critical averments could be held fatal to the pursuers' claim.

[16] It was also important to recognise that, as discussed by Lord Drummond Young in the McLaren case, the pursuers' loss arose, at the latest, when the building suffered damage. A substantial diminution in value had been sustained at that stage, although the pursuers' recoverable loss might ultimately be quantified by reference to the cost of repair. Moreover, since all past and future losses would require to be sued for in a single action, an award might in theory have had to be made before any remedial measures were undertaken. In that situation, the defenders could have had no concern with the question of who would ultimately pay the costs of rectification, and there was no logical reason why they should have any greater concern in circumstances where remedial works had already been carried out and paid for. Problems of quantification should not be confused with questions as to the crystallisation of a claimable loss in the pursuers.

[17] For all of these reasons, it was submitted, the disputed averments were relevant and sufficiently specific to go to inquiry. Even if they were held to be of doubtful relevancy, this would not warrant their being excluded from probation at this stage. The defenders had ample information on the basis of which a wide-ranging specification of documents could be framed, and it could not realistically be said that they were denied a fair opportunity to investigate and meet the case against them. A proof before answer should accordingly be allowed.

Discussion
[18] In my view there is force in many of the criticisms which were levelled at the pursuers' pleadings in the course of the debate. The precise circumstances in which the various payments were made by third parties "on the pursuers' behalf" are not averred. The explanation about the lease at p.92B provides only a background justification for the alleged obligation to reimburse. And in the course of the debate, further uncertainties and contradictions were identified. By way of illustration, while the alleged agents are shown as one of the paying parties in box 7 of the Schedule, they cannot realistically be taken to have used their own funds. Counsel were unable to shed any light on this matter, except to suggest that payments were largely being "channelled" through the paying parties and might come from insurers. Furthermore, box 20 indicates that, strangely, the fees payable to DJ Orchard & Associates were not paid by the pursuers as their principals, but by "Royal & Sun Alliance". In addition the pursuers' insurers, Royal & Sun Alliance Insurance plc, appear in six boxes in the Schedule. If they were paying out insurance monies, the pursuers could have no requirement to reimburse them as averred at p.92A, although of course in that situation the insurance payments would be res inter alios acta so far as the defenders are concerned. It is not, however, clear whether insurance payments were truly involved here, or whether Royal & Sun Alliance Insurance plc were merely meeting costs "on the pursuers' behalf" as an associated company within the group.

[19] Notwithstanding such deficiencies, I am ultimately not persuaded that the disputed passages are either fundamentally irrelevant, or so lacking in specification that they cannot be admitted to probation. It is well settled that the dismissal of a claim, in whole or in part, on the ground of irrelevancy is only warranted where the court is satisfied that, even if all the pursuers' averments were proved, the claim would nevertheless be bound to fail:- Jamieson v Jamieson 1952 SC HL 44, per Lord Normand at p.50. And, as regards specification, averments will not as a general rule fall to be excluded from probation unless they are so deficient as to deny the opposing party fair and reasonable notice of the case against him, and thus an adequate opportunity to prepare for proof. In my judgment these tests are not met in this case, and the matter of relevancy in particular cannot properly be determined by the court until the whole situation has been explored in evidence.

[20] In reaching this view, I do not require to rely on any developing hostility of the common law towards "legal black holes" as discussed in cases such as GUS, Linden Gardens and Panatown. It may be that the policy of the law is gradually moving in the direction of recognising that the day-to-day working out of ordinary family and commercial relationships should not, without good reason, be held to relieve a wrongdoer of an apparently justified liability. At present, however, as Lord Browne Wilkinson accepted in Linden Gardens, and as Lord Clyde later confirmed in Panatown, the general rule is still to the effect that a plaintiff or pursuer can only recover his own loss. The various cases cited during the debate may thus be seen as exemplifying exceptions to that general rule in particular circumstances, notably where interests in damaged property are subsequently transferred away from the primary victim having title to sue and in favour of related third parties.

[22] In the same vein, I am not satisfied that the pursuers in this case can make use of the legal presumption against donation in order to relieve themselves of the need to aver some basis on which, notwithstanding the invoicing and payment of multiple accounts to and by different companies within the group, they themselves remain entitled to include the value of such accounts in their claim against the defenders. As was illustrated in various ways during the debate, the strength of the presumption against donation will vary according to circumstances, and in particular, may be less compelling where the parties concerned are not wholly independent and at arms length with each other. In any event, the presumption is most often resorted to where an opposing party undertakes the onus of proving donation, whereas of course for present purposes the onus lies squarely on the pursuers to aver and prove a relevant case quoad both merits and quantum. In the context of a proof, the presumption against donation might be capable of assisting the pursuers to establish their claim, but I do not think that it can relieve them of the need to make relevant and specific averments at the present stage.

[23] The main reason why I do not consider that any of the foregoing lines of authority are of more than incidental significance for present purposes is that, in their averments, the pursuers de facto seek to bring themselves within the ordinary rule requiring the existence of an obligation to account, or an obligation to reimburse, before any claim can be made in respect of costs actually met by third parties. The critical question, in my opinion, is whether the pursuers have relevantly succeeded in doing so, because otherwise it might prove more difficult to justify treating the disputed heads of loss as the pursuers' own. In the whole circumstances it seems to me that the disputed averments are, at worst, of doubtful relevancy, and that at this stage it cannot be said that the pursuers have no possibility of establishing, at a proof, that the affected costs and expenses remain properly claimable at their instance. On a fair reading of these averments, the pursuer's position is not that the various payments were made by third parties on their own account and without any expectation of repayment. On the contrary, the payments are said to have been made "initially" and "on the pursuers' behalf", and in addition the pursuers offer to prove a requirement to reimburse. It may be that the supposed reason which they give is per se unconvincing, but in my judgment that would not preclude the pursuers from leading evidence in support of the critical assertions which they make. As the defenders concede, a substantial body of averments throughout the Record bears to identify the pursuers as the affected party for all purposes, and this is the background against which the disputed averments at pp.89-92 must in my view be read. On the whole matter I am satisfied that it would be going too far, too fast to hold these disputed averments to be irrelevant in advance of any proof.

Conclusion
[25] For all of these reasons, I am not persuaded that I should sustain the first and third defenders' pleas to relevancy and specification at the present time. I shall therefore allow the parties a proof before answer on their whole averments on Record.