United Kingdom House of Lords Decisions

British Telecommunications Plc v. James Thomson and Sons (Engineers) Ltd (Scotland) [1998] UKHL 46 (10th December, 1998)

LORD LLOYD OF BERWICK

My Lords,

&nbsp&nbsp&nbsp&nbspI have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend, Lord Mackay of Clashfern. I agree with it, and for the reasons which he has given I too would allow the appeal.

LORD MACKAY OF CLASHFERN

My Lords,

&nbsp&nbsp&nbsp&nbspThe pursuer and appellant in this appeal to whom I shall refer as "B.T." raised an action for damages in delict against the defender and respondent to whom I shall refer as "Thomson."

&nbsp&nbsp&nbsp&nbspAfter a discussion on procedure roll the Lord Ordinary (Lord Rodger of Earlsferry) dismissed the action as irrelevant in law. On a reclaiming motion the Second Division of the Inner House of the Court of Session by a majority (the Lord Justice Clerk, Lord Ross and Lord Cowie, Lord Morison dissenting) affirmed the Lord Ordinary's decision. Against that decision B.T. appeals to your Lordships' House.

&nbsp&nbsp&nbsp&nbspOn Sunday, 17 June 1990 servants of Thomson were engaged in the execution of certain steel work in B.T.'s telephone switching station in Glasgow. They were working under the roof of the switching station near large air ventilation pipes lagged with rock wool and encased in bitumenised felt. In circumstances which B.T. avers to import fault both in Thomson and its servants, a fire broke out under that roof. As a result of that fire, and the efforts of the Strathclyde Fire Brigade to extinguish it, B.T. suffered losses. The action in delict is seeking reparation for these losses. For the purposes of the debates before the Lord Ordinary, the Second Division, and this House these averments of fault are to be taken as true. If these were the only facts to be taken into account B.T. has a straightforward action in delict against Thomson.

&nbsp&nbsp&nbsp&nbspBut in the circumstances of the present case these are not the only facts to be taken into account. The work on which Thomson was engaged on the date of the fire was part of certain works of refurbishment and repair on the aerial equipment, housing, and roof of B.T.'s switching station in respect of which B.T. had entered into a contract with a construction company, now known as Melville Dundas and Whitsun Ltd., but then known as M.D.W. Ltd., for the execution of those works. I shall refer to this construction company as "the main contractor." The parties are agreed that the conditions of contract ruling between B.T. and the main contractor were those of the Joint Contracts Tribunal for the standard form of building contract, local authorities edition (with quantities) 1980, as amended by (a) amendments 1, 2, 4, 5 and 8 thereof; (b) the provisions contained in the Scottish supplement 1980 (as revised in January 1988) forming appendix no. 1 to the Scottish building contract (with quantities) of January 1988; and (c) the bills of quantities relative to the said works to be executed by the main contractor or its subcontractors. Clause 35 of the conditions enables the architect/supervising officer to reserve to himself the final selection and approval of the subcontractor to the main contractor who shall supply or fix any materials or goods or execute work forming part of the contract and where this option has been exercised the subcontractor so nominated shall be a "nominated subcontractor" for the purposes of the contract. Any subcontractor other than a nominated subcontractor is referred to as a domestic subcontractor. The written consent of the architect/supervising officer is required before the contractor can appoint a domestic subcontractor. By a letter dated 8 January 1990 the main contractor set out its terms of contract with Thomson to carry out the steel work referred to therein. This contained the provision:  "your work shall be carried out to the same specification, terms and conditions of contract as those ruling between ourselves and our client. These conditions shall take precedence over any you may have in your offer."

On this basis the subcontract between the main contractor and Thomson proceeded and since there was no nomination of Thomson, Thomson became a domestic subcontractor for the purposes of the provisions in the main contract.

&nbsp&nbsp&nbsp&nbspThomson submits against this background that whilst it must be assumed for the purposes of the present stage in the proceedings that B.T.'s averments of fact are true, the circumstances in which Thomson came to be working on B.T.'s property were inconsistent with Thomson having a duty of care towards B.T. and its property.

&nbsp&nbsp&nbsp&nbspThomson rely on a series of decisions in which the existence and terms of contracts under which work was done negative the existence of a duty of care on the party carrying out the work towards the owner of the property damaged as a result of his activities.

&nbsp&nbsp&nbsp&nbspThe foundation on which such an argument rests is the consideration that for a duty of care to be imposed while the elements of foreseeability and proximity require to be taken into account, so also must be considerations of fairness, justice and reasonableness. In the most recent authority on this topic in this House, Lord Steyn speaking for the majority of those who took part in the decision of Marc Rich & Co. A.G. v. Bishop Rock Marine Co. Ltd. [1996] 1 AC 211, 235, said:

 "But since the decision in Dorset Yacht Co. Ltd. v. Home Office [1970] AC 1004 it has been settled law that the elements of foreseeability and proximity as well as considerations of fairness, justice and reasonableness are relevant to all cases whatever the nature of the harm sustained by the plaintiff. Saville L.J. explained, at p. 1077: 'whatever the nature of the harm sustained by the plaintiff, it is necessary to consider the matter not only by inquiring about foreseeability but also by considering the nature of the relationship between the parties; and to be satisfied that in all the circumstances it is fair, just and reasonable to impose a duty of care. Of course . . . these three matters overlap with each other and are really facets of the same thing. For example, the relationship between the parties may be such that it is obvious that a lack of care will create a risk of harm and that as a matter of common sense and justice a duty should be imposed. . . . Again in most cases of the direct infliction of physical loss or injury through carelessness, it is self-evident that a civilised system of law should hold that a duty of care has been broken, whereas the infliction of financial harm may well pose a more difficult problem. Thus the three so-called requirements for a duty of care are not to be treated as wholly separate and distinct requirements but rather as convenient and helpful approaches to the pragmatic question whether a duty should be imposed in any given case. In the end whether the law does impose a duty in any particular circumstances depends upon those circumstances . . .' That seems to me a correct summary of the law as it now stands."

&nbsp&nbsp&nbsp&nbspThe contention of Thomson is that the contractual framework in which the work was done rendered it unfair, unjust and unreasonable to impose on Thomson a duty of care to B.T. in the circumstances. Put shortly, the submission is that the insurance provisions in the main contract make it clear that damage caused in the way alleged by B.T. in this case was contracted to be covered by an insurance policy which B.T. was bound to take out and that accordingly it would not be fair, just or reasonable to impose a duty on Thomson to avoid such damage.

&nbsp&nbsp&nbsp&nbspIn order to examine this argument further it is necessary to set out the relevant terms of the main contract. Before doing so it is important to notice that the contractual provisions in the present case are different from those under consideration in Scottish Special Housing Association v. Wimpey Construction U.K. Ltd. [1986] S.C. (H.L.) 57 and Norwich City Council v. Harvey [1989] 1 W.L.R. 828. Amendment No. 2, above referred to, altered substantially provisions in the earlier contract relating to insurance and therefore while these cases are illustrations of the way in which such a matter as that presently in issue may be handled they cannot provide a direct answer in the differing contractual position of the present case.

&nbsp&nbsp&nbsp&nbspClause 20.2 provides:

 "The contractor shall, subject to clause 20.3 and, where applicable, clause 22C.1 be liable for, and shall indemnify the employer against, any expense, liability, loss, claim or proceedings in respect of any injury or damage whatsoever to any property real or personal in so far as such injury or damage arises out of or in the course of or by reason of the carrying out of the works, and to the extent that the same is due to any negligence, breach of statutory duty, omission or default of the contractor, his servants or agents or of any person employed or engaged upon or in connection with the works or any part thereof, his servants or agents or of any other person who may properly be on the site upon or in connection with the Works or any part thereof, his servants or agents, other than the Employer or any person employed, engaged or authorised by him or by any local authority or statutory undertaker executing work solely in pursuance of its statutory rights or obligations."

Clause 22C.1 as modified by a provision in the bill of quantities provides:

 "The employer shall take out and maintain a policy in respect of the existing structures (which shall include from the relevant date any relevant part to which clause 18.1.3 refers) together with the contents thereof owned by him or for which he is responsible, for the full cost of reinstatement, repair or replacement of loss or damage due to one or more of the Specified perils up to and including the date of issue of the certificate of practical completion or up to and including the date of determination of the employment of the contractor under clause 22C 4.3 or clause 27 or clause 28 (whether or not the validity of that determination is contested) whichever is the earlier. The contractor, for himself and for all nominated subcontractors who are, pursuant to clause 22.3.1, recognised as an insured under the policy referred to in clause 22C.1 or clause 22C.3 shall authorise the insurers to pay all monies from such insurance in respect of loss or damage to the employer."

Clause 22.3 as similarly modified provides:

 "(1) The contractor where clause 22A applies, and the employer where either clause 22B or clause 22C applies shall ensure that the joint names policy referred to in clause 22A.1 or clause 22A.3 or the policies referred to in clause 22B.1 or in clause 22C.1 and 22C.2 shall either provide for a recognition of each subcontractor nominated by the architect as an insured under the relevant joint names policy or include a waiver by the relevant insurers of any right of subrogation which they may have against any such nominated subcontractor

  in respect of loss or damage by the specified perils to the works and site materials where clause 22A or clause 22B or clause 22C.2 applies and, where clause 22C.1 applies, in respect of loss or damage by the specified perils to the existing structures (which shall include from the relevant date any relevant part to which clause 18.1.3 refers) together with the contents thereof owned by the employer or for which he is responsible; and that this recognition or waiver shall continue up to and including the date of issue of the certificate of practical completion of the subcontract works (as referred to in clause 14.2 of the subcontract NSC/4 or NSC/4) or the date of the determination of the employment of the contractor (whether or not the validity of that determination is contested) under clause 27 or clause 28 or, where clause 22C applies, under clause 27 or clause 28 or clause 22C 4.3, whichever is the earlier. The provisions of clause 22.3.1 shall apply also in respect of any policy taken out by the employer under clause 22A.2 or by any joint names policy taken out by the contractor under clause 22B.2 or under clause 22C.3 in respect of a default by the employer under clause 22C.2.

 "(2) Except in respect of the policy referred to in clause 22C.1 (or the joint names policy referred to in clause 22C.3 in respect of a default by the employer under clause 22C.1) the provisions of clause 22.3.1 in regard to recognition or waiver shall apply to domestic subcontractors. Such recognition or waiver for domestic subcontractors shall continue up to and including the date of issue of any certificate or other document which states that the domestic subcontract works are practically complete or the date of determination of the employment of the contractor as referred to in clause 22.3.1 whichever is the earlier."

In the definition of specified perils fire is the first and therefore it is agreed that the damage in question in the present case was due to one of the specified perils.

&nbsp&nbsp&nbsp&nbspThe crux of the argument for Thomson as put by the Lord Justice Clerk at 1997 S.C. 59, 67B-C is:

 "If the subcontractor is aware that the employer has undertaken to insure against the risk of negligence on the part of the subcontractor, then the latter is entitled to assume not merely that he need not himself insure but that he is not under any duty of care to the employers with regard to any loss or damage caused by their actings." (i.e. the actings of the subcontractor and his servants)

Adopting this as their basis counsel for Thomson argue that having regard to the wording of the relevant provisions of the main contract the risk of fire being caused to existing structures while the works were being carried out was assumed, from the outset, by B.T. In argument in the courts below counsel for B.T. accepted that this was the result of clauses 20.2 and 22C.1 as between B.T. and the main contractor. However, in the light of further consideration and in particular of the reported decision of the official referee in Kruger Tissue (Industries) Ltd. v. Frank Gallyers Ltd. (1998) 57 Con LR 1, in your Lordships' House, he did not repeat this concession.

&nbsp&nbsp&nbsp&nbspIt is true, as counsel for Thomson argue, that B.T. were obliged to obtain insurance cover in respect of the existing structures, together with the contents thereof, owned by them, for the full cost of reinstatement, repair or replacement of loss or damage due to inter alia fire. The contractual arrangements therefore envisaged in the event of fire, B.T. would be indemnified by its insurers for the full cost of reinstatement irrespective of whether the loss or damage arose due to an act of God or an act or omission on the part of the main contractor or a subcontractor such as Thomson.

&nbsp&nbsp&nbsp&nbspSo far, I think that Thomson's argument can be supported. However, a question arises as to the terms of the insurance cover which B.T. were obliged to take out. In ordinary circumstances the insurer being obliged to indemnify B.T. would be entitled to the benefit of any rights of action that B.T. had against any party whose actions caused or contributed to the loss in question. This aspect of the matter is expressly dealt with under the main contract by the provision that any subcontractor nominated by the architect is to have the benefit of an insured under the policy or have the benefit of a waiver by the relevant insurers of any right of subrogation which they may have against any such nominated subcontractor. There is no such provision in the case of a domestic subcontractor in respect of the policy referred to in clause 22C.1, that is to say, the policy for insuring existing structures against specified perils.

&nbsp&nbsp&nbsp&nbspIt follows in my opinion that the terms of the provision for insurance of existing structures in respect of specified perils, while they provide for the recognition of a nominated subcontractor as an insured under the policy or that such nominated subcontractor shall have the benefit of a waiver of any right of subrogation which the insurer may have against him, provide no such protection for any domestic subcontractor.

&nbsp&nbsp&nbsp&nbspIt is true, as was pointed out by the Lord Ordinary and the majority of the Second Division, that the absence of a protection against the right of subrogation does not of itself establish such a right but in considering whether the terms of the insurance policy which required to be taken out under the main contract are such as to make it unjust, unfair or unreasonable that Thomson should have a duty of care to B.T., it is in my opinion necessary to take full account of all the provisions of the main contract with regard to the requirement for insurance and the terms on which such a policy should be taken out.

&nbsp&nbsp&nbsp&nbspIt is true also that insofar as the existence of the obligation on the employer to take out insurance against the specified perils in respect of existing structures relieves the main contractor from responsibility that he otherwise would have had for the negligence of subcontractors under clause 20.2, the risk of Thomsons actings causing such loss as part of the responsibility of the main contractor will be covered. However, in considering the nature of the risk undertaken by the insurer the fact that the insurer will have a right of subrogation against a domestic subcontractor such as Thomson will legitimately affect the question of premium. I conclude therefore that any element of double insurance which may be involved in giving effect to B.T.'s argument is not a sustainable commercial objection to the success of that argument since practical considerations of premium will be affected by the right which the insurer has under the contract in particular, his right or recourse against Thomson if Thomson has a duty of care toward B.T.

&nbsp&nbsp&nbsp&nbspCounsel for Thomson faced the hurdle to the success of his argument which I have stated in the preceding paragraph very squarely but in essence his answer was that in considering whether or not a duty of care should be held to be imposed upon Thomson by the circumstances of this case the existence of the obligation to insure on B.T. should determine the matter and that the terms of that insurance were not important.

&nbsp&nbsp&nbsp&nbspThe question is whether or not it is fair, just and reasonable to impose a duty of care and in considering that question if the terms of a contract are to be taken into account it must be right to take account of all the terms of the contract that are relevant to the question. In my opinion it is of crucial significance in the present case that a distinction is made between nominated subcontractors on the one hand and domestic subcontractors on the other in the terms of the insurance policy to be provided by B.T. under the contract. In my view the contractual provisions reinforce rather than negative the existence of a duty of care toward B.T. by Thomson in the circumstances of the present case. Accordingly, in my opinion, this appeal succeeds and the case should be remitted to the Court of Session for a proof before answer.

&nbsp&nbsp&nbsp&nbspThe view which I have reached is in accordance with the weight of opinion expressed by textbook writers who have considered this subject and to whose views we were referred. Counsel for B.T. referred also to criticisms of allowing contractual provisions to which parties to litigation were not themselves parties to be considered in deciding whether or not a duty of care between the parties to the litigation existed. These criticisms were based on the view that to do so was to deviate unjustifiably from the rules on privity of contract. Under the law of Scotland, where exception to the doctrine of privity of contract is recognised under some circumstances, different considerations might apply. It is unnecessary for the purposes of the present case to consider these arguments since the contractual provisions founded on do not, in my view, alter the situation between B.T. and Thomson which would obtain if they did not require to be considered at all, and it is unnecessary and it would be in my view undesirable in the present case to cast any doubt on the correctness of the authorities to which we were referred dealing with this matter.

&nbsp&nbsp&nbsp&nbspAlthough the position taken up by B.T. in argument in this House differed somewhat from the position taken in the Court of Session, it seems to me to be a case where cost should follow success and B.T. should be entitled to its costs against Thomson both here and in the Court of Session.

LORD MUSTILL

My Lords,

&nbsp&nbsp&nbsp&nbspI have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Mackay of Clashfern. For the reasons he has given I would also allow the appeal.

LORD COOKE OF THORNDON

My Lords,

&nbsp&nbsp&nbsp&nbspI have had the advantage of reading in draft the speech of my noble and learned friend, Lord Mackay of Clashfern. For the reasons he has given I would also allow the appeal.

LORD HUTTON

My Lords,

&nbsp&nbsp&nbsp&nbspI have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Mackay of Clashfern. I agree with it and for the reasons which he has given I would allow this appeal.