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Subcontractor indemnity effective despite others negligently failing to notice defects

5 August 2014

The Court of Appeal recently confirmed that a subcontractor remains liable to indemnify a party up the contractual chain for losses caused by defects for which it is responsible, even if others were negligent in not noticing those defects.

In Greenwich Millennium Village Ltd v Essex Services Group plc and Others [2014] EWCA CIV 960, the Court of Appeal unanimously upheld Coulson Js decision in the Technology and Construction Court (TCC).

Facts

The case concerned the construction of two blocks of flats in the Greenwich Peninsula. Laing ORourke plc (LOR) constructed the flats for Greenwich Millennium Village Ltd (GMVL). Unfortunately after completion of the flats a major flood occurred in one of the towers.

The flood was caused by a phenomenon known as a water hammer in the cold water system that involved water being pumped from the basement up into the flats.

GMVL pursued claims for £4.75million under collateral warranties it received from LORs mechanical and electrical subcontractor, Essex Services plc (Essex) and consultant engineers Hoare Lea (HL). In turn, Essex claimed against its sub-sub-contractor HS Environmental Services Ltd (HSE), which in turn claimed against its labour only sub-sub-sub-contractor DG Robson Mechanical Services Ltd (Robson).

The subject of the Court of Appeal proceedings was in an indemnity given by Robson to HSE which read:

"[Robson] hereby agrees to indemnify [HSE] against each and every liability which [HSE] may incur to any other person or persons and further to indemnify [HSE] in respect of any liability, loss, claim or proceedings of whatsoever nature such as shall arise by virtue of the breach or breaches of this Subcontract Agreement by, or at, default or negligence of [Robson]" The TCC held that there were failures in workmanship and design and that HSE could pass on the entirety of its liability to Robson.

Robson's argument

Robson appealed on four grounds. Three of the grounds were dismissed on the basis that the first instance judgment was "a classic example of a TCC judgment where the Court of Appeal should not interfere with findings of fact".

The fourth ground related to the indemnity provision. Robson argued that because HSE was itself at fault in certain respects (namely a failure to properly inspect Robsons work), HSE should not be entitled to recover under the indemnity.

Robson relied on the Canada Steamship principle which has been summarised as follows: "… if a person obtains an indemnity against the consequences of certain acts, the indemnity is not to be construed so as to include the consequences of his own negligence unless those consequences are covered either expressly or by necessary implication. They are covered by necessary implication if there is no other subject-matter upon which the indemnity could operate."

The decision

The Court of Appeal said it cannot be presumed that the parties intended to confine the indemnity clause to workmanship breaches by Robson which were invisible upon reasonable inspection. It distinguished other authorities cited to it on the basis they involved positive acts of negligence rather than a failure to notice. Accordingly, even though there were failings by HSE (and others) in not noticing the defect, those failings did not exclude the indemnity from operating and therefore HSE was entitled to recover under the indemnity.

In any event, the Court of Appeal held HSE would have been entitled to recover damages from Robson for its breaches of contract.

The Court of Appeals decision recognised (as did the TCC) that most building projects involve chains of contracts in which the basic principle is that each party should be paid for the work it does and should be responsible for the shortcomings in its own work. The Court of Appeal said "If a sub-contractor (or as in this case a sub-sub-sub-contractor) perpetrates defective workmanship, contractors and sub-contractors higher up the chain can be criticised for failing to notice the mistakes. Nevertheless it would largely defeat the commercial purpose of the contractual chain if "failure to notice" prevented the indemnity clauses from operating".

The Court of Appeal also commented that the Canada Steamship principle was a rule of construction not a rule of law, which rests upon the presumed intention of the parties. Applying that rule the court must have regard to the commercial context of the contract under consideration and in particular that "In the case of a construction contract a failure by the indemnitee [HSE] to spot defects perpetrated by its contractor or sub-contractor [Robson] should not ordinarily defeat the operation of an indemnity clause, even if that clause fails expressly to encompass damage caused by the negligence of the indemnitee."

Comment

The decision provides welcome clarification on circumstances when indemnities can effectively be passed down the contractual chain. In coming to their decisions both the Court of Appeal and the TCC looked at the commercial realities of how parties typically organise their contractual affairs in the construction industry and decided that should allow HSE to obtain a full indemnity from Robson. Had Robson escaped liability on the basis of HSEs failure to notice defects a wider re-examination of parties contractual provisions and risk profile would have been necessary.

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