0370 270 6000

already registered?

Please sign in with your existing account details.

need to register?

Register to access exclusive content, sign up to receive our updates and personalise your experience on brownejacobson.com.

Privacy statement - Terms and conditions

Forgotten your password?

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.

Training and events

8Sep

COP 26 - what is it and why is it important? Online

COP 26 is the global United Nations climate change Summit, which will take place in Scotland in November. It comes at a time when climate change, and how to reduce greenhouse gas emissions, is at the top of the political agenda.

View event

9Sep

In house lawyers: our sustainable future Online

This might be the greatest challenge facing C-Suite and legal teams over the next few years. What does that mean for you?

View event

Focus on...

Legal updates

be connected newsletter for higher education - July 2021

In this edition we provide you with the latest in legal updates, news and insight from the higher education sector.

View

Legal updates

Public Matters - July 2021

Updates on leisure contracts, SSPs, children's social care, construction, subject access disclosure, Building Safety Bill and Japanese knotweed.

View

Legal updates

Lifting of restrictions - what this means for employers in the higher education sector

19 July 2021 marked the lifting of many restrictions within England including the cessation of the need for social distancing, the removal of the legal requirement for face masks, and the end of required homeworking. We look at the guidance on the lifting of restrictions in the context of staff working in the higher education sector.

View

Integrated care systems (ICS) development webinar

Catch up on our on-demand video at our ICS development webinar included an overview of new legislation in developing your ICS, as well as the key features for developing integrated care boards, place based arrangements and provider collaboratives.

View

The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

Mailing list sign up

Select which mailings you would like to receive from us.

Sign up