Limitation of liability for losses caused by insured perils

In John F Hunt Demolition Limited v ASME Engineering Limited [2007] EWHC 1507 (TCC), His Honour Judge Peter Coulson QC considered the question of whether a sub-contractor could owe an employer a duty of care in tort in respect of damage for which the sub-contractor had no liability through the contractual chain.

The facts

The dispute arose out of a project at Whitehall Place where the Employer and the Main Contractor (both Kier companies) had entered into a JCT 98 with Contractor’s Design, with certain bespoke amendments. The Main Contractor, in turn, entered into a DOM/2 subcontract with Hunt to carry out demolition works. As part of the demolition process, temporary structures were required and Hunt contracted with ASME (by an exchange of letters) to carry out these works.

During the course of the works, sparks caused by an ASME operative set fire to the bitumen on the roof of the facades to the building being demolished, which were intended to be retained in the new building.
The Employer and the Main Contractor jointly brought a claim against Hunt for losses in the region of £150,000 plus interest. Hunt settled the claim for £152,000 and then sought to recover this amount from ASME.

Key terms of the contracts

The Main Contract provided that:

• The Main Contractor gave a wide-ranging indemnity to the Employer in respect of loss and damage to property except where such loss or damage was caused by Specified Perils for which the property in question was required to be insured under the Main Contract.
• The “Specified Perils” included fire “howsoever caused”. (CRS v Taylor Young established that this includes fire negligently caused.)
• The Employer was obliged to take out Joint Names insurance in respect of the existing structures and the construction works.
• The Joint Names policy was to name the sub-contractors (including Hunt) as Insureds (or to include a waiver of subrogation in their favour) in respect of the construction works and materials on site, but not in respect of the existing structures.
The DOM/2 Subcontract provided that:
• Hunt was deemed to have notice of the terms of the Main Contract.
• Hunt gave a wide-ranging indemnity, but damage to the works or site materials (but not the existing structures) was excluded from this indemnity.

The issue

Having paid out to both the Employer and the Main Contractor, Hunt unsurprisingly wanted to recover these sums from ASME. ASME argued that the operation of the main contract meant that the main contractor could not be liable to the Employer for fire damage to the existing structures, because that risk had been laid off to insurance, and so the main contractor could not pass the Employer’s losses down the contractual chain to Hunt. ASME said that Hunt should not, therefore, have settled the Employer’s claim.

Hunt argued in response that, although they accepted that they had no liability in contract (following well established principles on contractual allocation of risk by way of insurance), they nonetheless owed a duty of care to the Employer in tort not to cause damage to the existing structures. As Hunt’s DOM/2 contract only expressly limited liability in relation to damage to the works or site materials caused by a Specified Peril, Hunt said that this could not limit their duty in tort in respect of the existing structures.

The decision

HHJ Coulson QC found that Hunt did not owe the Employer a duty of care in tort in respect of the existing structures. The circumstances in which the Court will find that a duty of care exists in tort when the parties have entered into contractual arrangements which limit liability are restricted.

The test to be applied is the two stage test set out by the Court of Appeal in Riyad Bank v Ahli United Bank Plc [2006] 2 Lloyd’s LR 292:

• First, identify whether there is a duty of care. In the present case, normally there would be a duty of care not to cause physical damage to property.
• Second, consider whether that duty is negatived or excluded by the operation of the contract.

In this instance, although there was a prima facie duty of care to avoid damage to property, this was negatived by the fact that the Main Contract provided for the Main Contractor to have no liability for matters laid off to insurance (i.e. damage caused by Specified Perils). Hunt was aware of that arrangement through deemed notice provision of the DOM/2 contract. The whole scheme of the suite of contracts used in this case was to lay off the risk to insurance and the court should not find a duty in tort to circumvent that agreement.

In addition, HHJ Coulson QC did not accept the argument that the distinction made in the Main Contract for the purposes of naming subcontractors as insureds between the works and the existing structures meant that a similar distinction should also be drawn in the duties in tort. The distinction in the Main Contract related to the fact that the Main Contractor was responsible for reinstating the works, but not the existing structures. It had nothing to do with liability for the costs of so doing.

Conclusion

This decision reinforces the approach that the Courts will try to give effect to the allocation of risks to insurance made in the JCT family of building contracts. While in this case it was the subcontractor who lost out (having entered into what was perhaps an unwise settlement), employers also need to be aware that, if the insurance fails to pay out, ingenious attempts to reach the guilty sub-contractor party by a claim in tort may well not succeed.