Welcome to the construction and infrastructure updater
We reported on the case of Supershield Ltd v Siemens Building Technologies FE Ltd v Supershield Ltd  EWHC 927 (TCC) in our July 2009 Updater. The case concerned the important issue of when a party may settle a claim against it and then recover the amount of that settlement from another party in the contractual chain. The case has now been considered by the Court of Appeal which upheld the first instance decision.
Supershield Ltd v Siemens Building Technologies FE Ltd  EWCA Civ 7
On 9 October 2001, a nut and bolt connection on a float valve of a sprinkler system failed and water from a storage tank overflowed into the basement of a new office building. This caused flooding which subsequently led to extensive damage to the electrical equipment in the building.
The owner and occupier of the office building made a claim against the contractor for the resulting damage and loss of rent and the contractor in turn made a claim against the mechanical and electrical subcontractor (M&E subcontractor).
The M&E subcontractor joined Siemens Building Technologies (Siemens) into the proceedings, as it had been retained to supply and install the sprinkler system. Finally, Siemens joined Supershield Ltd (Supershield) into the proceedings as Supershield had a subcontract (subcontract) with Siemens to install the sprinkler system.
Following a mediation in June 2008, which was attended by all parties, Siemens settled its claim with the M&E subcontractor (at just under 50% of the sum claimed) and it then sought to recover the settlement sum from Supershield.
The court’s decision on whether Supershield was liable to Siemens
The court at first instance found that the probable cause of failure of the nut and bolt connection between the lever arm and the ball valve was insufficient tightening when the ball valve was installed by Supershield and that, under the Supershield sub-contract, Supershield had an obligation both to install the ball valve and lever arm and to carry out any adjustments which were necessary to ensure that the ball valve was operating correctly.
Supershield was therefore liable to Siemens for breach of the sub-contract.
The court’s decision on whether Siemens settlement was reasonable
Supershield disputed Siemens’ claim that the sum which Siemens had settled the claims made against it reasonably reflected the strength of the defences which were available to Siemens.
The judge at first instance found that Siemens settlement sum was reasonable and gave judgment in favour of Siemens to recover the amount of the settlement from Supershield.
The issues on appeal
Issue 1: Construction of the sub-contract
The first issue before the Court of Appeal was whether the judge misconstrued the terms of Supershield’s subcontract with Siemens. In other words, Supershield argued that on a proper construction, the subcontract works did not include the installation of the ball valve and the consequent adjustments to ensure that the ball valve was operating correctly. On the first issue the Court of Appeal was not persuaded by Supershield’s argument that the judge’s construction was wrong and agreed with the judge that the ball valve was part of the complete sprinkler system which Supershield had agreed to supply and install for Siemens.
Issue 2: Reasonableness of settlement
The second issue was whether the judge was wrong to find that the figure for which Siemens agreed to settle the claims against it was reasonable. Supershield sought to argue that Siemens had straightforward and complete defences to the claims made against it arising from the flood and that its settlement of those claims for just under 50% did not represent a reasonable attempt to mitigate the potential loss resulting from its exposure to the claims.
The Court of Appeal’s approach to reasonableness of settlement
The Court of Appeal set out a number of relevant points about why parties enter into settlement agreements as opposed to embarking on litigation proceedings and on the process of agreeing the settlement sum, namely:
- prudent parties usually try to avoid litigation where possible because of its uncertainty and expense;
- the “settlement value” of a claim is not an objective fact (or something which can be assessed by reference to an available market) but a matter of subjective opinion, taking into account all relevant variables;
- often parties have widely different perceptions of what would be a fair settlement figure without either party being unreasonable; and
- the object of mediation or negotiation is to close the gap to a point which each party finds acceptable.
The issue which the judge has to decide was not what assessment he would have made of the likely outcome of the settled litigation, but whether the settlement was within the range of what was reasonable.
An appellate court would not interfere with a judge’s decision unless persuaded that he erred in principle or that his decision was incapable of justification on any reasonable view (which was highly unlikely).
Did the settlement agreement reasonably reflect the causation and remoteness defences available to Siemens?
Supershield did not suggest that the judge had misdirected himself on the principles to be applied where a party settled a claim made against it and sought to recover its outlay from a third party but that the judge erred when he had examined the strength of Siemens’ causation and remoteness defences and as a result those defences were not reasonably reflected in the settlement that Siemens reached.
Instead, Supershield sought to argue that:
- the effective cause of water escaping from the sprinkler tank room was blocked drains; or
- even if the overflowing water from the sprinkler tank was a partial cause, damage caused by such overflow was too remote a consequence for Siemens to have been liable to the M&E subcontractor on a proper interpretation of Hadley v Baxendale (1854) 9 Ex 341.
The Court of Appeal on the issue of causation
The judge at first instance had concluded that the overflowing of water from the sprinkler tank which resulted from the failure of the connection between the ball valve and lever arm was an effective cause of the flood. The fact that the drains were also blocked did not take away the potency of the overflow to cause damage, but rather failed to reduce it.
The Court of Appeal saw no error in that approach.
The Court of Appeal on the issue of remoteness
The starting point is the classic statement in Hadley v Baxendale that:
“…the damages which the other party ought to receive in respect of such breach of contract is such as may fairly and reasonably be considered either arising naturally, ie according to the usual course of things, from such breach of the contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”
The judge at first instance had held that the probable result of a breach of contract in failing properly to install the nut and bolt would have been an escape of water though the overflow which, according to the usual course of things, would have caused a flood and led to water damage. The judge did not think that any imputed knowledge of the existence of the drains or of other protection measures, such as alarms, could have reduced what would otherwise have been recoverable under the first limb of Hadley v Baxendale.
Supershield sought to argue that the judge’s approach to remoteness was wrong. It was not a matter of imputing knowledge of the existence of drains in order to reduce what was otherwise recoverable under the first limb of Hadley v Baxendale rather, as a matter of fact, it was unlikely that the ball valve connection failure would result in a flood because the sprinkler tank room was designed and constructed with drains to cope with an escape of water.
In the normal course of things any water which overflowed from the sprinkler tank would have run away via the drains without damage to the building. The blocked drains were an unfortunate and unlikely occurrence which prevented the water from running away as it would have done in the normal course of things. Therefore, damage as a result of the overflow from the sprinkler tank was too remote.
The Court of Appeal on the issue of remoteness
The Court of Appeal considered that the distinctive feature of this case was that the ball valve and the drains were both designed to control the flow of water involved in the operation of the sprinkler system. None of the authorities cited by Supershield had any comparable feature (i.e. simultaneous failure of separate protection measures).
As the Court of Appeal noted it was not uncommon in construction projects for the designer to incorporate multiple safety devices in the reasonable expectation that the risk of simultaneous failure of both or all the protection devices would be minimal. But the fulfilment of that expectation depended on those responsible for the protection services doing as they ought. If those responsible for the devices failed to do so and the unlikely happened, it should be no answer for one of the parties responsible for the devices to say that the occurrence was unlikely when it was that party’s responsibility to see that it did not occur.
The reason for having a number of precautionary measures was for them to serve as a mutual backup. It would be a perverse result if the greater the number of precautionary measures, the less the legal remedy available to the victim in the case of multiple failures.
The Court of Appeal accepted that Supershield might be right that a failure of the connection between the ball valve and the lever arm was very unlikely to result in a flood because the probability was that the water would escape through the drains. However the Court of Appeal did not accept that this made the loss resulting from the flood too remote to have been recoverable by the M&E subcontractor from Siemens.
Siemens was responsible to the M&E subcontractor for supplying and installing the sprinkler system in such a way that that the water used from the system was properly contained, and it therefore assumed a contractual responsibility to prevent its escape. The ball valve was the first means of protection against water causing damage to other parts of the building and it failed. It was always possible that the second means of protection, the drains might also fail.
Accordingly, the Court of Appeal held that the flood which resulted from the escape of water from the sprinkler tank, even, if it was unlikely, was within the scope of Siemens’ contractual duty to prevent..
The Court of Appeal found no reason to overturn the judge’s conclusion that Siemens settlement sum was reasonable.
Although the case concerned the question of reasonableness of settlement, during the course of the judgment Toulson LJ made some interesting observations on the question of remoteness. He considered the law on remoteness of damage in relation to breach of contract to be grounded on the policy that the loss recoverable should be limited to loss from which the party in breach may reasonably be taken to have assumed a responsibility to protect the other party and that the question of remoteness could not be isolated from consideration of the purpose of the contract and the scope of the contractual obligation.
In his Lordship’s view, the rule in Hadley v Baxendale remained the standard rule but it has been rationalised so that it reflected the expectation to be imputed to the parties in the ordinary case:
“…The contract breaker should ordinarily be liable to the other party for damage resulting from the breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from that breach.”
Toulson LJ considered that the cases of South Australia Asset Management Corp v York Montague  and Transfield Shipping Inc v Mercator Shipping Inc ) were authority for a different approach which may apply in cases where, on examination of the contract and commercial background, the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties.