In Greenwich Millennium Village Limited v Essex Services Group PLC & Others [1], the Court of Appeal considered an indemnity clause in circumstances where the party relying on the indemnity clause (a sub-sub-contractor) had failed to notice the defective workmanship of the relevant sub-contractor (the sub-sub-sub-contractor) which ought to have been detected on reasonable inspection. Did this mean that the sub-sub-sub-contractor, whose defective workmanship caused a flood at the development, was absolved from responsibility?

Facts

Laing O'Rourke PLC (Contractor) was engaged by the employer and owner, Greenwich Millennium Village Limited (Employer), as the main contractor to design and construct 2 blocks of flats in South East London, known as the Millennium Village project. The Contractor engaged Hoare Lea (Consultant) as M&E consultant and Essex Services Group PLC (Sub-contractor) as sub-contractor for the design and installation of the M&E works. The Consultant and Sub-contractor provided warranties in favour of the Employer.

The Sub-contractor specialised in electrical works only and engaged sub-sub-contractor HS Environmental Services Limited (Sub-sub-contractor), to undertake the mechanical works. The Sub-sub-contractor then sub-contracted the labour element of the mechanical works to DG Robson Mechanical Services Limited (Sub-sub-sub-contractor). Clause 2 of the sub-sub-sub-contract provided that:

"The Sub-contractor hereby agrees to indemnity (sic) HS Environmental Services Ltd against each and every liability which HS Environmental Services Ltd may incur to any other person or persons and further to indemnity (sic) HS Environmental Services Ltd 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 act, default or negligence of the Subcontractor."

During the construction, the Consultant became aware that there was a risk of flooding due to the location of the water system at the development. As a result, 3 surge arrestors were required to be installed by the Sub-sub-sub-contractor in Cores 1, 2 and 3 of the development. A photograph of the pipework in Core 2, which was taken at the pre-handover inspection, showed that there were 2 obstructions beneath the surge arrestor (the presence of a non-return valve (NRV) and an isolation valve (IV) which was in a closed position). The obstructions prevented the surge arrestor from performing its correct function. However, the Consultant, the Sub-contractor and the Sub-sub-contractor did not identify these defects. Less than a year after completion water escaped from the riser mains in Cores 2 and 3, causing a major flood.

Claim

The Employer brought a claim against the Consultant and Sub-contractor for breach of warranty to recover the losses suffered as a result of flooding which had resulted in remedial works of £4.75 million. Part 20 proceedings also ensued.

First instance decision

In summary, Coulson J held that:

  • The Sub-contractor and the Consultant were liable to the Employer in relation to the Core 2 flood (apportioned: 60% for the Sub-contractor and 40% for the Consultant);
  • The Sub-contractor was liable to the Employer for the Core 3 flood;
  • The Sub-contractor could pass onto the Sub-sub-contractor its liability to the Employer (because of a back-to-back provision in the sub-sub-contract); and
  • The Sub-sub-contractor could pass on to the Sub-sub-sub-contractor its liability to the Sub-contractor (pursuant to the clause 2 wording above).

Coulson J made a number of factual findings, in particular that, whilst there were design and inspection failures, the principal causes of the flood were workmanship failures by the Sub-sub-sub-contractor. 

Grounds of appeal

The Sub-sub-sub-contractor accepted liability for the Core 3 flood but appealed on the following 4 grounds in respect of the Core 2 flood:

  1. The judge erred in holding that the Sub-sub-contractor was entitled to recover against the Sub-sub-sub-contractor under clause 2 of the sub-sub-sub-contract. Clause 2 did not permit recovery where the Sub-sub-contractor was at fault.
  2. The judge erred in holding the Sub-sub-sub-contractor responsible for the closed IV.
  3. If ground 2 succeeded, then the Sub-sub-sub-contractor had no liability arising from its installation of the NRV.
  4. The judge erred in holding that the Sub-sub-sub-contractor's installation of the NRV was a breach of contract.

Court of Appeal decision

The Court of Appeal dismissed the appeal.

1. Reluctance to step in and reverse the TCC's findings on facts

In relation to grounds 2 to 4, the Court of Appeal stated that: 

"The present case provides a classic example of a TCC judgment where the Court of Appeal should not interfere with findings of fact.  The judge listened to factual and expert evidence over the course of a thirteen day trial.  He brought to bear the specialist experience of a TCC judge in piecing together the jigsaw and resolving the numerous conflicts of evidence. It is not right for this court to step in and reverse the judge's findings…" (para 61)

2. Failures of inspection did not break the chain of causation and the wording of the indemnity provided in the sub-sub-sub-contract was not confined

As regards ground 1, the Court of Appeal considered the Canada Steamship principle[2], which was endorsed by the Court of Appeal in Walters v Whessoe Ltd [3], that, applying a rule of construction:

"… 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." (para 70)

At first instance, Coulson J had considered that the Canada Steamship principle did not apply because the authorities were personal injury cases concerned with negligence and further that it was contrary to business common sense if parties were not able to pass claims down the contractual chain. Whilst the Court of Appeal stated that the Canada Steamship principle was of a general application and not limited to personal injury claims, the court agreed that:

"…it would largely defeat the commercial purpose of the contractual chain if "failure to notice" prevented the indemnity clauses from operating." (para 87)

Further, clause 2 was:

"…wide enough to encompass the two workmanship breaches…it cannot be presumed that the parties intended to confine clause 2 to workmanship breaches by this labour only sub-sub-sub-contractor which were invisible upon reasonable inspection. The clause does not say that." (para 96)

Accordingly, it was held that neither the design failures (by the Consultant and the Sub-contractor) nor the inspection failures (by the Consultant and the Sub-sub-contractor) were sufficient to break the chain of causation.

Comments

Most construction projects involve chains of contracts "in which entitlement to be paid and liability for non-performance pass up and down the line" [4]. In this case, the design and inspection failures of other parties did not break the chain of causation which ultimately led to the Sub-sub-sub-contractor being responsible for the losses suffered (the Sub-sub-sub-contractor's workmanship having been held to be the principal causes of the defects). This decision may come as no surprise, particularly to those higher up the contractual chain on construction projects.

At the same time, the decision serves as a reminder to be cautious when agreeing to indemnities and to take professional advice accordingly, including from insurers. If an indemnity should be restricted to  cover certain duties / circumstances / losses, it is imperative that such wording is expressly included.

The decision also emphasises the reluctance of the Court of Appeal to overturn findings of fact by the TCC and therefore a potential appellant should carefully consider whether to incur the costs of bringing an appeal on those grounds. In addition, it is worth noting that the court commented on the Sub-sub-sub-contractor's lack of paper trails, which reiterates the importance of keeping accurate records during the course of a construction project, as records will be needed if matters escalate. A party to proceedings should also bear in mind how certain behaviour may be perceived in court. In this regard, at first instance the TCC commented that the Sub-sub-sub-contractor's "…propensity to blame other contractors for what they [5]…had done was irresponsible and damaging to their case as a whole" (para 40 (vi)).