In Greenwich Millennium v Essex Services and Others EWCA Civ 960, the Court of Appeal considered whether a party can rely on an indemnity in circumstances where (s)he negligently failed to identify the defect giving rise to the damage for which the indemnity is sought.
The contractor was responsible for the design and installation of a boosted water system in an apartment block. It entered into a labour only sub-contract, in which it was agreed that the sub-contractor would indemnify the contractor against any liability arising from breach of the sub-contract, or by any act, default or negligence on the part of the “subbie”.
The contractor was alerted to a potential flaw in the design of the system, which rendered it vulnerable to a surge in the water pressure. While it took steps to mitigate the risk by adding surge arrestors to the system’s design, the defective installation of two additional valves by the subbie blocked the necessary airflow, rendering the surge arrestors ineffective. This defect went unnoticed by the contractor upon its inspection of the system. A subsequent surge in water pressure resulted in a pipe bursting, which caused extensive flood damage to the property.
At first instance, the Court found that the subbie’s installation of the obstructing valves was ultimately responsible for the flooding of the property. Accordingly, the contractor was permitted to recover its liability to the owner of the property from the subbie under the terms of the indemnity.
The subbie lodged an appeal, in which it contended, among other things, that the construction of the indemnity clause did not permit the contractor to be indemnified in circumstances where the contractor was itself at fault for failing to notice the defect. The subbie drew the Court of Appeal’s attention to a line of authorities, including theCanada Steamship Principle (as explained in Canada Steamship Lines v The King  AC 192), which, absent express wording to the contrary, gives rise to a presumption that a party is unlikely to have intended to be liable under an indemnity for another party’s negligence.
The Court of Appeal found the indemnity to be enforceable. It noted that the Canada Steamship Principle was of general application as a rule of construction. However, the Court distinguished this matter from all previous construction cases where the Principle had been successfully invoked, being cases where the indemnitee had committed a positive act of negligence, which was causative of the damage. The Court found that, in construction contracts, a failure by an indemnitee to spot defects perpetrated by its contractor or sub-contractor should not ordinarily defeat the operation of an indemnity clause. It could not be presumed that the parties had intended to confine the indemnity to defects invisible upon reasonable inspection.
Absent express wording to the contrary, the negligent failure of one party to identify defects in the workmanship of another is unlikely to prevent the operation of an indemnity clause. This is an exception to the CanadaSteamship line of authorities, which establish a presumption that an indemnity does not extend to the consequences of the indemnitee’s own negligence. However, the Principle is still likely to apply where the indemnitee committed a positive act, which was causative of the loss in relation to which (s)he seeks an indemnity.