On 25 April, 2002 the House of Lords considered whether an architect or engineer who was sued by his employer for negligently damaging a building could require the main contractor to contribute towards any damages he was ordered to pay. The decision highlights potential risks for the design team if they are not covered under the CAR policy.

The facts

The case in question is Cooperative Retail Services Limited v Taylor Young Partnership and others. Cooperative Retail Services ("CRS") employed Wimpey as the main contractor to build a large new office block. Taylor Young partnership ("TYP") were employed as architects and Hoare Lee & Partners ("HLP") as mechanical and engineering consultants. On 16 March, 1995 a fire occurred at the site while a generator was being commissioned. As a result, completion of the works was substantially delayed and Wimpey had to carry out extensive repairs.

As is common in major construction contracts, the main contract required Wimpey to obtain contractor’s all risk insurance cover against damage to the works caused by fire. Wimpey had obtained a joint names policy which insured CRS, Wimpey and any sub-contractor. However, TYP and HPL were not covered by the policy.

CRS made claims under the all risks policy. The insurers paid CRS and then sued TYP and HLP alleging that their negligence had caused the fire. TYP and HPL attempted to bring Wimpey into the action claiming that they were entitled to payment from Wimpey towards any damages due. Wimpey argued that they had no liability to CRS and, therefore, could have no liability to contribute towards any damages awarded against TYP or HLP.

The law

Before we consider the court’s decision it may be helpful to briefly discuss two relevant points of law. The first is a principle known as subrogation. This states that when an insurer pays a claim, it has the right to take over any other methods which the policyholder may have had for obtaining compensation for the same event. In other words, the insurer can sue the person who caused the insured the loss in the first place. However, an insurer cannot pursue a subrogated claim against someone who is a joint insured covered for the same risk under the same policy as the insured.

The second relevant principle is the law of contribution. Legislation in a number of jurisdictions, including Hong Kong, enables a defendant to recover a contribution towards any civil judgment from any person who is also liable in respect of the same damage, so long as that other person is liable to the same plaintiff.

The decision

It was common ground between the parties that CRS’s insurers, acting through rights of subrogation, could sue TYP or HLP but could not pursue an action directly against Wimpey as they were insured against the same risk and under the same insurance policy as CRS. But, TYP and HLP argued that this did not prevent them from claiming a contribution from Wimpey. Wimpey provided two answers to this argument. The first was that Wimpey’s obligation under the main contract was simply to make good any damage to the Works. As Wimpey had done so, they had a defence to any claim that CRS might bring against them and, therefore, they were not "liable in respect of the same damage" within the meaning of the legislation. Second, Wimpey argued that any claim was barred by the fact that they were insured under the same joint names policy as CRS. The court considered both arguments in detail.

Were Wimpey ever "liable" to CRS in respect of the fire damage?

The court held that the provisions of the main contract provided a complete scheme for dealing with the consequences of the fire. Wimpey had to make good the fire damage but otherwise, the main contract excluded Wimpey’s liability for damage to the works. The court usefully summarised the insurance position, common to many forms of main contract, as follows:

  • CRS was not entitled to deduct anything from the sums payable to Wimpey under the contract as compensation for any loss and damage which CRS suffered due to the fire. This was so even if the fire was caused by Wimpey’s act or omission.
  • Wimpey was obliged to use due diligence to restore the Work that had been damaged by the fire.
  • Wimpey was not entitled to any payment for reinstatement work other than the sum received under the insurance policy.
  • Wimpey was entitled to an extension of time and was not liable to the employer for losses due to any delay caused by the fire.

For these reasons, the court agreed with Wimpey’s first argument and held that Wimpey had no liability to compensate CRS. Therefore, even if Wimpey’s negligence had been an immediate contributory factor to the fire, TYP and HLP had no right to any contribution from Wimpey.

The effect of the joint names policy

Wimpey argued that their joint insurance of the CRS provided them with a second defence to the claim. To allow the claim would be inconsistent with the intentions of the parties as it would effectively deprive them of the benefit of the insurance. The Court agreed and held that it would be nonsensical if parties who were jointly insured under an all risk policy could make claims against one or another in respect of damage to the contract works. That could not possibly be what the parties had intended and, if necessary, the court would imply a term to that effect.

Analysis

The decision highlights the risks where members of the design team are not insured under the joint names all risk policy obtained for a project. The court accepted that the result could seem unfair. It said "TYP and HLP complain with some force that the conclusions expressed above may lead to a very inequitable result: the bearing of the entire financial consequences of a catastrophe by a party which may have had a very minor responsibility for causing it. This is indeed a possible outcome, and may be the case here. This is the effect of the standard form contract which CRS, Wimpey and [the sub-contractor] made, and it is the standard form of which TYP, HLP and their professional indemnity insurers must [be] taken to have been aware". The court decided that the insurance and repair requirements in the contract swept away the ordinary rules for compensation for negligence. As a result, Wimpey was not obliged to compensate CRS for the same losses as TYP and HLP, and so TYP and HLP were not entitled to a contribution towards any liability from Wimpey. Similar insurance and repair schemes are common in Asia and the decision highlights a real exposure which Asia design teams should address. Given the increasing cost of P.I. cover, we anticipate that most design professionals will hope to address this liability by being named as joint insured under project policies rather than by securing or increasing their own P.I. cover. We wait to see whether main contractors and employers will be willing to allow the design team to be named on those policies.

© Herbert Smith 2002

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