UK: Liability for Fires: First Specify Your Peril

Contractual lawyers and draftsmen are accustomed to clauses transferring liability. The law is absolutely clear that they can be given effect, and has been settled so for centuries. An important area in construction contracts where this technique is used is liability for "insurable" losses or damage to the buildings being constructed or reconstructed, principally loss by fire. However, there has been a string of cases (starting in modern times at Scottish Special Housing Association v. Wimpey Construction UK Ltd [1986] 1 WLR 995 HL) which shows that this area is one in which the standard forms have failed to provide the industry with a uniform and clearly-understood position on the allocation of these risks.

This deficiency is important. It imposes extra bargaining costs on one of the United Kingdom’s biggest industries. It can lead to litigation, particularly when the losses from a large fire are to be allocated. It may lead to unclear requirements for insurance, which in turn may leave individual parties uninsured, or paying for duplicated insurance cover. This article looks at a recent case to see if further clarity is being achieved, at least in respect of the standard form contract considered in that case.

It is easy to say that the problems arise from poor draftsmanship - and judges have done so. However, it is not easy to tell from the decided cases what words would be necessary to produce a clear position. The tendency to cite prior cases on similar points and also to insist in the same judgment that each set of words is to be judged only on its natural meaning leads to confusion about what is legal authority and what is obiter.

This article considers the decision of HH Judge Seymour QC in Scottish and Newcastle PLC v. GD Construction (St Albans) Ltd [2002] 19 Const. LJ 246 in the Technology and Construction Court. In this case, the parties had concluded a contract substantially in the IFC 84 standard form terms under which the defendant was to perform renovation works on the claimant’s existing public house. The pub had a thatched roof and it caught fire when the defendant was working on it. There was serious damage to the existing structure and the issue was whether the Contractor or the Employer was liable to reinstate the works and the existing structure after the fire damage.

The reported part of the case was essentially a preliminary issue of law on assumed facts. The issue was whether the Defendant could be liable at all in view of the contract terms and in the end it turned on one of the hidden traps in the drafting of the IFC standard form, which is that the definition of Specified Perils (as in most construction contracts) includes: "fire" without saying whether this is to include all fires, or only fires caused by one party, or the other, or neither.

In the particular circumstances of the IFC 84 standard form, clause 6.1.2 is the starting point. It widens the Contractor’s liability for damage to the works in most circumstances:

The defendant’s case was that this clause stated the whole of the position on the Contractor’s liability for negligence under the IFC 84 arrangements. If it did not apply, then no matter how negligent that Contractor had been, the risk of any loss or damage of the type described fell on the Employer. In the circumstances of GD Construction, the argument ran, Clause 6.1.2 did not apply, because it was subject to Clause 6.3C.1 which did apply:

The result was that, in the Defendant’s view, Clause 6.1.2 encompassed all of the Contractor’s liability for fire, and 6.3C.1 negated it because the Employer was to be taken to have insured and insured losses were outside 6.1.2 both because of the express words in the last sentence of 6.1.2 and because both the claimant and the defendant would be insured under the Joint Names Policy and would therefore not be able to raise actions against each other in respect of the insured losses under the principles restated in Petrofina v. Magnaload [1984] 1 QB 127.

His Honour Judge Seymour QC disagreed. He said that Clause 6.1.2 extended the Contractor’s liabilities beyond those he would have had at common law, and (applying the reasoning of Lord Morton in Canada Steamship Lines Ltd. v. R. [1952] AC 192 PC as to the construction of exemption clauses against the party exempted) made the following points:

1. It was unlikely that the draftsman would have extended the liabilities just to exclude them.
2. The extended liabilities included liability for consequential losses.
3. The exclusion was limited to loss or damage caused by a Specified Peril.
4. A fire caused by the Contractor’s own negligence did not fall within the definition of "Specified Peril"

The result was that in Judge Seymour’s view Clause 6.3C.1 did not apply as the damage was not caused by a Specified Peril and so the Contractor was liable for all of the Employer’s losses under the indemnity in 6.1.2, and not just the consequential uninsured ones. This result is in accordance with earlier decisions on similar drafting in Dorset County Council v. Southern Felt Roofing Company Limited (1989) 48 BLR 96 and elsewhere.

Commercially, this is a surprising result, because the contracting parties, as a matter of business expectation, are often content to make their contractual arrangements so as to avail themselves of insurance. Speaking legally, this was something that the Court was bound to ignore. Speaking commercially, it would be sensible to assume that there is normally insurance in these cases. Assuming that insurance cover was in place in the GD Construction case, the fire held to be a Specified Peril would have been insured and neither party would have (in the end) suffered the loss directly. Instead, it would have been borne by insurers.

A further, simple commercial test of the logic of the Court’s interpretation if applied more widely is to look at the Contractor’s insurance position. Any Contractor faced with a project that might generate losses such as occurred in GD Construction will wish to insure the risk away. This will not be easy, because such insurance would require the Contractor to assess the risk in the existing structures (which do not belong to him and of whose value he is probably ignorant) and obtain insurance in the market. That difficulty is precisely why the standard form contracts provide for work to existing structures to be insured by the Employer.

However, the Court’s job is not to vindicate commercial expectations, but to interpret the actual contracts that have been made. The result accords with earlier authority. There is no need to criticise the Court’s interpretation from a legal (as opposed to commercial) point of view. The draftsman may have been striving for a particular effect and failed to achieve it.

Parties wishing to avoid the confusion that led to litigation in GD Construction need only to alter the definition of Specified Peril so that it is clear which fires are included.

They might also wish to take up the Court’s suggestion about consequential losses, which might require alterations to provisions dealing with liquidated damages, or a more restricted indemnity in Clause 6.1.2 or its equivalent.

© Herbert Smith 2002

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