Legal Watch:Property Risks & CoverageOctober 2014Issue 009

In This Issue:

• Welcome new colleague

• Broker not liable for gross underinsurance

• Failure to spot defective workmanship insufficient to defeat indemnity clause

• Burden of proof in claim pursuant to Consumer Protection Act 1987

Contact UsIf you would like any further information on the cases or articles featured in this issue, please contact:

Simon Beckwith

T: 0844 245 5296E: simon.beckwith@plexuslaw.co.uk

Mark Ratcliffe

T: 0844 245 5297E: mark.ratcliff@plexuslaw.co.uk

Christine Ferris

T: 020 7469 6282E: caf@greenwoods-solicitors.com

Clare Higgs

T: 0844 245 4478E: clare.higgs@plexuslaw.co.uk

Marise Gellert

T: 0207 469 6249E: msg@greenwoods-solicitors.com

IntroductionThis month Simon Beckwith and Mark Ratcliff, partners at Plexus Law, who acted for the defendant broker in the case of Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014], provide a helpful summary of the case.

Christine Ferris reviews the recent decision in Greenwich Millennium Village v Essex Services Group Plc (& Others). The main judgment in this case, in which Greenwoods’ Property Recoveries team acted for the successful claimant, was featured in Greenwoods’ Property, Insurance & Construction Review Issue 88 in November 2013.

Finally, Clare Higgs looks at the case of Hufford v Samsung Electronics (UK) Ltd [2014].

Thanks to all of them for their contributions.

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Welcome new colleagueChris Heitzman

Chris Heitzman joins the Property, Risks & Coverage team this month as an Associate Partner, based principally in Manchester. He specialises in commercial insurance work including subrogation, product and other liability claims, and coverage. Chris frequently delivers seminars, surgeries, mini-secondments and coaching. He lives in Cheshire and enjoys swimming, tennis, film, go-kart racing and, when time and budget allows, travelling.

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Broker not liable for gross underinsuranceIn Eurokey Recycling Ltd v Giles Insurance Brokers Ltd [2014] EWHC 2989 the Commercial Court dismissed in full a multi-million damages claim against an insurance broker by a company which claimed the broker had failed to arrange adequate insurance cover for its business, stock, plant and machinery.

Arguments revolved around the responsibility for the alleged under-insurance of the insured company, including allegedly vastly inadequate business interruption cover.

BackgroundGiles Insurance Brokers Ltd (Giles) advised Eurokey Recycling Ltd (Eurokey), a Leicester-based waste recycling business, between 2002 and 2010 and arranged a policy in 2010 which covered, among other things, premises, stock, machinery and business interruption.

The cover had been obtained on the basis of a market presentation completed by Giles on the basis of instructions provided by Eurokey. This included an anticipated turnover figure of £11m. The actual turnover figures in the company’s draft accounts that were provided to Giles after the inception of the policy were substantially higher.

The day after the inception of the policy, Eurokey emailed draft accounts to Giles for onward transmission to a credit finance company in support of an application for a loan to pay the premium, but without providing any instructions to the effect that the accounts had any bearing on the figures provided to the insurers in the market presentation or the business interruption insurance which had been arranged.

Giles forwarded the accounts to the credit finance company without reading them as they were provided to them for the purposes of obtaining credit. They showed a turnover in excess of £17m for the year ended 30 August 2009, some £6.5m more than the £11m estimate provided by Eurokey to Giles and by Giles to the insurers in the market presentation.

In May 2010 Eurokey suffered a major fire which is alleged to have destroyed the affected premises and the stock, plant and machinery present there. The insurer took issue with discrepancies between the claims made under the policy by Eurokey following the fire and figures provided for stock, plant and machinery, and turnover/business interruption in the market presentation. A settlement was agreed at £820,000, as against claimed losses of over £4m.

Eurokey issued proceedings in the Commercial Court against Giles and sought damages of over £3m, the difference between the actual settlement and what they believed they should have received, as well as a claim for lost profits arising from the under-payment of insurance monies, said to have been over £13m at the date of the trial, plus interest and costs.

Judgment All claims were dismissed in their entirety.

The judge decided that there had been no breach of duty by Giles, which had provided adequate advice to Eurokey as to its insurance requirements, including business interruption cover, and the information provided to the insurers in the market presentation and the cover obtained reflected Eurokey’s instructions. The broker was under no duty to interrogate the information he was given.

“The broker was under no duty to interrogate the information he was given.”The judge also decided on the facts that the broker was not under a duty to review the draft accounts provided after the inception of the policy because Eurokey had not asked him to do so and there was nothing to put the broker on notice that the information was material to the cover obtained or called into question its adequacy.

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CommentThe outcome of the eight-day hearing should give insurers encouragement to fight unmeritorious claims. It establishes on the facts that a broker is not under a duty to test or challenge instructions provided by a client and it can be sufficient for a broker to act as a postbox when he receives information for transmission to third parties after the inception of an insurance policy.

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Failure to spot defective workmanship insufficient to defeat indemnity clauseThe focus of this article is upon the Court of Appeal judgment handed down on 11 July 2014 in Greenwich Millennium Village Ltd v Essex Services Group Plc (& Others) [2014] EWCA Civ 960

Brief recap of the facts and summary of issues arising in the Appeal The claim arose from two separate but related escapes of water on 1 August 2007 from Cores 2 and 3 of the boosted cold water system serving a block of flats known as Holly Court in Greenwich Millennium Village. The judgment relating to the Core 2 flood (to which 92% of the damage caused was attributed) gave rise to the appeal.

Greenwich Millennium Village Ltd (GMVL) claimed against the M&E sub-contractors, Essex Services Group PLC (Essex) that had provided a warranty to GMVL. Essex, in turn, pursued a claim in contribution against the mechanical sub-sub contractors, HS Environmental Services Limited (HSE), who had entered into a back-to-back contract, assuming responsibility for all of Essex’s contractual obligations for the mechanical works. HSE, in their turn, passed on the claim to the labour only sub-sub-sub contractors, DG Robson Mechanical Services Limited (Robson).

Robson appealed against the first instance decision of Mr Justice Coulson that it was liable to indemnify HSE for workmanship defects causative of the Core 2 flooding. The principal issue in the appeal was whether HSE’s failure to detect these defects should preclude recovery under an indemnity clause or, alternatively, prevent recovery of the same sum as damages for breach of contract. Robson also challenged some of the trial judge’s findings of fact.

Supplementary judgment An interesting subsidiary point arising in the appeal was whether account should be taken of a second judgment, amplifying the reasons for having reached his original decision, delivered by Coulson J when refusing Robson’s original application for permission to appeal.

Lord Justice Jackson concluded that it was appropriate to take that judgment into account. In making that decision he relied upon English v Emery Reimbold & Strick Ltd [2002] EWCA Civ 605 where the Court of Appeal said that the judge may take the opportunity to provide additional reasons for his judgment. Emery was a case where the appellant had complained about lack of reasons. Jackson LJ noted that Robson’s Notice of Appeal complained about lack of reasons in one respect. Notwithstanding that, however, the additional reasons were helpful in other respects and could be taken into account.

Challenges to findings of factJackson LJ started from the premise that the Court of Appeal would not usually entertain appeals on questions of fact from the Technology and Construction Court (TCC), for the reasons expressed by May LJ in Yorkshire Water Services Lit v Taylor Woodrow Construction Northern Ltd [2005] EWCA Civ 894. He concluded that “the present case provides a classic example of a TCC judgment where the Court of Appeal should not interfere with findings of fact” in circumstances where the trial judge had “…brought to bear the specialist expertise of a TCC judge in piecing together the jigsaw and resolving the numerous conflicts of evidence.”

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“the present case provides a classic example of a TCC judgment where the Court of Appeal should not interfere with findings of fact” Jackson LJ described a contention that the trial judge should have rejected certain factual evidence that been contradicted by expert evidence as “a hopeless submission”. He concluded that there was “no question of the Court of Appeal stepping in and substituting different findings of fact on matters of this nature.”

The contractual position and indem-nity clauseThe contractual documents between the parties gave rise to the principal point of law arising in the appeal. The following contractual documentation existed between HSE and Robson:

1. Robson’s quotation dated 7 December 2004 offering to install the pipework services at Holly Court and Bequerel Court for £500,000 plus VAT

2. HSE’s order dated 8 July 2005 accepting that quotation

3. HSE’s terms and conditions

Robson alleged in its grounds of appeal that the trial judge erred in holding that HSE was entitled to recover against Robson under clause 2 of the sub-sub-sub contract which, upon its true construction, did not permit recovery where HSE itself was at fault. HSE contended, in a respondent’s notice, that even if Robson were right about that, then they would still be entitled to recover an equivalent sum as damages from Robson for breach of contract.

Clause 2 of HSE’s terms and conditions provided that “The Sub-contractor hereby agrees to indemnify HSE against each and every liability which HSE may incur to any other person or persons and further to indemnify HSE 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.”

The trial judge found that the effect of this clause was to require Robson to indemnify HSE against its indemnity to Essex.

Robson’s counsel relied upon the case of Canada Steamship Lines v The King [1952] AC 192. Jackson LJ concluded that the “Canada Steamship principle” applied to indemnity clauses as well as exemption clauses and relied on Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165 at 172 in support. He adopted Devlin LJ’s summary of the Canada Steamship principle in Walters v Whessie Ltd (1960) 6 BLR 23 as follows: “It is now well established that 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…It is thought to be so unlikely that one man would agree to indemnify another man for the consequence of that other’s own negligence that he is presumed not to intend to do so unless it is done by express words or by necessary implications”.

Coulson J gave two reasons for not applying this rule of construction in the present case. Firstly, that the authorities cited were personal injury cases concerned with negligence and secondly, that the rule of construction would destroy the ability of the parties to pass claims down the contractual chain, which was contrary to business common sense.

The point was argued much more fully on appeal than at first instance and Jackson LJ found the first of these two reasons to be wrong, as the principle was of general application and not limited to personal injury claims. He described the second reason, however, as “a more formidable one”, as most building projects involve chains of contracts in which

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the basic intention is that each party in the chain should be paid for the work it does and should be responsible for the shortcomings in their own work. He noted that in all of the cases where the Canada Steamship principle had been successfully invoked the indemnitee had committed a positive act of negligence that was causative of the damage, as opposed to having failed to detect defects or to order rectification.

Jackson LJ concluded that “in the case of a construction contract a failure by the indemnitee (in this case HSE) to spot defects perpetrated by its contractor or sub-contractor should not ordinarily defeat the operation of an indemnity clause, even if that clause fails expressly to encompass damage caused by the negligence of the indemnitee.”

It was implicit in the findings of fact at trial that HSE ought to have detected Robson’s workmanship errors upon making a reasonable inspection. However, the Court of Appeal held that HSE’s failure to inspect Robson’s work properly did not shut out its claim under clause 2.

“...a failure by the indemnitee to spot defects perpetrated by its contractor or sub-contractor should not ordinarily defeat the operation of an indemnity clause...”Jackson LJ’s response to the question as to whether, if he was wrong about the effect of the indemnity clause, HSE could recover an equivalent sum from Robson as damages for breach of contract was that negligence by an indemnitee which prevents the operation of an indemnity

clause need not shut out an alternative claim for breach of contract. The trial judge found that Robson’s workmanship failures were breaches of its sub-sub-sub contract with HSE, that were therefore entitled to recover that loss against Robson as damages for breach of contract.

The appeal was accordingly dismissed. We are not aware of any intention on the part of Robson to appeal further to the Supreme Court.

Comment This appeal judgment shows that there is little point in appealing against findings of fact of specialist judges such as those sitting in the TCC, which are most unlikely to be overturned.

Furthermore, if permission to appeal is required, the initial application for permission will give the trial judge an opportunity to expand upon the reasons for his original judgment and those are likely to be taken into account by the Court of Appeal. If permission to appeal is refused, any such supplementary judgment merits careful consideration before making a decision to take the appeal any further.

It is clear that a widely worded contractual indemnity clause like the one included within Robson’s sub-sub-sub contract is highly likely to prove effective and it will take a positive act of negligence on the part of the party relying upon the indemnity that is causative of the damage before the Canada Steamship principle can be relied upon. A negligent failure to spot defective workmanship and require it to be rectified will not be enough.

07

Burden of proof in claim pursuant to Consumer Protection Act 1987 In the case of Michael Hufford v Samsung Electronics (UK) Ltd [2014] EWHC 2956 (TCC) the claimant failed to discharge the burden of proof required by the Consumer Protection Act 1987.

BackgroundA fire occurred in the kitchen of the claimant’s home on New Year’s Eve 2009. The claimant had completely refurbished his kitchen in the weeks leading up to Christmas 2009 at a cost of some £14,000. He had however, retained a Samsung fridge-freezer which had been purchased some two years previously, which was stored in the hallway during refurbishment and was then moved to a different position within the kitchen.

In the hours leading up to the fire, the claimant hosted a late lunch for his parents. His evidence was that whilst he was a smoker, he did not smoke in front of his parents, his parents had cleaned the kitchen before they left and he had then left the house overnight. On returning home the next day, he found the house cold and dark and there was evidence of a fire in the kitchen, although by that point the fire had burnt itself out.

The claimant brought a claim against the manufacturer for breach of statutory duty under section 2 of the Consumer Protection Act 1987 (the Act) on the basis the fridge-freezer was defective pursuant to section 3 of the Act, which provides “...there is a defect in a product for the purposes of this Part if the safety of the product is not such as persons generally are entitled to expect: and for these purposes “safety”, in relation to a product, shall include safety with respect to products comprised in that product and safety in the context of risks of damage to property, as well as in the context of risks of death or personal injury.”

The basis of the claim was therefore that the fridge-freezer had caught fire in the course of its normal use. Specifically,

the claimant said that the fire originated inside the fridge-freezer in the machinery compartment at the rear. The defendant alleged the fire originated outside of the fridge-freezer in some combustible material situated in front of it.

In this instance there were two potential causes for the court to consider:

1. An unspecified electrical fault in the machinery compartment of the fridge-freezer

2. The ignition of combustible material left in front of the fridge-freezer by reason of discarded smoking materials

The defendant also submitted that the fridge-freezer had been damaged when it was moved within the kitchen, although no evidence was adduced in support and therefore the trial proceeded on the basis it was a ‘closed list’ case.

The judge rejected the defendant’s submission that the claimant must prove the defect with a reasonable degree of specificity to allow it to establish a defence under section 4 (1) (d) of the Act, which is that the defect did not exist in the product at the relevant time.

In order to run such a defence the onus is on the defendant to identify the defect in question which it says did not exist in the product at the relevant time. That is not to say, however, that there is a burden of proof on the defendant. If he raises an alternative cause he need not prove that was the cause of the peril or accident. The ultimate question remains: has the claimant proved its claim on the balance of probabilities?

The claim was also pleaded in negligence although references to the claim in negligence were fleeting.

JudgmentThere were numerous inconsistencies in the claimant’s case (including some within the letter of claim) which the judge criticised, in particular, whether a bag of rubbish had been

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removed from in front of the fridge-freezer; whether the surfaces were clear and whether an ashtray had been left on top of the fridge-freezer. Overall the judge found the claimant to be a “less than impressive witness” whose version of events was not supported by the findings of either party’s expert. In particular, the judge found as a matter of fact, contrary to the evidence of the claimant and his mother, that there was a quantity of combustible material immediately in front of the fridge-freezer; the location of most severe damage was at the front of the fridge-freezer and the natural air flow through the appliance was from front to back.

The judge preferred the defendant’s expert’s evidence that the insulating material under the fridge compartment was not badly burned and the fridge compartment itself was only smoke damaged compared with the front, which was badly burned suggesting the fire spread from an area in front of the fridge-freezer, all of which supported the defence.

Whilst the inconsistencies in the claimant’s case were not helpful, it remained the case that the claimant had not discharged the burden of proof which rested upon him to prove either that there had been a defect in the product in question or that the origin of the fire had been in the machinery compartment at the rear of the appliance, as he alleged. Further, the facts did not give rise to a claim in negligence. The claimant did not establish a duty of care nor did the evidence prove any breach of such a duty. Given that the claimant had failed to prove that there had been a defect in the product in question or that the fire had originated in the machinery compartment at the rear of the appliance as he alleged, the mere fact of a fire involving the appliance did not mean that the case was one where the maxim res ipsa loquitur (the facts speak for themselves) applied and the claim failed.

...the mere fact of a fire involving the appliance did not mean that the case was one where the maxim res ipsa loquitur applied...CommentThe judge commented that in his written opening submissions, the claimant’s counsel submitted that it was for the court to “look at the full picture”, without then including any of the evidence derived from the expert witness within his list of what made up that “full picture”. The judge held that it is necessary to have regard to both the evidence of fact and the expert opinion evidence in the case to “look at the full picture”. This case demonstrates how important it is to consider all of the evidence, whether that evidence is consistent and supports the allegations being made. It also demonstrates the danger of taking what some may consider to be the ‘easy option’ of relying on “res ipsa loquitur”.

The information and opinions contained in this document are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations. This document speaks as of its date and does not reflect any changes in law or practice after that date. Plexus Law and Greenwoods Solicitors are trading names of Parabis Law LLP, a Limited Liability Partnership incorporated in England & Wales. Reg No: OC315763. Registered office: 8 Bedford Park, Croydon, Surrey CR0 2AP. Parabis Law LLP is authorised and regulated by the SRA.

www.plexuslaw.co.ukwww.greenwoods-solicitors.com

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Contact UsFor information on articles and cases featured in other editions of Property Risks and Coverage Newsletters, please contact:

Marise Gellert

PartnerT: 020 7469 6249E: msg@greenwoods-solicitors.com