Liability where beneficiary under an indemnity is itself at fault
GREENWICH MILLENNIUM v ESSEX SERVICES GROUP (CA) [2014]
A sub-contractor was held liable under an indemnity agreed with its immediate superior contractor in respect of claims by parties higher up the contractual chain even though the immediate superior contractor had failed to detect the defective workmanship which resulted in the claims.
Facts:
- A sub-sub-sub-contractor (R) caused a flood at a residential development in Greenwich which resulted in damage to the properties.
- The contract included an indemnity clause which stated that:
“The Sub-contractor hereby agrees to indemnity [sic] [the contractor] against each and every liability which [the contractor] may incur to any other person or persons and further to indemnity [sic] [the contractor] 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”.
- R’s immediate superior contractor (H) sought to claim under this indemnity despite itself being at fault in not recognising the problems.
- The Technology and Construction Court (TCC) held that R was indeed liable to indemnify H against the losses incurred due to the damage to the development.
- R appealed against this decision, amongst other things on the ground that the sub-contract did not permit recovery under the indemnity when the indemnified party was itself at fault in ‘failing to notice’ the defective work.
Decision:
- The Court of Appeal (CA) dismissed the appeal and upheld the TCC’s decision.
- Whilst reaffirming that a party who is to benefit from an indemnity is not usually able to recover under it (in the absence of express wording) where it has itself been negligent and this has contributed to the loss, the CA held that this principle is based on the presumed intention of the parties and it must be applied in the commercial context of the individual contract in question. In this case the CA said the parties would not have envisaged that failure by the indemnified party to spot defects would mean no claim could be made under the indemnity.
- The CA made reference to different degrees of fault on the part of the indemnified party and seemed to suggest that it might make a difference whether the indemnified party had been ‘actively negligent’ in the sense of doing something positive to cause the damage and ‘passive negligence’, such as a failure to detect a breach by a sub-contractor. It said, “mere failure to detect breaches should not ordinarily be sufficient to defeat an indemnity clause”. In addition the CA commented that the operation of the indemnity clause, “is not confined to workmanship breaches which were invisible upon reasonable inspection”.
- Even if negligence did prevent the indemnity from operating, the CA found that this did not necessarily preclude a claim for breach of contract which would enable liability to be passed down the contractual chain to the sub-contractor.
Points to note:
- Rather strangely, the legal teams involved agreed that an apportionment or sharing of the liability between the respective parties according to their degree of fault was not possible and the coverage under the indemnity then became a matter of ‘all or nothing’. Quite why they agreed to that is unclear.
- It appears it will now be more difficult for a sub-contractor to evade liability under an indemnity where it believes there has been a degree of fault on the part of the indemnified party. The TCC seemed to consider that, in the context of a contractual chain, it is desirable that each part of the chain should take full responsibility for its own element.
- The decision probably creates greater uncertainty as taking the ‘commercial context’ into account necessarily leaves a significant degree of discretion and ambiguity as to how the indemnity may be affected by some fault due to the indemnified party.
- The burden on a party higher up the contractual chain to check the work undertaken by a sub-contractor will seemingly be reduced. It may therefore be sensible for the sub-contractor to expressly specify the obligation of that higher party to supervise and check its work. Equally, it may be advisable for a contract to expressly set out what degree of responsibility, if any, the sub-contracting party has for checking the work of a sub-contractor and in appropriate cases, even to expressly disclaim any such responsibility so that there is less chance of a dispute similar to this arising.