At your peril

Undertaking electrical or mechanical installations is a risky business, and occasionally faults occur that can cause fire or flooding, unless proper precautions are taken. When such faults occur the damage caused can be significant, and the party at fault will want to know their contractual liabilities.

Building contracts sometimes include express requirements relating to who is responsible for insuring the works and existing structures, to cover the effect of such faults. The allocation of risk by way of insurance has important implications for the contractual liability of the parties for the damage caused, as the following example below illustrates.

The incident

Tyco Fire & Integrated Solutions (UK) was engaged by Rolls-Royce Motor Cars to design, install, commission and complete a fire protection system. Prior to completion of the works on 30 July 2003, an escape of a large quantity of water occurred from one of the main supply pipes on the sprinkler system.

The water caused damage to parts of the building, loss of goods and stock and loss of contents, and created clean-up costs. Tyco admitted liability and made good the damage to the sprinkler system and works.

Rolls-Royce considered that Tyco was also responsible for the damage caused to the building and goods. Tyco disagreed. Rolls-Royce referred the matter to adjudication. The adjudicator found in its favour and awarded it £433 428.09, which Tyco duly paid.

The court case

Tyco, unhappy with the decision, began action in the High Court against Rolls-Royce on 15 December 2006 (Tyco Fire and Integrated Solutions (UK) v Rolls-Royce Motor Cars, 2007).

Tyco sought a decision by the court that Rolls-Royce was not entitled to recover compensation awarded by the adjudicator for damage, expense or loss arising out of the escape of water.

The escape of water came under the definition of a ‘specified peril’ set out in the contract under the term “...flood, bursting or overflowing of water tanks, apparatus or pipes”.

There was a clause in the contract that meant Tyco was under a contractual obligation to indemnify Rolls-Royce against any damage or expense or loss it had suffered as a result of the escape of water that arose out of Tyco’s negligence.

Because the damage was caused by one or more of the specified perils, it was treated differently due to the fact it was covered by joint names insurance

However, in a separate clause, Rolls-Royce was required to maintain joint-names policy on both the existing structures and the works to provide cover against the specified perils. The court, therefore, had to decide which of the clauses prevailed.

In order to decide this, the court had to consider whether the effect of the clause for joint-names insurance limited the scope of the contractual indemnity clause, or whether it excluded Tyco’s obligation to compensate Rolls-Royce for negligence if the damage was caused by one or more of the specified perils.

In seeking to answer the question, the court considered Lord Bingham’s approach in a similar case (Co-operative Retail Services v Taylor Young Partnership, 2002) in which the test applied was whether the contract provided expressly, and exclusively, for dealing with the specified perils.

The court applied the test to the present case and decided that Tyco and Rolls-Royce had made express provision as to what was to happen if the damage was caused by one or more of the specified perils.

This meant that Rolls-Royce had to look exclusively to the joint-names insurance for payment. It was not entitled to recover any compensation from Tyco in respect of the damage caused to the building or its contents.

So, Rolls-Royce had to repay the monies it received by way of the adjudication.

If the clause that required Tyco to indemnify Rolls-Royce against any damage or expense or loss suffered as a result of the escape of water had been applicable, Tyco would clearly have been held liable.

However, because the damage was caused by one or more of the specified perils, it was treated differently because it was covered by joint-names insurance.

Although Rolls-Royce failed to take out the insurance, it would have been unjust to have held Tyco liable under the indemnity. Rolls-Royce had breached the contract in failing to maintain such insurance and could not seek to sue Tyco in respect of damage that should have been covered by the joint-names policy.

Tyco may have been entitled to seek damages against Rolls-Royce if it had suffered loss as a result of such a breach.

This case shows that, where contracts are drafted to create certainty for the parties, there may still be ambiguity as to who bears the risk of what, so it is left up to the court to decide.