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Important CA decision on indemnity clause – widespread implications for the construction industry

On 11 July 2014 the Court of Appeal handed down judgment in Greenwich Millennium Village Ltd v Essex Services Group Plc [2014] EWCA Civ 960. This is an important decision in which the court considered liability under an indemnity when the indemnitee was itself partly at fault in causing the relevant liability to be incurred.

The claim involved a catastrophic flood at a block of flats on the Greenwich Peninsula. After a trial in July 2013 before Coulson J, the Sixth Party (DG Robson Ltd) was held to be liable for some of the damage caused by reason of an indemnity clause in its contract with the Third Party (HS Environmental Services Ltd). Under the clause the Sixth Party agreed to indemnify the Third Party against liabilities arising by virtue of the Sixth Party’s breach of contract.

The Sixth Party appealed against the judge’s finding that it was liable under the indemnity clause. In particular, the Sixth Party relied upon the judge’s findings that the Third Party was itself to blame for its supervision and management of the relevant works. The Sixth Party argued that the Canada Steamship principle (as applied to indemnity clauses in such cases as Walters v Whessoe (1960) 6 BLR 23) operated so as to exclude any recovery under an indemnity clause where the indemnitee as well as the indemnitor were culpable in causing the relevant liability.

Jackson LJ (giving the leading judgment) disagreed. He pointed out that the Canada Steamship principle was a rule of construction and not a rule of law, and he held that it was not improbable in the context of a chain of construction contracts that a party would agree to indemnify another against the consequences of its default, even when such consequences should have been picked up on inspection by the indemnitee. He pointed out that previous decisions applying the Canada Steamship principle to the construction of indemnity clauses have involved positive acts of negligence by the indemnitee which was causative of the relevant damage. He held that a failure by an indemnitee merely to spot defects perpetrated by a 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.

Jackson LJ also took the opportunity to re-state the guidance given in Yorkshire Water Services Ltd v Taylor Woodrow Construction Northern Ltd [2005] EWCA Civ 894 as to the difficulty in appealing on issues of fact from the TCC.

This is the first time that the Court of Appeal has considered what type of careless conduct by an indemnitee might be sufficient to prevent recovery under an indemnity clause. Jackson LJ declined an invitation by the Third Party to adopt the distinction applied in American jurisprudence between “active negligence” and “passive negligence”, and he confined his judgment to the specific case of failing to spot a defect on inspection in a construction context. As a result his judgment leaves various issue unanswered, and in particular whether other forms of “secondary” negligence on the part of an indemnitee (for examples, failures of instruction, supervision and specification, as well as those of mere inspection) are or are not likely to defeat the operation of an indemnity clause. Jackson LJ was at pains to state that the construction of each indemnity clause will depend upon the factual and commercial context in question. The implications of the judgment for those who litigate over (and draft) indemnity clauses are significant.

Roger ter Haar KC and Alexander Macpherson were instructed by Fox Hartley to represent the Sixth Party at the trial and in the Court of Appeal.

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