UK: Liability For Damage Caused By Fire And Applying The Principles In "Biggin V Permanite" In Considering The Reasonableness Of A Settlement

The question of who is liable for damage caused by fire is one which crops up more often than you might think. The case of John F Hunt Demolition Ltd v ASME Engineering Ltd [EWHC] 1507 TCC provides a useful recap on questions of responsibility where there is damage is to property, and the contract makes provision for a Joint Names insurance policy. Here, in the end (and in line with previous authority), Judge Coulson QC decided that the sub-contractor in a contractual framework where the employer took responsibility for the insurance of the event causing the loss was not liable to that employer in tort.

The Judge also had to consider the case of Biggin v. Permanite and, in particular, whether a settlement was unreasonable (and so could not be passed on) because there was no liability for the claim that was settled.

By a contract, incorporating the JCT Standard Form, 1998 Edition, With Contractor’s Design, Kier (Whitehall Place) Ltd ("Whitehall") engaged Kier Build Ltd ("Build") to carry out the design and construction of commercial office premises. Build sub-contracted the demolition works to Hunt by way of a sub-contract incorporating the JCT DOM/2 conditions as amended. Hunt in turn appointed ASME to construct a temporary steel structure to support the existing facades of the property during the demolition process.

In April 2003, ASME were constructing part of that temporary steel structure when sparks from welding work set light to bitumen felt weather-proofing on the remaining facades. The facades then caught fire. Whitehall and Build advised Hunt that they would be claiming damages for the fire damage to the existing facades and the repair work that had to be carried out to the facades. Hunt informed ASME and in August 2005, Hunt and AMSE jointly instructed quantity surveyors to assess the value of the claim. The assessment was £151,545 exclusive of interest.

In the summer of 2006, Hunt offered to settle the claims for £152,500. Of this, £108,987.12 related to losses suffered by Whitehall who had to reinstate the retained facades. Under the terms of the main contract, Whitehall could not recover these losses from Build and therefore Build could not pass these losses onto Hunt. There was no contractual relationship between Whitehall and Hunt. However, Hunt believed that it had a liability to Whitehall in tort. The remaining part of the settlement sum, £43,512.88 related to Build’s losses as a result of the fire and its consequences, which Build could pass onto Hunt under their sub-contract.

Hunt claimed the settlement sum paid to the Kier companies from ASME. ASME said that Hunt had no liability to Whitehall in tort and that accordingly, Hunt’s maximum liability to the Kier companies was limited to £43,512.88. Therefore the settlement made was unreasonable and not the true measure of loss.

The following issues came before the court:

1. Did Hunt owe a duty of care in tort to Whitehall? And
2. If Hunt had no liability to Whitehall, was that sufficient on its own to render the settlement at £152,500 (rather than £43,512.88) unreasonable?

First HHJ Coulson considered the relationship between contract terms and common law duties of care. He noted that there have been a number of cases in which, following a fire during building works, an employer has sought to make a claim against the main contractor, only to be met with the assertion that, as a result of the insurance provisions, the main contractor had no liability under the terms of that contract. The Judge also noted that in Keating on Construction Contracts, 8^th Edition, 2007, the editors conclude that although the position is not clear, the clear intention of the JCT forms as a whole was that the risk of damage due to a specified peril should fall upon the insurers, rather than the parties to the relevant contracts. As a consequence, HHJ Coulson concluded that:

In the case here, the starting point was Hunt's concession that Build were not liable to Whitehall under the terms of the main contract. Clause 20.2 of the main contract provided a wide-ranging indemnity by Build to Whitehall. However that indemnity expressly excluded loss or damage where the damage was caused by fire. Under clause 22C.1, Whitehall were obliged to insure the existing structures, against damage by fire. Therefore Build would have had no liability to Whitehall under the terms of the main contract, because the express exclusion in Clause 20.2 operated both to exempt them from liability, and to place responsibility for the financial consequences of making good any damage to the retained facades upon the insurers.

As a result of the provisions of the main contract and the sub-contract, Hunt owed no duty of care to the employer, Whitehall, in respect of the costs of repairs to the existing structures caused by fire. Given the concession that Hunt were not liable under the terms of the sub-contract in respect of any losses suffered by Whitehall, Hunt had no liability in law whatsoever to Whitehall. Therefore the maximum for which Hunt were liable to the Kier companies was the £43,512.88.

ASME therefore argued that they were not liable for the full amount of the settlement. ASME said that Hunt must establish their liability to Whitehall and Build, as well as ASME's liability to Hunt, before the sum paid in settlement becomes the measure of damage. Hunt’s failure to realise they were not liable to Whitehall meant that the settlement was irrelevant or, at the very least, unreasonable. The basic rules as to the extent that a paying party will be able to point to the level of settlement for the purpose of his subsequent claim were established in the case of Biggin v Permanite as follows:

1. the settlement amount sets an upper limit to what is recoverable;
2. if it is reasonable, the settlement should be taken as the measure;
3. the settlement goes only to the question of quantum, and not to the question of the liability of the subsequent defendant

Here, the Judge was not persuaded that Hunt had to prove their liability before calling upon the principles in Biggin v Permanite to recover against ASME the sum paid in settlement. In cases where a party’s liability to another may be difficult to establish, the court must consider whether the breach of contract caused the loss incurred in satisfying the settlement. Unless the claim was of sufficient strength reasonably to justify a settlement, and the amount paid in settlement was reasonable having regard to the strength of the claim, it cannot be shown that the loss has been caused by the relevant breach of contract. On the other hand, there will be circumstances when the settlement of an intrinsically weak claim in order to avoid the uncertainties and expenses of litigation may well be reasonable. In other words questions of reasonableness of settlement are almost exclusively matters of fact. The Judge said that a claim will usually have to be so weak as to be "obviously hopeless" before it could be said that the settlement of the claim was unreasonable.

Therefore whether or not the settlement between Hunt and the Kier companies was reasonable would be a matter of fact for the full trial. The fact that there was no liability for the claim that was settled was not on its own enough to make the settlement unreasonable. If the settlement between Hunt and the Kier companies was reasonable then Hunt could recover the £152,500. Whether or not it was reasonable would turn on the facts. The amount paid pursuant to an unreasonable settlement agreement would not be recoverable because it would be unforeseeable. If the settlement was unreasonable then the maximum value of Hunt's claim against ASME would be £43,512.88.

To see further articles on matters relating to construction projects, please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.