Case No: B2/2000/3030
Neutral Citation Number: [2001] EWCA Civ 1655
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHICHESTER COUNTY COURT
District Judge Davies
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Wednesday 7 November 2001
B e f o r e :

LORD JUSTICE SCHIEMANN

and 

LORD JUSTICE WALLER
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	Stace & Francis Ltd	Respondent	
	
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Ashby & anr	
Appellant	

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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
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Charles Taylor (instructed by Gray Purdue for the Appellant)

Benjamin Pilling (instructed by Thomas Eggar Church Adams for the Respondent)

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Judgment
Lord Justice Waller : 
1.	This is a judgment of the court.  
2.	Mr and Mrs Ashby live at Varykinow, Closewalks, Midhurst, West Sussex.  Their house suffered from subsidence and they notified their buildings insurers (the Insurers).  Loss adjusters and a surveyor were appointed, and Stace & Francis Limited (SFL) was instructed to carry out remedial works (the Main Works).  While SFL was on site carrying out the Main Works, the Ashbys asked them to carry out certain work which would not be covered by their insurance policy (The Ancillary Works).  
3.	The Ancillary Works were carried out between September and October 1998 contemporaneously with the remainder of the Main Works.  During that period the Ashbys became dissatisfied with the work being done by SFL in particular in relation to the Main Works.  SFL left the site at the end of October 1998.  Some effort was made to resolve matters as between the Ashbys and SFL, and as between the Ashbys and their insurer but that came to nothing.  In the result SFL commenced an action against the Ashbys in Chichester County Court for payment of about £1400 in respect of the Ancillary Works.  The Ashbys counter-claimed for damages in relation to the Main Works.  It is in that context that on 23 March 1999 Mr Ashby wrote to Mr John Crabbe (the surveyor employed by the insurers and the loss adjusters) in the following terms: 
“I am not prepared to have [SFL] back on site.  You must now be aware that they have issued summonses against both Vicky and myself, which we both intend to aggressively defend.  We also intend to counter-claim for the loss and damage arising from their work and presence on site.” 
4.	The suggestion of Mr Ashby in that letter was that SFL had taken “the meat” out of the contract for which they had been paid but had no intention of fulfilling their contractual obligations.  He thus suggested that an alternative contractor should be sought without delay and he specified certain items which still remained to be finalised.  
5.	Negotiations continued between John Crabbe, acting for the insurers and/or loss adjusters, and the Ashbys.  The main thrust of that correspondence appears to be to try and reach some form of settlement as between the Ashbys and the insurers which would result in a payment by the insurers to enable the Ashbys to carry out the balance of the works remaining to be done under the Main contract through contractors other than SFL (see in particular the letter of 21 May 1999 at p. 179 in the bundle).  
6.	It was in that context that the Ashbys and the loss adjusters attempted to reach an agreement as to the right figure to put on “the outstanding remedial works items”.  Thus it was by letter dated 16 June 1999 that the loss adjusters set out details of the works both remedial and unfinished that they suggested were outstanding plus the figures which the loss adjusters put on the various items.  Under that letter the loss adjusters were offering the Ashbys a sum of £2,675.60 that being the overall recommended cash settlement relating to outstanding items less the policy excess of £1,000.  
7.	That figure was unacceptable to the Ashbys and it is apparent that meetings and conversations took place which led to a further letter from the loss adjusters dated 27 August 1999.  In that letter the loss adjusters confirmed that the “notional building reinstatement costs and associated items” should be valued at £4,925.  The loss adjusters further set out the various items that had been paid pursuant to the insurers’ obligation to indemnify the Ashbys.  However in this letter the loss adjusters suggested that a sum had been paid directly to Mrs Ashby which should have been passed on to a company Uretek (UK) Limited.  The letter thus suggested that the Ashbys had been overpaid and that despite the figure of £4,925 being due for reinstatement costs, the Ashbys in fact owed money to the insurers in the sum of £2,293.72.  The Ashbys would not dispute the value put on the reinstatement costs, but have not accepted the terms of the letter.  
8.	Although the letter of 27 August 1999 was not before the District Judge the figure of £4,925 less policy excess of £1,000 was the figure assumed by the District Judge to have been “agreed” by the insurers as compensation for the rebuilding reinstatement costs and associated items.  
9.	After the trial which lasted 2 days, the first day being 7 February 2000 and the second day 28 June 2000, judgment was reserved.  The judge handed down a written judgment on 4 August 2000.  By the date of the judgment Mr Ashby had in fact been declared bankrupt and the claim against him was stayed.  The judge held that SFL succeeded on its claim against Mrs Ashby in the sum of £1,221.37 in relation to the Ancillary Works.  He further held that the Ashbys succeeded in their counter-claim.  He assessed the aggregate of the amounts set out in a schedule relating to complaints against SFL as coming to £4,950.  But he held that the sum of £3,925 which the insurers had “agreed” should be deducted therefrom.  He assessed the value of the counterclaim at £1,025.  It is common ground, as we understand it, that the figure of £4,950 should in fact read £5,220.  The appeal relates to the question whether the judge was right in making the deduction of £3,925.  The reasoning of the District Judge relating to that deduction appears in one paragraph at p. 18 where he said: 
“Lastly he (counsel for SFL) submits that since the Defendant made an agreement with the Insurers via the loss Adjusters in the summer of 1999 in the sum of £3,925 in respect of all shortcomings and defects that there may have been on the part of the Defendants then credit must be given for that sum against any sum found to be due on the Counterclaim.  Normally of course the principle res inter alios acta would prevent the Claimants from mounting this argument but on the circumstances of this case not to allow such a credit would appear to amount to a genuine double recovery.” (Clearly in the fifth line the judge meant Claimants rather than Defendants). 
10.	The background to the above reasoning was as follows.  The District Judge found that the contract for the Main Works was made between the insurers and SFL.  He found also however that there was a collateral contract relating to the Main Works between the Ashbys and SFL of the type which was found to exist in Charnock v Liverpool Corporation [1968] 1 WLR 1498.  Although the District Judge did not analyze fully the nature of that collateral contract it seems he obtained a concession from counsel acting for the Ashbys that they could not claim damages for non-performance and those items were accordingly abandoned.  That left items which were said to be recoverable by virtue of the obligation on SFL to carry out the Main Works with reasonable skill and care.  There has been no challenge to the judge’s conclusion that the contract was between the insurers and SFL and no challenge to the conclusion of the judge as to the nature of the collateral contract which existed between SFL and the Ashbys.  We for our part have some reservation as to whether the concession by counsel was right but nothing turns on it so far as this appeal is concerned.  
11.	We should say that the District Judge disallowed some items on the principle established in Ruxley Electronics and Construction v Forsyth [1996] AC 344.  There was to be an appeal on that aspect but the sums involved were small and wisely Mr Taylor, for the appellant, has not pursued that aspect.  
12.	The grounds of appeal thus relate simply to the legitimacy of deducting the figure of £3,925 from the figure found by the District Judge representing damages due from SFL to the Ashbys.  
13.	The sum of £3,925 was never in fact paid by the insurers to the Ashbys.  As appears from the letter already quoted, the figure of £4,925, less the excess on the policy, was offered as the sum available in relation to reinstatement and failure to fulfil the contract.  However the Ashbys were only offered that sum in the context of a letter which suggested that repayments were due to the insurers.  That condition, as we have said, was not acceptable to the Ashbys.  The reasons are explained in paragraph 15 of Mrs Ashby’s evidence.  The question whether Mrs Ashby was right or wrong in her assertion in paragraph 15 was not dealt with by the District Judge and indeed could hardly be dealt with in the absence of the insurers.  The position thus was that although the figure was described by the District Judge as “agreed”, it did not reflect a binding settlement as between insurers and the Ashbys but simply an acknowledgement on the part of the insurers that a figure of £4,925 accurately represented as between the Ashbys and the insurers the value of what remained to be completed or remedied under the contract for the Main Works.  
14.	Ground 1 of the notice of appeal raises a fundamental point.  It asserts that even if agreed and paid the sum of £3,925 would be an indemnity payment by the insurers in respect of the defective works and it was thus a sum which SFL were not entitled to have deducted from damages recoverable from SFL by the Ashbys.  It is further asserted in the grounds of appeal that “rather the insurers would take the benefit of damages recovered from the claimants by subrogation” if the insurers had duly indemnified the Ashbys.  Ground 2 asserts that the deduction should not have been made because no payment had actually been made by the insurers.  
15.	In relation to ground 1 Mr Taylor showed us the following passage in McGregor on Damages 16th ed. paragraph 1617 which provides as follows: 
“As early as 1874 it was decided in Bradburn v G.W. Ry (1874) L.R. 10 Ex. 1 that, where the plaintiff had taken out accident insurance, the moneys received by him under the insurance policy were not to be taken into account in assessing the damages for the injury in respect of which he had been paid the insurance moneys.  This decision has withstood time and is solidly endorsed at House of Lords level by Parry v Cleaver [1970] A.C. 1, not only by the majority who relied upon it by analogy but also by the minority who sought to distinguish it, and more recently by Lord Bridge speaking for the whole House in Hussain v New Taplow Paper Mills [1988] A.C. 514 at 527G and in Hodgson v Trapp [1989] A.C. 807 at 819H, and by Lord Templeman similarly in Smoker v London Fire Authority [1991] 2 A.C. 502 at 539B-F.  The matter is clearly now incontrovertible.” 
16.	Mr Pilling, for the respondent, accepted the general principle as set out in the above passage but suggested that the general principle did not apply to the very special circumstances of this case.  He suggested that the correct analysis of the various liabilities was as follows: (a) the insurers original liability to the appellant was to provide an indemnity in respect of events falling within the scope of the original contract of insurance i.e. the subsidence; (b) that a relevant event occurred; (c) unusually the insurer contracted directly with SFL to carry out repair work to the property; this he submitted led to the consequence that the insurer was under an obligation to the appellant to carry out repair work to the property (and implicitly to carry it out in accordance with the specification and with reasonable skill and care); (d) a collateral contract also arose as between SFL and the appellant requiring SFL to carry out the work with reasonable skill and care; (e) (as he submitted the judge found) SFL carried out some of the work defectively and this amounted to a breach of both SFL’s obligation to the appellant and of the insurer’s obligation to the appellant to carry out the works; (f) thus, (Mr Pilling submitted) SFL and the insurer were both liable to the appellant for the same damage and it was open to the appellant to bring a claim for the cost of remedying the defects against either of them; (g) the insurer settled its liability to the appellant in respect of the defects and Mr Pilling submitted that a payment received from one contract breaker in respect of a loss is not res inter alios acta in a subsequent claim against a second contract breaker for the same loss.  Consequently the appellant was bound to give credit to SFL for the sums received in the settlement with the insurer.  
17.	The principle identified in the last sub-paragraph was applied, he submitted, by the Court of Appeal in Heaton v Axa Equity and Law [2001] Ch 173.  
18.	The difficulty with the above submission is that in our view it breaks down at various stages.  Certainly the District Judge did not find, and in our view it certainly was not a consequence of the arrangement, that “the insurer was under an obligation to the appellant to carry out the repair work to the property with reasonable skill and care”.  If there was any consequence to the arrangement made imposing an obligation on the insurer in relation to the appellant for the work being carried out, it could be no more than an obligation to use reasonable care to see that the work was carried out by SFL to a reasonable standard, but (1) that could only arise by necessary implication and (2) it is difficult to see the necessity for the implication having regard to the direct contract between the Ashbys and SFL.  
19.	It seems to us wrong that the result in this case should depend on whether the insurers made a contract with SFL or not.  The normal position would be that the contract with the building works would be made as between the insured and the builder with the insurance company paying the amounts due either directly to the builder or to the insured.  In such a situation, if the building contractor failed to carry out the works, the insurers’ liability to indemnify against the risk of subsidence would still be alive.  It is true that the insured might have a claim under the contract against the builder.  If the insurers had paid out pursuant to the policy prior to any compensation being paid by the builder to the insured, and if the insureds were entitled to compensation from the builders then (a) there would be no question of the builders receiving credit for the insurance monies, and (b) the insureds would bring the claim for the benefit of the insurers.  
20.	Mr Pilling’s analysis also breaks down at a further stage which brings in to play ground 2 of the appeal.  The insurers have not paid any part of the sum relating to unfinished or unremedied building works to the Ashbys.  Indeed there is (as we would see it) not even a binding agreement as between insurers and the Ashbys in relation to the costs of those remedial works.  The position might be different if as between SFL and the insurers some agreement had been reached in relation to the liability of the builder for defects and a final agreement had been reached between the insurers and the Ashbys.  It was in fact being contended by SFL that  an agreement had been reached in May 1999 between the insurers and SFL but the District Judge held “I am not prepared to find even on a balance of probabilities that there was an agreement that there would be no further liability on the part of [SFL]” (see p. 16 at the bottom).  
21.	As we see it the proper approach to the offer of £3,925 by the insurer was the following.  First, this was an offer by insurers to discharge a liability under their insurance policy.  Second, there was no justification in giving SFL credit for that offer.  SFL were liable for the defects as found by the District Judge in that they had not been released from any liability by the insurers or by the Ashbys.  Third, if the insurers had paid this sum to the Ashbys in relation to failures by SFL then the Ashbys would hold such sum as they recovered from SFL in equity for the insurers.  Fourth, since no sum had been paid by the insurers, it will be for the insurers to make such claim as they have against the Ashbys on the basis that the Ashbys have now received compensation from SFL and have, as it would appear on the insurer’s analysis, been seriously overpaid.  
22.	The parties have agreed that after certain adjustments for value added tax and interest, the sum for which judgment should be entered in favour of Mrs Ashby is £4,702.95.
Conclusion 
23.	In those circumstances it seems to us that the appellant is entitled to succeed on this appeal by reference to the above points alone.  There is thus no reason to go into other grounds raised by Mr Taylor and we would allow the appeal.  We would be prepared to assess the value of the counterclaim at what we understand to be an agreed figure of £5,220, and to enter the appropriate judgment on that basis subject to certain caveats.  First, it seems to us that Mr Ashby’s trustee in bankruptcy may have some interest in whether judgment should be entered for Mrs Ashby alone.  Notification should therefore be given to the trustee in bankruptcy of this judgment before any final order is made.  Second, the District Judge simply entered judgment against Mrs Ashby for £45.47.  We are not clear how that was calculated and we will need assistance on the form in which judgment should now be entered.  

Order: Appeal of 2nd Defendant allowed; 2nd Defendant's costs of this appeal be paid by the Claimant, such costs to be subject to detailed assessment and be determined by a costs judge; the order for costs below be varied only to the counterclaim; the Claimant do pay 50% of the 2nd Defendant's costs, such costs to be subject to detailed assessment and be determined by a costs judge.
(order does not form part of the approved judgment)