Neutral Citation Number: [2014] EWCA Civ 960

Case No: A1/2013/3306
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE TECHNOLOGY AND CONSTRUCTION COURT, THE HIGH COURT OF JUSTICE
MR JUSTICE COULSON
HT12116
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Friday 11th July 2014
Before :

LORD JUSTICE JACKSON
LORD JUSTICE BEATSON
and
LADY JUSTICE GLOSTER
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Between :

	GREENWICH MILLENNIUM VILLAGE LIMITED
	Claimant	
	and
 		
	ESSEX SERVICES GROUP PLC

and

HOARE LEA (a firm) 

and

HS ENVIRONMENTAL SERVICES LIMITED (in administration)

and

DG ROBSON MECHANICAL SERVICES LIMITED	First Defendant

Second Defendant/
Fifth Party

Respondent/Third Party

Appellant/Sixth Party	

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(Transcript of the Handed Down Judgment of
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Mr Roger ter Haar QC and Mr Alexander Macpherson (instructed by Fox Hartley) for the Appellant
Mr Simon Hargreaves QC and Mr Karim Ghaly (instructed by Clyde & Co) for the Respondent

Hearing dates: 25th and 26th June 2014
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Judgment
Lord Justice Jackson : 
1.	This judgment is in seven parts, namely:
Part 1. Introduction	paragraphs 2 to 9   	
Part 2. The facts	paragraphs 10 to 29  	
Part 3. The present proceedings	paragraphs 30 to 41   	
Part 4. The appeal to the Court of Appeal in relation to the Core 2 flood	paragraphs 42 to 47  	
Part 5. Challenges to the judge’s findings of fact	paragraphs 48 to 62  	
Part 6. The operation of the indemnity clause	paragraphs 63 to 101  	
Part 7.  Conclusion	paragraphs 102 to 103	
Part 1.  Introduction
2.	This is an appeal by a labour only sub-sub-sub-contractor against a decision of Mr Justice Coulson that it is liable to indemnify the respondent, who was the party above it in the contractual chain, for workmanship defects which caused flooding in a block of flats.  The principal issue in this appeal is whether the respondent’s failure to detect those defects precludes recovery under an indemnity clause, alternatively prevents recovery of the same sum as damages for breach of contract.  There are also challenges to the judge’s findings of fact.
3.	The employer and building owner, which is claimant in the litigation, is Greenwich Millennium Village Ltd (“GMVL”).  The main contractor, which is not a party to the action, is Laing O’Rourke Plc (“LOR”).  Hoare Lea (“HL”) is a firm of engineers whom LOR engaged.  HL is second defendant and fifth party in the action.
4.	Essex Services PLC (“Essex”) is a specialist sub-contractor and is the first defendant in this action.  HS Environmental Services Ltd (“HSE”) is a specialist sub-sub-contractor.  HSE is third party in the litigation and respondent in the appeal.  
5.	DG Robson Mechanical Services Ltd (“Robson”) is the labour only sub-sub-sub-contractor whose workmanship errors the judge held to have caused the flood.  Robson is sixth party in the action and appellant in the present appeal.
6.	I shall use the following abbreviations:
“BMCWS” means boosted mains cold water system.
“IV” mean isolation valve.
“NRV” means non-return valve.
“TCC” means Technology and Construction Court.

7.	When asking the judge to grant permission to appeal, Robson produced its draft grounds of appeal and skeleton argument.  In his judgment refusing permission the judge amplified the reasons for his original decision.  I have wondered whether it is legitimate to take into account the second judgment.  My conclusion is that it is appropriate to take that judgment into account.  In English v Emery Reimbold & Strick Ltd [2002] EWCA Civ 605; [2002] 1 WLR 2409 at [25] the Court of Appeal said that at the permission stage the judge may take or be given the opportunity to provide additional reasons for his judgment.  In Emery the Court of Appeal was considering the position where the appellant complains about lack of reasons.  In the present case the notice of appeal complains about lack of reasons in one respect.  Furthermore in other respects the judge’s additional reasons are helpful.  I shall therefore refer to the judge’s judgment on the permission application (the “supplemental judgment”) as and when appropriate.
8.	For the assistance of the reader, I annexe to this judgment four diagrams illustrating how the flooding in question occurred.  I shall refer to these four diagrams as “figure 1”, “figure 2”, “figure 3” and “figure 4”.
9.	After these introductory remarks, I must now turn to the facts.
Part 2.  The facts
10.	During 2004–2006 LOR constructed two blocks of flats, known as Holly Court and Becquerel Court, for GMVL on the Greenwich Peninsula in south east London.  This was part of the Millennium Village project.  The main contract incorporated the JCT (With Contractor’s Design) Form, 1998 edition.
11.	Pursuant to a contract dated 20th October 2006 LOR engaged HL as its mechanical and electrical consulting engineer.  Such an arrangement is common when a design and build contractor is obliged to complete the design commenced by that same consultant.  The contractual services provided by HL included design development, the preparation of production information for construction purposes, the examination of the trade contractors’ drawings and details, and visiting the site at agreed intervals, “to see that” the works were completed in accordance with the contract documents.
12.	On 30th October 2006 HL executed a warranty in favour of GMVL that it would properly perform its design and inspection obligations in its contract with LOR.
13.	LOR engaged Essex as its sub-contractor for the design and installation of mechanical and electrical works.  On 23rd January 2006 Essex warranted to GMVL that it would properly perform its obligations under that sub-contract.
14.	Essex was a company specialising in electrical, but not mechanical, works.  It entered into a joint venture with HSE, a company specialising in mechanical works, for the purposes of this and other projects.  By a sub-sub-contract made on 4th April 2005 Essex sub-sub-contracted the design and installation of mechanical works to HSE.  Clause 7.1 of the sub-sub-contract provided that it would be back to back with the sub-contract between Essex and LOR.  HSE operatives often wore Essex branded work clothes.  Thus Essex and HSE gave the impression to others that Essex were carrying out both the mechanical and electrical works.
15.	HSE sub-sub-sub-contracted the labour element of the mechanical works to Robson.  The contractual documents as between HSE and Robson were the following:
i)	Robson’s quotation dated 7th December 2004, offering to install the pipework services at Holly Court and Bequerel Court for £500,000 plus VAT;
ii)	HSE’s order dated 8th July 2005 accepting that quotation;
iii)	HSE’s terms and conditions.
16.	Clause 2 of HSE’s terms and conditions provided, so far as material:
“The Sub-contractor hereby agrees to indemnity HS Environmental Services Ltd against each and every liability which HS Environmental Services Ltd may incur to any other person or persons and further to indemnity HS Environmental Services Ltd 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.”

I shall refer to this clause as “the indemnity clause” or “clause 2”.  
17.	Let me now turn to the design of the boosted mains cold water system (“BMCWS”).  In both Becquerel Court and Holly Court the main water tanks were located in the basement, not the roof.  This meant that water could not descend to the flats by operation of gravity.  Instead mains water had to be pumped up vertical pipes, known as “riser mains” or “risers”, in order to reach the flats at each level.  The risers were made of plastic, not copper.
18.	Figure 1 annexed to this judgment shows in diagrammatic form the arrangement of the riser mains within two cores of Holly Court, namely Core 2 and Core 3.
19.	One problem with this form of cold water system is that if water is pumped up the riser at excessive speed, it will cause a “water hammer”.  A water hammer may lead to a burst pipe.  If for any reason there is a vacuum within the riser and the mains water pump is operating, water is liable to surge upwards and cause just such a water hammer with disastrous consequences.
20.	In early 2005 HL became aware of this risk because of flooding which had occurred at another building with which they were dealing.  HL alerted all their engineers to the issue.
21.	On 9th November 2005 HL sent an email to Essex explaining the risk of water hammer and advising that surge arrestors be installed at the top of each of the risers.  The function of a surge arrestor is to let air into the riser if the water level drops, thus preventing a vacuum from forming.  Essex asked LOR as main contractor to issue an instruction for the supply and installation of surge arrestors.  
22.	On 2nd May 2006 LOR issued an instruction to Essex for the installation of surge arrestors in Cores 1, 2 and 3 of Holly Court.  On the same day, HSE recorded that Essex had instructed them to install surge arrestors in those three cores, so as to prevent hydraulic shock within the BMCWS.
23.	On 20th June 2006 Robson provided a quotation to HSE for the installation of surge arrestors in Cores 1, 2 and 3 of Holly Court.  There is no written record of HSE accepting that quotation.  Nevertheless, as the judge has found and Robson does not now challenge, Robson installed those three surge arrestors during July or early August 2006.
24.	HSE and Robson completed most of their works at Holly Court in August 2006.  On 17th August Mr Dayal and Mr Gilbert of HL carried out the pre-handover inspection of the mechanical works in Holly Court.  In the course of that inspection they took a photograph of the pipework and valves inside the riser cupboard at level 8 of Core 2.  I will refer to this photograph as “the August photograph”. 
25.	The August photograph shows that about two feet below the surge arrestor is a non-return valve (“NRV”).  A few inches below that is an isolation valve (“IV”) in the closed position.  These two obstructions beneath the surge arrestor prevented it from performing its function of letting air into the riser if the water level dropped.  Neither HL nor Essex nor HSE spotted these defects.
26.	During September 2006 all the building works at Becquerel Court and Holly Court were completed.  LOR handed over the buildings to GMVL.  Tenants then moved into the new flats.  
27.	All was well for the first few months.  Unfortunately in the early hours of 1st August 2007 there was a major flood in Holly Court.  Water escaped from the riser mains in Cores 2 and 3.  It streamed through the flats to the balconies and then cascaded down the sides of the building.  The residents awoke to a very unpleasant surprise.  They contacted GMVL, whose staff hastened to turn off the basement pumps.
28.	GMVL promptly put in hand remedial works.  They arranged for some of the tenants to stay in hotels while work was proceeding.  The total cost of the remedial works, hotel bills and related matters was £4.75 million.  All parties agree that figure.  
29.	In order to recover its losses flowing from the flood, GMVL commenced the present proceedings.
Part 3.  The present proceedings
30.	By a claim form issued in the Technology and Construction Court on 10th April 2012 GMVL claimed damages against Essex and HL for breaches of the warranties which they had each given, as referred to in Part 2 above.  There then followed a cascade of proceedings under CPR Part 20.  Essex claimed against HSE the amount of their liability to GMVL.  HSE claimed against Robson the amount of their liability to Essex.  There were other Part 20 proceedings which are of no relevance to this appeal.
31.	It was agreed between the parties that GMVL’s total loss of £4.75 million should be apportioned as follows.  The losses referable to the Core 2 flood were £4,370,000.  The losses referable to the Core 3 flood were £380,000.
32.	The sequence of events on 1st August 2007 was not controversial.  It was agreed between the experts at an early stage of the litigation and is illustrated on figures 1 to 4 annexed to this judgment.  I would describe that agreed sequence of events as follows.
33.	Figure 1 shows the BMWCS in its normal operation.  Water supplied by Thames Water enters the large storage tanks in the basement of Holly Court.  Triple booster pumps pump the water up the riser mains to serve the requirements of the various flats.
34.	In the early hours of 1st August 2007 a valve at level 2 of Core 3 failed.  Water escaped.  This reduced the water volume in the riser of Core 3, as shown in figures 2 and 3.  
35.	As a consequence of that water escape, the water level in the basement tanks dropped.  This activated a sensor which caused the pump to shut down.  With the pumps out of action, the water level in all the risers dropped, as water drained back into the storage tanks from which it had come.  In riser 2 unfortunately the surge arrestor was ineffective.  This was for two reasons.  Immediately beneath the SA was an NRV, which did not let air pass downwards from the surge arrestor.  Furthermore the IV below the NRV was closed.  Thus two obstructions in the riser stopped air entering to fill the void left by the water draining downwards.  This created a vacuum, as shown in figure 3.
36.	As a result of water returning from the risers and the continuing supply of water from the incoming Thames Water main, the water level in the basement tanks started to rise once more.  The pumps were re-activated automatically.  They started driving water up the riser mains.  In Core 2 the vacuum in the riser caused the incoming water to rise at excessive speed, thus creating a water hammer.  As shown in figure 4, that water hit the closed IV at level 8 and converted its kinetic energy into a shockwave.  That shockwave dispersed through the entire Core 2 network, damaging valves and seals.  At level 6 the shockwave caused a valve to burst.  Large quantities of water escaped.  This led to a massive flood and extensive water damage.
37.	Although the mechanism of the flooding was agreed between the parties, the allocation of responsibility remained in dispute.  Crucial issues of fact included the following: who was responsible for the defective valve at level 2 of Core 3? Who was responsible for the fact that an NRV was situated at the top of the Core 2 riser, thus rendering the surge arrestor ineffective? Who was responsible for the fact that the IV beneath the NRV on the Core 2 riser was closed?
38.	Mr Justice Coulson tried the action over 13 days in July 2013.  He heard evidence from a large number of factual and expert witnesses.  He handed down his reserved judgment on 25th October 2013: see Greenwich Millennium Village Ltd v Essex Services Group Plc [2013] EWHC 3059 (TCC).  Of necessity the judgment is lengthy.  Nevertheless it is well structured and clear.
39.	In summary the judge held:
i)	Essex and HL were both liable to the claimant, GMVL, for £4,370.000 together with interest to be determined in respect of the Core 2 flood.
ii)	Essex was alone liable to GMVL for £380,000 together with interest to be determined in respect of the Core 3 flood.  
iii)	Liability for the Core 2 flood should be apportioned between Essex and HL on the basis that Essex is liable for 60% and HL for 40%.
iv)	Essex could pass on to HSE the entirety of its liability to GMVL.
v)	HSE could pass on to Robson the entirety of its liability to Essex.
As previously mentioned the judge provided additional reasons for his decision in a supplemental judgment delivered on 15th November 2013.
40.	In the course of his judgments the judge made the following findings:
i)	There were design failures on the part of HL and Essex, namely (a) failure to show the surge arrestor on the working drawings, (b) failure to specify that an IV should be installed below the surge arrestor; (c) failure to specify that the IV should be tamper-proof; (d) failure to require that all valves be labelled.  See judgment paragraphs 80, 81, 200-210, 228-236.
ii)	There were inspection failures on the part of HL, namely failing to spot (a) the presence of an NRV which should not be there and (b) the fact that the IV was closed, when it should be open.  See judgment paragraphs 100-105, 113, 211-221.
iii)	The design failures by themselves did not cause the flood.  (This is because – despite the inadequate drawings – Robson installed a surge arrestor in Core 2 with an IV beneath.  Although the IV was not tamper proof and was not labelled, no-one did in fact tamper with it.)  The principal causes of the flood were workmanship failures, namely the closed IV and the presence of the NRV.  See judgment paragraphs 199, 238-9, 242, 246 and supplemental judgment paragraphs 3-4.
iv)	As a result of the workmanship errors in conjunction with the design errors, both HL and Essex were liable to GMVL for the Core 2 flood.  That liability should be apportioned 40% to HL and 60% to Essex.  See judgment paragraphs 199, 222, 241-247.
v)	Essex can pass on all its liabilities to HSE, because of the back-to-back provision in the sub-sub-contract.  See judgment paragraphs 52, 248-249.
vi)	The lack of a paper trail enabled Robson to argue (in the end unsuccessfully) that it was not responsible for the workmanship failures.  Robson’s propensity to blame other contractors for what they (Robson) had done was irresponsible and damaging to their case as a whole.  See judgment paragraphs 6, 97.
vii)	Robson installed the surge arrestor and IV on the Core 2 riser in July or early August 2006.  They installed the NRV either before or at the same time as the surge arrestor and IV.  See judgment paragraphs 99-101, 258 and supplemental judgment paragraphs 13-14.
viii)	There were workmanship failures on the part of Robson, namely (a) installing the NRV, which ought not to have been there and (b) closing the IV, alternatively failing to open it before the handover on 18th August 2006.  These were breaches of the sub-sub-sub-contract.  See judgment paragraphs 250-267 and supplemental judgment paragraphs 13-14.
ix)	No-one opened the IV between Robson’s departure from site and the occurrence of the flood on 1st August 2007.  See judgment paragraphs 110, 198.
x)	The closed IV and the presence of the NRV both prevented the surge arrestor from performing its proper function.  They were two equally efficacious causes of the Core 2 flood.  See judgment paragraph 193.
xi)	The principal causes of the Core 2 flood were Robson’s workmanship failures, namely the presence of the NRV and the fact that the IV was closed.  See judgment paragraphs 199, 242, 246 and supplemental judgment paragraph 4.
xii)	HSE is entitled to recover an indemnity from Robson under clause 2.  HSE is not debarred from recovering by its own breaches.  See main judgment paragraphs 250-255 and supplemental judgment paragraph 3.
xiii)	Alternatively, HSE is entitled to recover an equivalent sum as damages for breach of the sub-sub-sub-contract.  See supplemental judgment paragraph 5.
41.	The effect of this judgment is that Robson ends up paying 60% of the damages for the Core 2 flood and all of the damages for the Core 3 flood.  Robson accepts that it is liable in respect of the Core 3 flood.  That arose because of two straightforward workmanship failures.  Robson does not accept, however, that it has any liability in respect of the Core 2 flood.  Accordingly it appeals to the Court of Appeal in relation to the Core 2 flood.
Part 4. The appeal to the Court of Appeal in relation to the Core 2 flood
42.	Robson appeals to the Court of Appeal on four grounds which I summarise as follows:
i)	The judge erred in holding that HSE was entitled to recover against Robson under clause 2 of the sub-sub-sub-contract.  Upon its true construction that clause did not permit recovery where HSE was itself at fault.
ii)	The judge erred in holding Robson responsible for the closed IV.
iii)	If ground (ii) succeeds, then Robson has no liability arising from its installation of the NRV.
iv)	The judge erred in holding that Robson’s installation of the NRV was a breach of contract.
43.	HSE has served a respondent’s notice seeking to uphold the judge’s decision on the additional ground identified in paragraph 5 of the supplemental judgment.  This is that, even if HSE fails under the indemnity clause, it is entitled to recover an equivalent sum as damages for breach of contract.
44.	The appeal was heard on 25th and 26th June 2014.  Mr Roger ter Haar QC represented Robson and Mr Simon Hargreaves QC represented Robson, as they had both done in the court below.  Counsel on both sides argued their cases with considerable vigour.  I am grateful for their assistance.
45.	On the first day of the appeal we heard the arguments of both parties on grounds (ii) and (iv).  On the morning of day 2 we indicated that those two grounds failed for reasons to be set out later in the written judgment.  In those circumstances ground (iii) fell away.  The whole of the second day was directed to argument about the first ground of appeal.
46.	Both Mr ter Haar and Mr Hargreaves leavened their submissions with a sprinkling of pleading points.  I was not persuaded by those pleading points.  Both sides could only plead their cases in fairly general terms.  No one knew what findings of fact the judge would make or which witnesses he would believe.  In this court both parties have the benefit of the judge’s detailed findings of fact and are able to focus their arguments accordingly.  I therefore propose to address the substantive arguments advanced by Mr ter Haar and Mr Hargreaves.  I do not consider that the pleadings shut out any of those arguments.
47.	Having set the scene, I must now turn to the second and fourth grounds of appeal.  These are essentially challenges to the judge’s findings of fact.
Part 5. Challenges to the judge’s findings of fact
48.	I deal first with the closed IV.  The background here is that Robson commissioned the Core 2 riser on 15th June 2006, as recorded in their commissioning record sheet of that date.  That, however, did not complete their work on the Core 2 riser.  They installed the NRV, the IV and the surge arrestor during July or early August 2006.  Furthermore daywork sheets record that Robson were working on the cold water system serving the Core 2 flats during the weeks ending 13th August and 20th August 2006.
49.	It was Robson’s duty to leave the IV open when they finished work on the Core 2 riser.  In fact, as we know from the August photograph, that valve was closed on 17th August, the day before handover.  The judge has held that the IV was never opened between that date and 1st August 2007.
50.	The crucial question, therefore, is who caused the IV to be closed on 17th August 2007? Mr ter Haar contended at trial that a company called Goodwater probably closed the IV.  Goodwater was a separate contractor who chlorinated and flushed through the system on 15th August 2006.  This is recorded in their water treatment certificate of that date.
51.	There was conflicting evidence as to whether Goodwater needed to close the IV in order to carry out their work.  Some of the expert witnesses speculated that Goodwater would have closed the IV for this purpose.  Mr Danny Robson, the managing director of Robson, said the opposite.  He maintained that the IV would have been open for the purpose of flushing and chlorination.  Mr Amundsen, HSE’s on-site project manager, gave evidence to the same effect.  The judge concluded that Goodwater did not close the IV and they had no reason to do so for the purpose of their task.
52.	Mr ter Haar challenges that finding of fact.  He submits that the judge should have rejected the evidence of Mr Robson and Mr Amundsen on this issue.  In my view that is a hopeless submission.  The judge presided over a lengthy trial.  He heard conflicting evidence on this and many other issues.  The judge decided which evidence he accepted and which evidence he rejected.  There is no question of the Court of Appeal stepping in and substituting different findings of fact on matters of this nature.
53.	Even if Goodwater did close the IV, that would not absolve Robson.  Robson’s plumbers were working in the immediate vicinity of the IV in the days before and after Goodwater treated the system.  They were going into the riser cupboard and opening or closing other isolation valves serving the individual flats.  One of Robson’s witnesses accepted that Goodwater handed the system back to Robson after completion of their work and that it was Robson’s task to leave the system operational.  
54.	The judge concluded at paragraph 265 of his judgment: 
“Either Robson installed the IV in the closed position and never opened it, or closed it in the period leading up to or shortly after 18 August, when they were opening and closing all the other IVs in the relevant riser cupboard; or they failed to ensure that it was left open at the end of all their testing and commissioning works.”

55.	Mr ter Haar is strongly critical of that conclusion.  I reject those criticisms.  The judge reached a decision which was open to him on the evidence and this court will not interfere.
56.	Mr ter Haar makes the additional point that the judge wrongly discouraged him from re-examining one of Robson’s witnesses on the IV issue.  I have considered the relevant part of the transcript.  This is the re-examination of Mr Hughes at day 7, pages 147 to 149.  In my view what the judge did was to discourage Mr ter Haar from pursuing a hypothetical question.  The judge indicated that what he needed was evidence based on actual recollection, rather than speculation.  The judge’s intervention was not improper.  Mr ter Haar could have reformulated his question so as to ask what the normal practice was, but he did not do so.  
57.	For all of the above reasons I reject the second ground of appeal.
58.	I turn now to the fourth ground of appeal concerning the NRV. Robson’s case at trial was that it did not install the NRV and had no responsibility for it.  In support of that case Robson relied upon the fact that “there has been no evidence whatsoever to establish … that Robson was instructed to install the NRV”: see Robson’s closing submissions paragraph 66.
59.	In the event the judge held that Robson did install the NRV.  There is not and there could not now be any challenge to that finding of fact.
60.	Robson on appeal contend that, since they installed the NRV, they must have been instructed to do so.  This is contrary to Robson’s case at trial and contrary to the judge’s findings of fact.  There is simply no evidence to support Robson’s present contention, either from Robson or from anybody else.  I therefore reject the fourth ground of appeal.
61.	There is also a more fundamental objection to the second and fourth grounds of appeal.  This is that the Court of Appeal does not usually entertain appeals on questions of fact from the TCC.  May LJ explained why this was so in Yorkshire Water Services Ltd v Taylor Woodrow Construction Northern Ltd [2005] EWCA Civ 894 at paragraphs [19] to [32].  The present case provides a classic example of a TCC judgment where the Court of Appeal should not interfere with findings of fact.  The judge listened to factual and expert evidence over the course of a thirteen day trial.  He brought to bear the specialist experience of a TCC judge in piecing together the jigsaw and resolving the numerous conflicts of evidence.  It is not right for this court to step in and reverse the judge’s findings on two discrete issues.
62.	Accordingly I reject the second and fourth grounds of appeal.  In those circumstances the third ground of appeal does not arise.  The only remaining matter therefore is the first ground of appeal relating to the operation of the indemnity clause.  
Part 6. The operation of the indemnity clause
63.	I have set out the relevant section of clause 2 in Part 1 above.  The judge held that the effect of this clause is to require Robson to indemnify HSE against its liability to Essex.
64.	Mr ter Haar challenges this conclusion.  He submits that because HSE were at fault in certain respects, they were not entitled to recover under clause 2.  He relies upon a line of authorities on the operation of indemnity clauses in situations where the indemnitee is at fault.  I must therefore begin by reviewing the relevant case law. 
65.	In Canada Steamship Lines v The King [1952] AC 192 by a lease dated 18th November 1940 the Crown leased to a shipping company a shed for storing freight situated on the bank of a canal in Montreal.  Clause 7 of the lease provided that “the lessee shall not have any claim … against the lessor for … damage … to the … said shed … or to any … goods … placed … in the said shed.”  By clause 8 the Crown undertook to maintain the shed.  Clause 17 provided that “the lessee shall at all times indemnify … the lessor … against all claims and demands, loss, costs, damages, actions, suits or other proceedings by whomsoever made, brought or prosecuted, in any manner based upon, occasioned by or attributable to the execution of these presents, or any action taken or things done or maintained by virtue hereof, or the exercise in any manner of rights arising hereunder.”  On 5th May 1944 while repairs to the shed involving the use of an oxy-acetylene torch were being carried out by the Crown’s employees, a spark from the torch was negligently allowed to fall on some bales of cotton waste, which caught fire.  The shed and its contents were destroyed.  In a claim by the company against the Crown for damages for negligence, the Crown relied on clause 7 as relieving them from liability, and under clause 17 claimed from the company to be indemnified against claims by the owners of goods destroyed by the fire.  
66.	The Privy Council, reversing the decision of the Supreme Court of Canada, found in favour of the plaintiff.  Since the fire had been caused by the negligence of the Crown’s employees, clause 7 did not exempt the Crown from liability and clause 17 did not entitle the Crown to an indemnity.
67.	Lord Morton of Henryton cited with approval the guidance on the interpretation of exemption clauses, which Lord Greene MR gave in Alderslade v Hendon Laundry Ltd [1945] KB 189 at 192.  He then stated the principles as follows at [1952] AC 208:
“(1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called “the proferens”) from the consequence of the negligence of his own servants, effect must be given to that provision … (2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against the proferens … (3) If the words used are wide enough for the above purpose, the court must then consider whether “the head of damage may be based on some ground other than that of negligence”, to quote again Lord Greene in the Alderslade case.  The “other ground” must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it, but subject to this qualification, which is no doubt to be implied from Lord Greene’s words, the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are, prima facie wide enough to cover negligence on the part of his servants.”

68.	I shall refer to this formulation as “the Canada Steamship principle”.  The Privy Council applied this principle to the construction of clause 7, which was an exemption clause.  The Privy Council adopted a broadly similar approach to clause 17, which was an indemnity clause.  In a number of subsequent cases concerned with the operation of indemnity clauses the courts have held that the Canada Steamship principle applies to indemnity clauses as well as exemption clauses.  Lord Fraser confirmed this in Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165 at 172.  Lord Wilberforce and Lord Salmon agreed with Lord Fraser.
69.	In Walters v Whessoe Ltd (1960) 6 BLR 23 Whessoe were erecting a large oil tank for Shell Refining Co Ltd (“Shell”).  This work involved electric welding.  As a result of Shell’s negligence a drum of highly explosive vapour was nearby.  Because of Whessoe’s negligence the welding work was done in an unsafe way in that the method of earthing the electric current was unsatisfactory.  The electric welding caused the vapour in the drum to explode.  The lid of the drum flew off and killed the plaintiff’s husband, who was assisting one of the welders.  The plaintiff brought a claim under the Fatal Accidents Acts 1846–1908 against both Whessoe and Shell.  After a trial at the Liverpool Assizes she succeeded against both defendants, with liability apportioned 20% to Whessoe and 80% to Shell.  Shell claimed an indemnity against Whessoe pursuant to clause 3 of their contract.  This provided:
“Clause 3: ‘Injury and Damage: The Contractor shall indemnify and hold Shell their servants and agents free and harmless against all claims arising out of the operations being undertaken by the Contractor in pursuance of this contract or order or incidental thereto in respect of: (a) personal injury including death and industrial disease, sustained by any employee of the Contractor or a Sub-contractor; (b) loss or damage to the property and personal injury, including death, to the person of any Third Party; and (c) loss or damage to the property, equipment or tools of the Contractor, a Sub-contractor or any of their employees.”

70.	The Court of Appeal applying the Canada Steamship principle dismissed Shell’s claim.  Devlin LJ stated that the court was applying a rule of construction, which he summarised in this way:
“It is now well established that if a person obtains an indemnity against the consequences of certain acts, the indemnity is not to be construed so as to include the consequences of his own negligence unless those consequences are covered either expressly or by necessary implication.  They are covered by necessary implication if there is no other subject-matter upon which the indemnity could operate. Like most rules of construction, this one depends upon the presumed intention of the parties.  It is thought to be so unlikely that one man would agree to indemnify another man for the consequence of that other’s own negligence that he is presumed not to intend to do so unless it is done by express words or by necessary implications.”

71.	In Sims v Foster Wheeler Ltd [1966] 1 WLR 769 F was the main contractor constructing a reactor for Esso Petroleum at Milford Haven.  F engaged P as sub-contractor to carry out work to the interior walls of the reactor.  P engaged CG as sub-sub-contractor to spray gunnite onto the walls.  CG lowered a circular staging into the reactor, so that its men could stand on the staging and spray the walls.  When CG’s team had sprayed the interior walls up to a height of twenty feet, they stopped work, so that F could install a “shroud ring” at that level.  For that purpose seven workmen employed by F stood on CG’s staging and set about installing the shroud ring.  The staging collapsed and fell to the bottom of the reactor.  The plaintiff’s husband was killed and the other six men suffered personal injuries.  
72.	The plaintiff brought a claim for damages under the Fatal Accidents Acts 1846 to 1908 against F and CG.  F brought third party proceedings against P, claiming, (i) an indemnity pursuant to an indemnity clause in the sub-contract, (ii) an equivalent sum as damages for breach of an implied term that the staging would be of sound construction and suitable for its purpose.
73.	Unfortunately neither the Weekly Law Reports nor the All England Law Reports set out the terms of the indemnity clause.  But when one compares the two reports it is clear that P agreed to indemnify F against claims by and liabilities to third parties in respect of personal injury arising out of or in connection with the execution of the works.  It is unclear whether the indemnity clause used the word “liability” or “liabilities”, but probably nothing turns on that.  
74.	Paull J held that there was a defect in the staging.  F was liable to the plaintiff for breach of regulation 7 of the Building (Safety, Health and Welfare) Regulations 1948.  CG, the sub-sub-contractor, were liable to the plaintiff in negligence.  The Court of Appeal apportioned the tortious liability 75% to CG and 25% to F.  In subsequent proceedings F sought to recover against P its 25% liability for damages and costs.  Paull J dismissed that claim and F appealed.  
75.	The Court of Appeal dismissed F’s claim under the indemnity clause but upheld F’s claim against P for breach of contract.  Neither of the available law reports sets out more than a very brief summary of the Court of Appeal’s reasoning on the indemnity clause.  It seems clear, however, that the court was applying the Canada Steamship principle.  F chose to use CG’s staging for the purpose of its own work.  Since the lives of seven of F’s employees would depend upon the safety of the staging, F was under a statutory duty to ensure that the staging was of good construction, of suitable and sound material and of adequate strength.  F’s breach of that statutory duty disentitled it from recovering under the indemnity clause against P (who was sub-contractor to F and the employer of CG).
76.	The law reports set out the full judgments of the court on the alternative claim for damages for breach of an implied term in the sub-contract.  That claim succeeded.  F’s breach of statutory duty did not break the chain of causation.  P’s breach of the implied term caused F to incur a liability in tort for 25% of the damages and costs due to the deceased’s widow.
77.	I presume that P recovered against CG the amount of its liability to F.  On the assumption that the sub-sub-contractor was back to back with the sub-contract, CG were in breach of their implied duty to P to ensure that the scaffolding was of sound construction and suitable for its purpose.  The law reports do not reveal what the outcome was as between P and CG.  Probably that was resolved by agreement between their respective insurers.  
78.	In AMF International Ltd v Magnet Bowling Ltd [1968] 1 WLR 1028 the plaintiff was installing bowling equipment at the first defendant’s building.  The second defendant was still constructing that building pursuant to a building contract in the old RIBA form (which preceded the JCT contracts).  Clause 14(b) provided:
“… (b) Injury to property.  Except for such loss or damage by fire … the contractor shall be liable for and shall indemnify the employer against any loss, liability, claim or proceedings in respect of any injury or damage whatsoever to any property real or personal in so far as such injury or damage arises out of or in the course of or by reason of the execution of the works, and provided always that the same is due to any negligence, omission or default of the contractor, his servants or agents or of any sub-contractor …”

79.	As a result of the negligence of both defendants the plaintiff’s equipment suffered water damage.  Mocatta J held both defendants liable to the plaintiff under the Occupiers Liability Act 1957.  He apportioned liability 40% to the first defendant and 60% to the second defendant.  
80.	There was a separate claim by the first defendant against the second defendant for an indemnity pursuant to clause 14 (b) of the RIBA contract.  Mocatta J, applying the Canada Steamship principle as developed by the Court of Appeal in Walters v Whessoe, dismissed the claim for an indemnity.  The wording of clause 14 (b) was wide enough to cover damage caused by the first defendant’s negligence, but it could also cover damage occurring without any fault on the part of the first defendant.  Therefore the clause was confined in its operation to the latter situation, namely to damage which had not been caused by the first defendant’s negligence.
81.	Although Mocatta J dismissed the claim under the indemnity clause, he allowed the first defendant’s claim for damages in the same amount for breach of contract: see 1060 to 1061.  This is a matter to which I will return.
82.	As Mr ter Haar points out, the rule of construction formulated in Canada Steamship and Walters v Whessoe is of general application.  The Court of Appeal has applied it in cases concerning shipping contracts: see Mediterranean Freight Services Ltd v BP Oil International Ltd [1994] 2 Lloyds LR 506 and Northern Shipping Co v Deutsche Seereederei G.m.b.h [2000] 2 Lloyds LR 255.  
83.	Mr Justice Coulson stated two reasons why he was not applying that rule of construction in the present case.  One reason was that the authorities cited were “personal injury cases concerned with negligence”.  The other reason was that rule of construction would destroy the ability of parties to pass claims down the contractual chain.  This was contrary to business common sense.
84.	This issue has been much more fully argued on appeal than it was at first instance.  Before the judge Mr ter Haar cited the relevant authorities by referring to paragraph 10-31 of Hudson’s Building Contracts (12th Edition) rather than the actual cases.
85.	It is clear that the first of the two reasons mentioned by the judge is wrong.  It is true that Walters v Whessoe and most of the cases cited by Hudson as illustrating the Canada Steamship principle arose out of personal injury claims.  But that principle is of general application.  It is not limited to personal injury claims.
86.	The judge’s other reason is a more formidable one.  Most building projects involve chains of contracts in which entitlement to be paid and liability for non-performance pass up or down the line.  The basic intention is that each party in the chain should be paid for the work it does and should be responsible for the shortcomings in its own work.
87.	If a sub-contractor (or as in this case a sub-sub-sub-contractor) perpetrates defective workmanship, contractors and sub-contractors higher up the chain can be criticised for failing to notice the mistakes.  Nevertheless it would largely defeat the commercial purpose of the contractual chain if “failure to notice” prevented the indemnity clauses from operating.  The participants in building projects arrange their affairs and take out insurance cover on the basis that they are likely to be held liable for shortcomings in their own work.
88.	The editors of Hudson (Nicholas Dennis QC, HHJ Mark Raeside QC and Robert Clay) discuss this problem in paragraph 10-32.  They state:
“No attempt appears to have been made so far by the English judiciary to distinguish between categories of indemnitee negligence which, on a basis of presumed intention, might be regarded as not invaliding an indemnity under the Alderslade principle.”

The editors note that judges in a number of US jurisdictions have grappled with the issue.  The American judges distinguish between “active negligence” in the sense of doing something positive to cause the damage and “passive negligence”, such as failure to detect defects or to order rectification.  See, for example, Rossmoor Sanitation Inc v Pylon Insurance 532 P 2nd 97 (1975).
89.	Counsel have not researched the American authorities.  My own knowledge of that jurisprudence is solely derived from the brief passage in Hudson and the judgment of the Californian Supreme Court in Rossmoor, which is now almost 40 years old.  I do not suggest that we should be adopting Californian law, whatever that may now be.  I do, however, see force in the proposition that mere failure to detect breaches of duty by a sub-contractor should not ordinarily be sufficient to defeat an indemnity clause in a sub-contract.  
90.	In a case such as the present it is possible to think of workmanship breaches which would not be detectable upon a reasonably careful inspection.  These scenarios are not “fanciful” (to use Lord Morton’s term).  Indeed the workmanship breaches at Core 3 level 2 probably fall into that category.  They consisted of over-tightening a nut and allowing metal particles to be present in the thread of that nut.  On the other hand to confine clause 2 (which is typical of many indemnity clauses) to defects undiscoverable upon reasonable inspection would substantially curtail its effect.
91.	The Canada Steamship principle is a rule of construction, not a rule of law.  As Devlin LJ stated in Walters v Whessoe, the rule of construction rests upon the presumed intention of the parties.
92.	In most situations, as Devlin LJ said, it is “so unlikely that one man would agree to indemnify another man for the consequences of that other’s own negligence that he is presumed not to intend to do so unless it is done by express words or by necessary implications.”  In a chain of building contracts, however, it is not inherently unlikely that each party will agree to be liable for shortcomings in its own work, even if superior parties in the chain fail to detect those shortcomings. 
93.	In all the construction cases where the Canada Steamship principle has been successfully invoked, the indemnitee has committed a positive act of negligence which was causative of the damage.  In Walters v Whessoe the indemnitee negligently left a drum containing highly explosive vapour near where Whessoe’s works were taking place.  In Sims the indemnitee sent seven of its own employees to work on a suspended staging erected by a sub-sub-contractor without ensuring that it was safe.  In AMF the indemnitee invited an independent contractor (the plaintiff) to bring valuable property onto the site when there was an obvious risk of flood damage: see the findings of Mocatta J at 1039 E-G and 1042 G to 1045A.
94.	Let me now draw the threads together.  In my view the rule of construction stated in Canada Steamship and Walters v Whessoe is of general application.  Nevertheless it is based upon the presumed intention of the parties.  In applying that rule the court must have regard to the commercial context of the contract under consideration.  In the case of a construction contract a failure by the indemnitee to spot defects perpetrated by its contractor or sub-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.
95.	How does that principle apply in the present case? There were design failings by HL and Essex as set out in Part 3 above.  HSE was contractually responsible to Essex for designing the mechanical works.  Those design failings meant that there was no proper paper trail.  This made the judge’s task more difficult at trial in determining who did what and why.  On the other hand, on the facts as found by the judge it was Robson’s workmanship errors, rather than the design errors, which were the principal cause of the Core 2 flood.
96.	Although the judge focused upon the inspection failures of HL, it is implicit in the findings of fact that Robson’s workmanship breaches were such that HSE ought to have detected them upon making a reasonable inspection.  In my view HSE’s failure to inspect Robson’s work properly does not shut out its claim under clause 2.  The clause is certainly wide enough to encompass the two workmanship breaches in this case, namely leaving the IV closed and inserting the NRV.  Despite the rule of construction formulated in Canada Steamship and Walters v Whessoe, it cannot be presumed that the parties intended to confine clause 2 to workmanship breaches by this labour only sub-sub-sub-contractor which were invisible upon reasonable inspection.  The clause does not say that.  No-one other than an enthusiastic reader of the law reports would think of construing it in that way.
97.	I therefore conclude that HSE is entitled to recover against Robson pursuant to clause 2, as the judge has held.
98.	If I am wrong about that, the question arises whether HSE can recover an equivalent sum from Robson as damages for breach of contract.  Negligence by the indemnitee which prevents the operation of an indemnity clause need not shut out an alternative claim for breach of contract.  Mocatta J’s decision in AMF and the Court of Appeal’s decision in Sims illustrate that this is so.
99.	In the present case the judge has found that Robson’s workmanship failures were breaches of its sub-sub-sub-contract with HSE.  Those breaches caused the loss which HSE has suffered, namely its liability in damages and costs to Essex.  Therefore HSE is entitled to recover that loss against Robson as damages for breach of contract.  This analysis enables liability to pass down the contractual chain to Robson, the party whose breaches were the principal cause of the Core 2 flood.  Neither the design failures nor the inspection failures are sufficient to break the chain of causation at any stage.
100.	Finally I should add that counsel are agreed that apportionment between HSE and Robson is not possible.  Therefore this is an all or nothing case.  I agree with that analysis.  Robson’s liability to HSE is contractual.  Adopting the categorisation of Hobhouse J in Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488, this case cannot be fitted in to category 3.
101.	In the result therefore I dismiss the first ground of appeal.
Part 7.  Conclusion
102.	For the reasons set out in Part 5 above I reject the appellant’s challenges to the judge’s findings of fact concerning the IV and the NRV.  For the reasons set out in Part 6 above, I reject the appellant’s first ground of appeal.
103.	If I am wrong in relation to the indemnity clause, then I uphold the judge’s decision on the grounds set out in the respondent’s notice.  In the result therefore I would dismiss Robson’s appeal.
Lord Justice Beatson:
104.	I agree.
Lady Justice Gloster:
105.	I also agree.