| Date | 1 April 2008 |
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| Judgment | Kruger Tissue (Industrial) Ltd -v- Frank Galliers, ORB 24 February 1998 |
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| The Issue | Whether a contractor may be liable for reinstatement costs and consequential losses of the employer in the event of a fire. |
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| Implication |
Under a JCT80 form a contractor's liability in respect of the costs of reinstatement in the event of fire are limited by the requirement upon the employer to insure, but such limitation does not extend to the consequential losses which may be suffered by the employer. |
printThe insurance and related liability provisions of the JCT contracts regularly cause difficulty of interpretation. The case of Kruger Tissue Ltd -v- Frank Galliers Ltd considered whether the main contractor would be liable to its client in respect of consequential loss suffered in the event of a fire, in circumstances where the client was under a duty to insure against the costs of the reinstatement works. Kruger were manufacturers of paper products at a factory in Wales. Galliers were appointed in 1992 as main contractor to erect an extension and carry out internal alterations to the warehouse and factory production area. In the course of its work, a fire broke out when incandescent materials from cutting equipment which a sub-contractor was using fell upon paper and set it alight. The fire largely destroyed the warehouse and much of its contents and caused damage to the production area. In consequence Kruger sued Galliers, and in its statement of claim gave particulars of loss and damage under five heads: (a) damage to the premises; (b) damage to stock; (c) damage to machinery; (d) loss of profit and increased cost of working; and (e) loss of consultant's fees. The contract which was largely in the unamended JCT80 form, provided by clause 20.2 that "subject to clause 22C.1" the contractor would be liable for, and must indemnify the employer against, any expense, liability or loss in respect of any injury or damage whatsoever to any property, real or personal, in the course of the carrying out of the works. Clause 21 goes on to provide that, without prejudice to the contractor's obligation to indemnify the employer under the previous clause, the contractor shall take out and maintain insurance in respect of claims arising out of this liability. Clause 22 deals with insurance of the Works and 22C, which applied in this case, deals with the situation where the insurance is taken out in respect of works in or extensions to existing structures. Under this arrangement, if a fire occurs for whatever reason, monies paid out under the insurance will go to the employer and the contractor will be required to make good the loss or damage and be paid for doing so as a variation. Against the background of all of these clauses, in its defence Galliers said that the combined effect of clause 20.2 and 22C.1 meant that the Employer bore the whole risk of any damage to the existing warehouse structure, the contents of the warehouse, and the contract works themselves if such damage was caused by a fire. In effect the employer, Kruger, had to look solely to the insurance policy to recover any loss and damage suffered as a result of the fire. They also argued that the consequential losses claimed under heads (d) and (e) were similarly excluded. In the event, Kruger dropped its claims under heads (a), (b) and (c) for damages to the premises, stock and machinery. It conceded that it was obliged to take out insurance under clause 22C.1 to cover this type of loss, and the provision of that insurance by the employer expressly qualified the liability of the contractor under clause 20.2. His Honour Judge Hicks QC stated that in his judgment that concession was rightly made. It remained to be decided whether the consequential loss claims under heads (d) and (e) for loss of profit, increased cost of working and loss of consultant's fees would similarly be excluded. Judge Hicks considered that the principal question was whether the obligation under clause 22C to insure the existing structures and their contents for the "full cost of reinstatement, repair or replacement of loss or damage" included an obligation to cover for loss of profit and increased cost of working incurred by the business in consequence to the fire. His conclusion was that 22C.1 did not oblige Kruger to insure against such consequential loss and accordingly this clause provided no bar to the recovery by them of their consequential loss claims. In conclusion, in circumstances where 22C type insurance is required, a contractor who negligently causes a fire, either directly or by one of its sub-contractors, may avoid liability for the cost of reinstatement works on the basis that such costs are covered under the insurance provisions. The contractor may well find however that it is under a direct liability to meet the claims of the employer in respect of consequential loss, and must be well advised to consider separately insuring this risk.
CJ-9812
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