Skanska Construction Ltd v Egger [Barony] Ltd

A contractual obligation to insure works against loss or damage from whatever cause does not ordinarily cover the cost of remedying defective design, workmanship, materials or construction. Where the contract separates primary design and construction obligations from custodial responsibility for the works during construction, the insurance obligation addresses accidents and mishaps affecting the physical works during the specified period, whether or not the contractor was at fault. The mere manifestation of a defect in the very part that is defective, including cracking, curling, spalling or crazing under ordinary use, is not insured loss or damage. Distinct physical damage to another part caused by collapse may be different, but the original defect remains outside the insurance obligation.

The appeal arose from a guaranteed maximum price contract under which Skanska agreed to design and construct a wood chipboard factory for Egger. Defects were alleged in the warehouse floor slab, including cracking, curling and crazing caused by breaches concerning design, materials and workmanship. Egger had obtained insurance excluding loss or damage caused by such defects.

On preliminary issues, HHJ Havery QC held that Clause 22 required insurance covering loss and damage caused or materially contributed to by Skanska’s contractual breaches, but that the insurance did not extend to rectification of defects themselves. The central issue before the Court of Appeal was the proper scope of the insurance obligation in Clause 22(2)(a).

1. Disposition. The Court of Appeal unanimously allowed the appeal. It answered the first preliminary issue in the negative, set aside the orders of HHJ Havery QC, and declined to determine the second issue because it concerned the construction of the Eagle Star policy and had not been argued with the insurer present.
2. Contractual scheme. Per Latham LJ, the contract distinguished between Skanska’s primary obligations under Clauses 2, 7 and 16A to design and construct in accordance with the contractual requirements, and the separate regime under Clauses 20 and 22 dealing with loss and damage sustained during the carrying out of the works. Clause 22 was custodial in character. It addressed accidents and mishaps occurring on site and provided a mechanism for repairing their consequences, with recourse to insurance.
3. Scope of insurance. The words all loss or damage from whatever cause arising were qualified by the requirement that the loss or damage be of a kind for which the contractor was responsible under the contract. In context, that responsibility referred to the care obligations in Clause 22(1)(a) and (b). It could include accidental physical damage even where the contractor was not at fault, but did not include the manifestation of defective design or workmanship.
4. Defects in the same part. Per Mance LJ, a floor slab defect which manifested itself through cracking, curling, spalling, crazing or lifting under ordinary use remained a defect governed by Clauses 2, 7 and 16A. The contractor’s obligation to make good the defective slab was not transformed into insured loss or damage merely because the defect had become apparent.
5. Qualification. Mance LJ observed that physical damage to a distinct part of the works caused by an accidental fall or collapse might fall within Clause 22(2), although the original defect and its manifestation would remain outside the insurance obligation. That question did not arise on the facts.
6. The court derived no assistance from evidence about the insurance market because there was no evidence that the parties knew of or took account of that market when contracting. The respondent was ordered to pay the appellant’s costs of the appeal, cross-appeal and preliminary issue trial.

• Court of Appeal (Civil Division): unanimously allowed the appeal, answered the first preliminary issue in the negative, set aside the lower court’s orders, and made no order on the second issue.
• Technology & Construction Court: HHJ Havery QC determined the preliminary issues on 25 May 2001 and clarified the order on 6 July 2001. He held that Clause 22 required insurance covering relevant loss and damage caused by contractual breaches, but excluded rectification of defects themselves.