John F Hunt Demolition Ltd v ASME Engineering Ltd

Contractual insurance provisions may determine whether a common-law duty of care exists between parties in a construction chain. Although physical damage to property ordinarily supports a duty of care, the duty will not arise where the contractual allocation of risk places specified-peril damage with insurers and negatives liability. The existence and reasonableness of a settlement are separate questions. A claimant need not prove actual liability to the third party before recovering a reasonable settlement from the party whose breach caused the exposure. The claim settled must have sufficient substance to justify settlement, and the amount paid must be reasonable in the circumstances. Those questions are generally factual. An unreasonable settlement is prima facie irrelevant to the recoverable loss; the claimant is ordinarily confined to direct losses caused by the breach.

The claimant was a demolition sub-contractor in a contractual chain for works involving retained building facades. The defendant had undertaken temporary steel-support works for the claimant. A fire caused by the defendant’s alleged default damaged the facades.

The claimant settled claims brought by the main contractor and employer for £152,500 and sought to recover that sum from the defendant. The parties agreed preliminary issues concerning the effect of the JCT insurance provisions, any common-law duty of care owed to the employer, and the legal effect of the settlement. The court was asked whether the absence of liability to the employer made the settlement unreasonable or prevented recovery under the principles in Biggin & Co Ltd v Permanite Ltd.

1. The court answered the insurance issue on the agreed basis that the main contractor was not liable to the employer under the main contract. The main contract’s indemnity excluded loss or damage to existing structures required to be insured under clause 22C.1 when caused by fire. Responsibility for reinstatement therefore lay with the insurers. The maximum recoverable under the sub-contract was the main contractor’s own agreed loss of £43,512.88.

2. Applying the two-stage approach identified in Riyad Bank v Ahli United Bank PLC, physical damage to property ordinarily gives rise to a duty of care, subject to foreseeability. The court must then examine the contractual structure to determine whether the duty is negatived. The JCT provisions, read as a whole, allocated fire damage to the existing structures to the joint-names insurance and prevented the claimant from bypassing that allocation by pursuing a tort claim against the sub-contractor. The claimant owed no duty of care to the employer for the fire damage and had no liability to the employer.

3. The absence of legal liability to the third party did not, as a matter of principle, make a settlement irrecoverable. The question was whether the claim had sufficient substance reasonably to justify settlement and whether the amount paid was reasonable having regard to the strength of the claim. Actual or probable success was unnecessary. The reasonableness of the settlement was a factual issue to be determined at trial.

4. If a settlement was unreasonable, it would prima facie have no evidential value and the sum paid would not be recoverable as loss caused by the defendant’s breach. The claimant could ordinarily recover only direct losses caused by the breach. The court rejected the proposed approach of identifying a hypothetical reasonable settlement, and answered preliminary issue 4 in favour of limiting the claim to the amount legally recoverable, here £43,512.88.