Oakapple Homes (Glossop) Ltd v DTR (2009) Ltd & Ors

A beneficiary under an architectural collateral warranty is not treated as responsible for the contractor’s negligence merely because the warranty treats the beneficiary as a joint employer. Connected companies remain separate legal entities, and a contractor’s negligence cannot reduce damages recoverable from the architect by the beneficiary.

For insurance purposes, a requirement that the warranty benefit be no greater than that under the original contract concerns the scope, extent and duration of the contractual liability. It does not limit cover by reference to the amount of damages the original contracting party might have recovered. A collateral warranty reflecting the architect’s original duty of reasonable skill and care therefore falls within cover where the policy so provides.

Oakapple Homes had appointed DTR as architect for the conversion of Wren Nest Mill. DTR’s appointment was later novated to the building contractor. DTR had executed a collateral warranty in favour of Oakapple Homes, but not in favour of the purchasers and tenants of the residential apartments.

After a fire, Oakapple Homes sought execution of those further warranties. DTR entered liquidation, and the insurers were joined to determine whether professional indemnity cover would respond. The issues were whether DTR could rely on the contractor’s alleged contributory negligence against warranty beneficiaries, and whether Exclusion 5.9 of the policy excluded indemnity.

1. Contributory negligence. DTR could not defend claims under the warranties by alleging negligence by Oakapple Construction. Oakapple Homes and Oakapple Construction were separate legal entities. An employer under a construction contract was not vicariously liable for the contractor’s negligence, and the connected-company relationship did not alter that position.
2. The reference in the draft warranty to the beneficiary being treated as a joint employer concerned the original architectural Appointment, not the Appointment as novated. In any event, the result would be the same under the novated appointment. Under the analysis in Vesta v Butcher [1989] 1 AC 852, apportionment under the Law Reform (Contributory Negligence) Act 1947 did not provide a defence to the beneficiaries’ contractual claims. The proposed defence failed at the final stage because DTR could not reduce damages payable to the beneficiaries by reference to the contractor’s negligence.
3. Construction of Exclusion 5.9. The “original contract” meant the original Appointment, not the Appointment as novated. The “benefit” of the warranty referred to the scope, extent and duration of DTR’s contractual liability. It did not refer to the quantum of damages recoverable by a particular beneficiary. A contrary construction would produce an unrealistic result and would not reflect sound commercial principles.
4. Exclusion 5.9 therefore did not entitle the insurers to decline indemnity. The policy provided cover for liability arising under the collateral warranties for the relevant insurance period.