Greenwich Millennium Village Ltd v Essex Services Group Plc & Ors

The Canada Steamship principle is a rule of construction based on the parties’ presumed intention and applies to indemnity clauses. Its application must reflect the contract’s commercial context.

In a chain of construction contracts, an indemnitee’s failure to detect defective workmanship will not ordinarily prevent recovery under an indemnity covering the contractor’s breach, even where the clause does not expressly cover the indemnitee’s negligence. The parties may intend each participant to bear responsibility for shortcomings in its own work.

If the indemnitee’s negligence defeats the indemnity, it may still recover the same loss as damages where the contractor’s breach caused the indemnitee’s downstream liability and intervening design or inspection failures did not break the chain of causation.

A labour-only sub-sub-sub-contractor installed an unnecessary non-return valve and left an isolation valve closed. Those defects disabled a surge arrestor and were the principal causes of extensive flooding. The Technology and Construction Court held that the contractor immediately above it could pass down its liability under an indemnity clause or, alternatively, as damages for breach of contract: [2013] EWHC 3059 (TCC).

The sub-sub-sub-contractor appealed, challenging the findings about both valves and contending that the indemnitee’s own design and inspection failures precluded recovery. The central issue was whether failure to detect defective workmanship prevented recovery under the indemnity or, alternatively, as contractual damages.

1. Appeal dismissed. The trial judge was entitled to find that the appellant installed the non-return valve and was responsible for leaving the isolation valve closed. Those findings followed a 13-day specialist trial involving extensive factual and expert evidence. The Court of Appeal would not substitute different findings on such discrete factual matters.
2. The Canada Steamship principle applies generally to exemption and indemnity clauses, rather than only to personal injury cases. It is, however, a rule of construction founded on the parties’ presumed intention, not an inflexible rule of law. Its application must therefore take account of the commercial context.
3. Construction projects commonly involve contractual chains through which payment and liability pass. Their basic commercial purpose is that each participant receives payment for its work and bears responsibility for its own shortcomings. It is not inherently unlikely that a contractor will agree to remain responsible for its defective workmanship even though a superior contractor could have found the defect through reasonable inspection.
4. Earlier construction cases in which an indemnitee’s negligence defeated an indemnity involved a positive causative act by the indemnitee. Mere failure to detect a subordinate contractor’s breach stands differently. Such failure should not ordinarily defeat an indemnity in a construction contract, even where the clause does not expressly encompass damage caused by the indemnitee’s negligence.
5. Clause 2 was wide enough to cover both workmanship breaches. The parties could not be presumed to have intended that it apply only to defects invisible on reasonable inspection. The respondent’s inadequate inspection therefore did not prevent recovery under the clause.
6. In any event, negligence that defeats an indemnity does not necessarily bar an alternative claim for damages. The appellant’s contractual breaches caused the respondent’s downstream liability and associated costs. The superior parties’ design and inspection failures did not break the chain of causation, so the same sum was recoverable as contractual damages.
7. The appellant’s liability was contractual and could not be apportioned between it and the respondent. Lord Justice Beatson and Lady Justice Gloster agreed with Lord Justice Jackson.

• Court of Appeal (Civil Division): The appeal was dismissed unanimously. The indemnity remained effective despite the respondent’s failure to detect the workmanship defects. The lower court’s decision was also upheld on the alternative ground of contractual damages: [2014] EWCA Civ 960.
• Technology and Construction Court: Coulson J held that the appellant’s workmanship breaches were the principal causes of the relevant flood and that the respondent could recover under the indemnity or, alternatively, in damages for breach of contract: [2013] EWHC 3059 (TCC).