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	England and Wales High Court (Technology and Construction Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Tate Gallery (Board of Trustees of) v Duffy Construction Ltd & Anor [2007] EWHC 361 (TCC) (15 February 2007) URL: http://www.bailii.org/ew/cases/EWHC/TCC/2007/361.html Cite as: [2007] EWHC 361 (TCC), [2007] 1 All ER (Comm) 1004, [2007] Lloyd's Rep IR 758, [2007] BLR 216

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		St. Dunstan's House
		15th February 2007

MR. JUSTICE JACKSON:

1. This judgment is in seven parts, namely Part 1, Introduction; Part 2, The Facts; Part 3, The Present Proceedings; Part 4, Issues 1(A) and 1(B); Part 5, Issues 2(B) and 3; Part 6, Issues 4 and 5; Part 7, Conclusion.
   Part 1. Introduction

2. The Tate Gallery in London was first opened to the public in 1897. Over the years the gallery has been expanded and further buildings have been added. In 1997 the trustees of the Tate Gallery marked the centenary of the gallery by embarking upon the Tate Gallery Centenary Development. The present litigation concerns water damage which occurred at the Tate Gallery in the course of the Centenary Development, causing, it is said, some £5 million worth of damage.

3. The claimant in this action is the board of trustees of the Tate Gallery ("the trustees"). The first defendant is Duffy Construction Limited, the trade contractor which undertook the hard landscaping works that formed part of the Centenary Development ("Duffy"). The second defendant is Specialist Services Electrical Limited, a subcontractor of Duffy ("SSEL"). One other company will feature briefly in the narrative. That is Mace Limited, which acted as construction manager for the trustees ("Mace").

4. The present trial is a trial of preliminary issues as between the trustees and Duffy. The purpose of this trial is to determine the extent to which the trustees' claim is soundly based in law. It is sensible for this to be established before the parties incur the substantial costs of a full trial including expert evidence on both sides. After these introductory remarks I must now turn to the facts.
   Part 2. The Facts

5. The Tate Gallery Centenary Development Project consists of upgrading the northwest quadrant of the Tate Gallery to incorporate new and improved facilities for both the public and the gallery. The project includes the following: a new public entrance off Atterbury Street, providing level access to the ground floor of the building and linking it to a large entrance hall and orientation gallery; a new lift providing access between ground and gallery floors (this is a 40-person passenger lift suitable for wheelchairs and classified as an evacuation lift); a new staircase within the northwest quadrant hall which makes a positive visual connection between ground and gallery floors; the provision of six new galleries and nine fully refurbished galleries within the northwest quadrant; an additional retail outlet at ground floor level; a new audio-visual projection room; an area for entertainment and public functions; new public lavatories; a new greatly enlarged cloakroom; extensive upgrading of the service installation including new plant rooms, new infrastructure and new substation with capacity for four transformers; an improvement to the external environment and landscape to Millbank and Atterbury Street.

6. The works comprising this development were divided into 38 separate packages. Each package of work was entrusted to a trade contractor with whom the trustees entered into a separate trade contract. The hard landscaping around the gallery constituted Package 8100. This package included excavation, sub-bases, bedding, drainage and finishes in connection with the external improvements to the Tate Gallery.

7. On 23^rd June 1998 the trustees took out a "combined contract works and third party liability insurance" policy in respect of the Tate Gallery Centenary Development Project, No.CR954980140. I shall refer to this either as "the policy" or by its full policy number, as the context requires. The policy comprises three sections. Section one provides insurance cover for the works; section two provides insurance cover for increased costs of outstanding construction works; section three provides insurance cover for third party liability. The trustees, the project manager and the construction manager are named as insured for the purposes of all three sections of the policy. In addition, in respect of section one only of the policy, the following are named as being insured:

   "4. All other contractors and/or trade contractors of whatsoever tier and/or suppliers engaged for the purpose of the project (as to the extent stated in Memorandum 15)."

8. The specification to section one of the policy provides:

   "Contract works.

   "Insuring clause.

   "The Insurer(s) will indemnify the Insured against loss of or damage to the Insured Property from any cause other than as hereinafter excepted.

   "The Insured Property.

   "(a) The whole of the works whether permanent or temporary including materials incorporated or to be incorporated therein and other things the property of the Insured or for which they are responsible

   "(b) Constructional plant and equipment and temporary buildings and their contents the property of the Insured (1), (2) and (3) or for which they are responsible

   "(c) Clothing and Personal Effects the property of employees of the Insured insofar as the same are not otherwise insured

   "(d) Existing marble architraves and skirting boards

   "whilst on or adjacent to the Project Site and within the Territorial Limits in respect of the Project as defined herein

   "(e) Existing Millais Statue on the Project Site."

9. Memorandum 15 to section 1of the policy provides:

   "The indemnity provided by this Section of the Policy to the Insured (4) is restricted to loss or damage due to any of the Specified Perils as defined in the JCT (1980 Edition) of the Standard Form of Building Contract."

10. The definition of "specified perils" in the 1980 JCT standard form of building contract (which is incorporated by reference into Memorandum 15 of the present policy) reads as follows:

    "Fire, lightning, explosion, storm, tempest, flood, bursting or overflowing of water tanks, apparatus or pipes, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion but excluding excepted risks."

11. The policy contains general conditions which are applicable to all three sections. Those general conditions include the following:

    "4. Precautions

    "(a) The Insured shall take and cause to be taken all reasonable precautions to prevent injury illness loss or damage and to comply with all statutory obligations and regulations imposed by any authority…

    "(c) The Insured shall take all reasonable precautions to maintain in efficient condition all plant and appliances used in connection with the contract and the Insurer(s) shall at all reasonable times have by their representatives access to examine such plant and appliances. The Insured shall also take and cause to be taken all reasonable precautions for the safety of the Insured Property and in the event of an occurrence covered by this Policy shall take such immediate action as is necessary to minimise the loss

    "5. Observance.

    "The due observance and fulfilment of the terms of this Policy so far as they relate to anything to be done or complied with by the Insured and the truth of the information supplied shall be conditions precedent to any liability of the Insurer(s) to make any payment against this Policy

    "6. Non-Invalidation

    "Notwithstanding General Conditions 4 and 5 no act or omission or default on the part of any of the Insured parties nor any breach of any term or condition of this insurance by any such party shall operate to avoid invalidate or otherwise prejudice the cover thereby provided for the benefit or advantage of any of the other Insured parties"

12. By a trade contract dated 21^st December 1999 made between the trustees and Duffy, Duffy agreed to carry out the hard landscaping works comprised in Package 8100. Thus Duffy became one of the insured contractors under the policy to the extent provided in the policy. The trade contract includes the following provisions:

    "1.2. Terms used in this Contract shall have the meanings given to them in Appendix 1…

    "2.1. The Trade Contractor shall execute and complete the Works in strict accordance with the Contract Documents and shall comply with and adhere strictly to any instructions issued to him by the Construction Manager relating to the Works, including, but not by way of limitation, instructions relating to the sequencing and timing of the execution of the Works…

    "2.2. Without prejudice to any express or implied warranties or conditions, the Trade Contractor shall exercise in the performance of his obligations under this Contract all the reasonable skill, care and diligence to be expected of a competent specialist contractor experienced in carrying out work of a similar scope, nature and size to the Works within a project of similar scope, nature and size to the Project.

    "2.3. The Trade Contractor shall indemnify the Client and keep the Client indemnified against each and every liability which the Client may incur to any person whatsoever and against all damage, expense, loss, cost, claim or proceedings suffered or incurred by the Client to the extent that the same arises out of or in connection with any negligence or breach of duty by the Trade Contractor, his servants, agents, sub-contractors, suppliers or other persons engaged by the Trade Contractor upon the Works or any breach by the Trade Contractor of any of his obligations under this Contract…

    "14.1. The Works and each part of them shall, subject only to the provisions of Clause 14.4, be at the risk of the Trade Contractor until Completion of the Works or such part. If the Construction Manager so instructs after Completion of the Works or any part of the Works, the Trade Contractor shall carry out all necessary repairs, replacements and remedial work so that, at Practical Completion of the Project, the Works are in the condition required by this Contract or (if the Project is to be completed in Sections) at Practical Completion of any Section those parts of the Works in such Section are in the condition required by this Contract. The provisions of Clause 6.1 shall apply in respect of compliance with such Construction Manager's instruction.

    "14.2. The Trade Contractor shall protect the Works as may be reasonably necessary to prevent damage to them and as may be specifically required by Appendix 2 and shall maintain such protection until Practical Completion of the Project or Practical Completion of any Section in which the part of the Works to be so protected is comprised. The Trade Contractor shall also protect occupiers of adjacent properties and the public from danger, discomfort, disturbance, trespass or nuisance caused by the Works.

    "14.3. Without prejudice to his liability to indemnify the Client under this Contract the Trade Contractor shall take out and maintain such insurances in such amounts as are specified in Appendix 1, Part J(a) and (b). The Trade Contractor shall produce documentary evidence to the Construction Manager and the Client that each such insurance is properly maintained as and when requested to do so and, in case the Trade Contractor is in breach of Clause 14.3, the Client may himself insure and may deduct the costs of so insuring from the Contract Sum.

    "14.4. The Client shall maintain insurance of certain of the existing structures to be retained and incorporated in the Works. The Works and all work executed or in the course of execution and any goods and materials which have become the property of the Client and which are located in the United Kingdom or Eire against the Specified Perils, as defined in and in accordance with Appendix 1, Part J. Upon the occurrence of any of the Specified Perils, the Trade Contractor shall, when instructed to do so by the Construction Manager, restore and repair the Works, replace any goods and materials which have been destroyed or damaged, remove any debris relating to them from Site and continue with the execution and completion of the Works. Subject to Clause 14.5, the provisions of Clause 6.1 shall not apply in respect of compliance by the Trade Contractor with such Construction Manager's instruction and the occurrence of any of the Specified Perils shall be disregarded in computing any amount payable to the Trade Contractor under this Contract.

    "14.5. The Trade Contractor shall observe and comply with the conditions contained in the policy of insurance of the Client, as described in Appendix 1, Part J."

13. Appendix 1 to the trade contract is divided into eleven parts. Part A of Appendix 1 provides:

    "'The Works' in this Contract means the design (as required), procure, supply and installation of External hard landscaping works

    "'The Site' in this Contract means The Tate Gallery, Millbank, London SW1P 4RG

    "'The Project' in this Contract means The Tate Gallery Centenary Development (2018)."

14. Part J of Appendix 1 provides:

    "Insurances to be maintained by the Trade Contractor:

    "(a) The Trade Contractor shall maintain such insurances as are necessary to cover his liability in respect of personal injury or death arising out of or in the course of or caused by the carrying out of the Works (other than injury or death to persons referred to in paragraph (b)) and in respect of injury or damage to property, real or personal (except for loss or damage to the Works) arising out of or in the course of or by reason of the carrying out of the Works. The insurance cover shall be for the sum of £5,000,000 minimum (or such greater sum as the Trade Contractor may choose) for any one occurrence or series of occurrences arising out of one event.

    "(b) The Trade Contractor shall maintain and cause his subcontractors to maintain insurance in respect of claims for personal injury to or the death of any person under a contract of service or apprenticeship with the Trade Contractor or his sub-contractor, as the case may be, and arising out of or in the course of such person's employment and such insurance shall comply with the Employer's Liability (Compulsory Insurance) Act, 1969 and any statutory orders made thereunder or any amendment or re-enactment thereof.

    "(c) The Specified Perils in respect of the Client's Project policy No.CR954980140 are:

    "Fire, lightning, explosion, storm, tempest, flood, bursting or overflowing of water tanks, apparatus or pipes, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion (excluding any loss or damage caused by ionising radiations or contamination by radioactivity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, radioactive toxic explosive or other hazardous properties of any explosive nuclear assembly or nuclear component thereof, pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speed or any loss or damage caused by fire or explosion due to terrorism)."

15. It will be noted that the wording of para.(c) of Part J of Appendix 1 substantially follows the wording which was incorporated by reference into Memorandum 15 to section one of Policy CR954980140.

16. Duffy duly proceeded with the hard landscaping works in accordance with the provisions of the trade contract. During the course of the works a redundant fire main water pipe provided a temporary water supply to the site ("the water main"). A flexible polymer pipe conveyed water from the water main to other parts of the site.

17. In February 2000 the water main was damaged by Duffy's piling subcontractor. It is in issue between the parties whether that mishap occurred because Mace had given to Duffy an inaccurate plan showing the location of the pipe. For present purposes, nothing turns on that issue. Mace instructed Duffy to repair the damage to the water main. One element of the repair work involved reconnecting the flexible polymer pipe to the end of the water main and installing a new valve at that location. Duffy entrusted this work to its subcontractor, SSEL.

18. Duffy and SSEL duly carried out the works of repair and reconnection during February 2000. The reconnection of the water main to the flexible polymer pipe involved five separate elements as follows:

    (i) A Viking Johnson maxi-fit coupling was attached to the four inch cast iron water main.

    (ii) At the other end of the coupling a four inch to three inch reducer was fixed.

    (iii) A three inch metal valve was attached to that reducer which could be used to turn the water on and off.

    (iv) The metal valve was in turn attached to a three inch to two inch reducer.

    (v) That reducer was attached to the flexible polymer pipe conveying water to the rest of the site.

19. After the reconnection had been made the temporary water supply to the site was resumed and was used without mishap until Easter. On Thursday 20^th April 2000, as part of the shut-down for the Easter long weekend, Mace instructed Duffy to close the valve on the connection assembly at the end of the water main. Duffy duly did so. At the end of that day the various contractors departed for the Easter holiday. Unfortunately, during the Easter weekend the connection at the end of the water main failed and a large quantity of water escaped. This caused substantial damage both within and outside the Tate Gallery.

20. In August 2000, solicitors acting for the trustees and for the insurers under policy CR954980140 intimated a claim against Duffy for the loss and damage caused by the escape of water. This claim was not resolved by correspondence, since Duffy denied that it had any responsibility for the incident. Duffy denied that it had been negligent or in breach of contract and asserted that other parties were responsible for the incident. Duffy also asserted that it had a co-insurance defence on the basis that both the trustees and Duffy were co-insured under policy CR954980140 in respect of the loss and damage which had occurred.

21. The solicitors for both parties set out their cases very fully in pre-action correspondence, but were unable to achieve a resolution. In those circumstances, the trustees commenced the present proceedings.
    Part 3. The Present Proceedings

22. By a claim form issued on 19^th April 2006, the trustees claimed against Duffy and SSEL damages for breach of contract and negligence, in respect of the disruption and damage which had been caused by the escape of water. The loss and damage was set out in a schedule to the particulars of claim comprising six columns. The first two columns identify the various elements of the works which suffered damage or disruption as a result of water ingress. Column four sets out the cost of damage to the development. Column five sets out the increased costs of constructing the development as a consequence of the water damage. The losses set out in column four total £4,181,892. The losses set out in column five total £831,202. The total damages claimed are £5,013,094.

23. It is no secret that the trustees have been indemnified by insurers under the policy in respect of the losses set out in that schedule. In respect of the losses listed in column four, the trustees have been indemnified pursuant to section one of the policy. In respect of the losses listed in column five, the trustees have been indemnified pursuant to section two of the policy. Thus it can be seen that the present action is a subrogated claim brought by insurers.

24. On 4^th July 2006, Duffy served its defence disputing liability on a number of grounds. Two of those grounds, namely the contract defence and the co-insurance defence, should be briefly summarised. The contract defence runs as follows. The trustees' obligation to insure under clause 14.4 of the trade contract protects Duffy against liabilities which would otherwise attach under clauses 2.1, 2.2, 2.3 and 14.1 in the event that any specified peril causes damage. Thus clause 14.4 exempts Duffy from liability for a substantial part of the trustees' present claim. The co-insurance defence is based upon the rule of law that where parties are jointly insured against particular damage, one party cannot sue the other in respect of that damage. In the present case, both the trustees and Duffy were insured against the specified perils set out in Memorandum 15 to Section 1 of Policy CR954980140. Therefore, it is said, the trustees cannot claim against Duffy in respect of those matters. If Duffy is wholly successful on either the contract defence or the co-insurance defence, this would defeat all of the damages claimed in column four of the trustees' schedule. That amounts to some 83 per cent of the total claim in this action.

25. SSEL also served a defence disputing liability on a number of grounds, including co-insurance. SSEL is a company in liquidation, with whom the trustees settled at an early stage. Therefore, SSEL has now dropped out of the picture, save that certain assertions contained in SSEL's defence have been adopted by the trustees as against Duffy.

26. On 22^nd August 2006 this action was transferred to the Technology and Construction Court. At a case management conference held on 3^rd November 2006, Duffy proposed that its contract defence and its co-insurance defence should be the subject of a preliminary issue. After some debate at the case management conference, both parties agreed that the trial of a preliminary issue would be a cost-effective method of progressing this litigation, provided that the hearing was of limited length and that no oral evidence was required. I therefore directed that the preliminary issue should proceed on the basis of the pleaded facts.

27. On 24^th November 2006 the trustees (as permitted by the directions order of 3^rd November) served an amended particulars of claim. Paragraph 10 of the amended particulars of claim sets out clearly and helpfully the mechanism by which the trustees allege that the connection failed. In essence, the trustees' case is that, owing to (a) fluctuating mains water pressure, and (b) lack of external restraint, the Viking Johnson coupling slid away from the water main, thus enabling water to escape. The coupling may have moved so far that it was completely detached from the water main. Alternatively, the water main may have remained within the mouth of the coupling but at a point where water could escape freely. The amended particulars of claim also set out more fully the allegations of breach against Duffy. The trustees allege that it was Duffy's responsibility to provide restraint for the coupling and that numerous warning notices alerted, or should have alerted, Duffy to that necessity. Accordingly, it is alleged that Duffy was seriously at fault in this regard.

28. Following service of the amended particulars of claim, counsel for both parties discussed the precise wording of the preliminary issue to be tried. They agreed to divide the issue into separate questions as follows.

    "1. Specified Perils:

    "(A) Whether, on the facts pleaded by Tate in the Amended Particulars of Claim, the damage in respect of which the claim is made was caused by bursting or overflowing of water tanks, apparatus or pipes within the meaning of clause 14.4 and Appendix 1 Part J of the Contract between Tate and Duffy.

    "(B) Whether, on the facts pleaded by Tate in the Amended Particulars of Claim and the assumed facts identified in Annex A, the damage in respect of which the claim is made was caused by flood within the meaning of clause 14.4 and Appendix 1 Part J of the Contract between Tate and Duffy.

    "2. Whether, if what occurred was a Specified Peril because of Tate's obligation to insure under clause 14.4 of the Contract between Tate and Duffy, Duffy is not liable for:

    "(A) loss and damage to 'the Works' (as defined in Appendix 1 Part A of the Contract);

    "(B) loss and damage to the rest of 'the Project' (as defined in Appendix 1 Part A of the Contract) apart from the Works;

    "(C) increased costs of the Project consequent upon loss and damage to the Works;

    "(D) increased costs of the Project consequent upon loss and damage to the Project apart from loss and damage to the Works.

    "3. Would the answers to 2 above, or any of them, be different when account is taken of the actual provisions of Policy No.CR954980140?

    "4. Would the answers under 2 or 3 above, or any of them, be different if Duffy was in breach of clause 14.5 of the Contract?

    "5. Would the answers under 2 or 3 above, or any of them, be different if Duffy was in breach of General Condition 4 of Policy No.CR954980140?"

29. Having agreed the questions, counsel then went on to discuss the answers. They agreed the answers to three of those questions. Counsel are agreed that the answers to questions 2(A), 2(C) and 2(D) are as follows.

    "2(A). Duffy not liable.

    "2(C). Not a defence for Duffy.

    "2(D). Not a defence for Duffy.

    Thus the surviving questions which this court is required to answer are 1(A), 1(B), 2(B), 3, 4 and 5.

30. It is convenient to treat these questions as six separate preliminary issues. For the purpose of issue 1(B), the court is asked to assume the following facts.

    "The water that escaped from the pipe was a large quantity. It spread over a significant part of the site area. It filled a large and deep hole that Duffy had dug in the external area. A ramp to the side of the building was totally submerged. Water entered the basement of the Gallery, where M&E plant was housed, via stairways and vents and filled it to a depth of approximately 1.4 metres."

31. The trial of the six preliminary issues commenced on Monday of this week, namely 12^th February 2007, and the argument has taken one and a half days. Mr. Andrew Bartlett QC and Mr. Julian Field represent the trustees. Mr. Richard Wilmot-Smith QC and Mr. Karim Ghaly represent Duffy. Counsel have furnished to me the actual Viking Johnson coupling which was at the scene of the mishap, and that sits on the bench before me. Counsel on both sides have delivered extremely helpful skeleton arguments, as well as clear and detailed oral submissions. I am grateful to all counsel for their assistance. With the benefit of counsel's submissions, I must now tackle the preliminary issues in the order in which they have been formulated.
    Part 4. Issues 1(A) and 1(B)

32. Mr. Bartlett, on behalf of the trustees, contends that the answer to both issue 1(A) and 1(B) is No. Mr. Wilmot-Smith, on behalf of Duffy, contends that the answer to both issues is Yes. In relation to these issues, both counsel have drawn attention to four previous decisions concerning the meaning of "flood" or "burst", and have made detailed submissions concerning their effect. I shall therefore begin by reviewing those authorities.

33. In Young v. Sun Alliance & London Insurance Ltd. [1976] 2 Lloyds Rep. 189, the plaintiff insured his house under a policy issued by the defendants. Under paragraph 8 the policy covered loss, destruction or damage from "storm, tempest or flood". Under paragraph 9 the policy covered "escape of water from or frost damage to any water, drainage or heating installation." After the plaintiff and his family had lived there for some years, water ingress occurred to the lower lavatory on the ground floor of the house. Ineffective remedial works were carried out and the problem recurred. Water accumulated in the room to a depth of three inches. In the end, it was discovered that there was a natural source of water beneath the floor and the problem was resolved by the installation of a pump. The plaintiff sought to recover the cost of remedial works from his insurers. Both the county court judge and the Court of Appeal rejected the plaintiff's claim. In the Court of Appeal, Shaw LJ set out his conclusions as follows at p.191:

    "But on further consideration it seems apparent that what the policy was intending to cover, whatever may be the colloquial use of the word 'flood' in common parlance, were three forms of natural phenomena which were related not only by the fact that they were natural but also that they were unusual manifestations, certainly of those phenomena: that is to say, 'storm' meant rain accompanied by strong wind; 'tempest' denoted an even more violent storm; and 'flood' was not something which came about by seepage or by trickling or dripping from some natural source, but involved 'a large movement, an irruption of water', as one of the definitions in the Oxford Dictionary puts it. The slow movement of water, which can often be detected so that the loss threatened can be limited, is very different from the sudden onset of water where nothing effective can be done to prevent the loss, for it happens too quickly.

    "It is because the word 'flood' occurs in the context it does, that I have come to the conclusion that one must go back to first impressions, namely, that it is used there in the limited rather than the wider sense; that it means something which is a natural phenomenon which has some element of violence, suddenness or largeness about it.

    Lawton LJ reasoned as follows at p.191:

    "It is not without relevance that par.9, the next paragraph in the policy, refers to the 'Escape of water from or frost damage to any water, drainage or heating installation'. So 'flood' is something different for the purposes of this policy from 'an escape of water'.

    "I agree with Lord Justice Shaw that the essence of 'flood' in ordinary English is some abnormal, violent situation. It may not necessarily have to be sudden, but it does, in my judgment, have to be violent and abnormal. This seepage of water through a rise in the water level was not violent, and it was not all that abnormal; it was the sort of incident which householders sometimes have to suffer as a result of 'rising damp'. I, too, would dismiss the appeal."

    Cairns LJ reasoned as follows at 192:

    "That it could be called a flooded floor, that an ordinary man or an ordinary housewife would say, 'The water is flooding my floor', I have no doubt. But we come back to the question: Is it a flood? Is it a flood in a clause which refers to 'storm and tempest'? – which I think contributes to giving a colour to the meaning of it.

    "I think it is very largely a question of degree. Mr. Day made it the main part of his concise argument before us that a flood involved a large quantity of water. That seems to me to be right. I do not think that water 3 in. deep in a room 6 ft. by 4 ft. would be regarded by any normal person as a flood. Therefore, I agree with my brethren that the appeal fails."

34. In Computer & Systems Engineering plc v. John Lelliott (Ilford) Limited [1990] 54 BLR 1, Case was the employer, Lelliott was the main contractor and Stoddart was the subcontractor. An employee of Stoddart dropped a purlin which sheared through a pipe. As a result, 1,600 gallons of water were discharged and caused damage to Case's property. The judge held that this incident was neither a flood nor a bursting of pipes or apparatus. Consequently, it was not one of the specified perils in the JCT standard form of building contract, 1980 edition. The Court of Appeal upheld that decision. Beldam LJ gave the leading judgment, with which Taylor LJ and Purchas LJ agreed. At pp.9-10 Beldam LJ said this:

    "In the present case the words 'storm, tempest and flood', are followed by "bursting or overflowing of water tanks, apparatus or pipes'. This express reference to risks associated with and emanating from an installation used for the collection, storage and distribution of water, generally located in premises, reinforces the restrictive meaning to be given to the word 'flood', for if inundation from any source or cause was encompassed by the word 'flood', no content would remain for the words which follow. As Lord Keith remarked, there have been many cases in which flooding of premises and damage originating from a natural downpour have been contributed to by a blockage of drains, downpipes or culverts due to fault on the part of the contractor. Moreover in my view since the risks associated with water tanks, apparatus or pipes are expressly confined to bursting or overflowing, any flooding of the premises from water emanating from such an installation was intended to be confined to an occurrence of that nature.

    "In the context of this contract 'flood', in my view, imports the invasion of property, which is at the employer's risk, by a large volume of water caused by a rapid accumulation or sudden release of water from an external source, usually but not necessarily confined to the result of a natural phenomenon such as a storm, tempest or downpour. I conclude that the effect caused by Mr. Chase was not a flood because neither in extent or origin was it within that meaning.

    "It has been argued that the consequences of the sub-contractor's actions in this case amounted to the bursting of pipes or apparatus. Mr. Jones has argued that 'bursting of pipes' should be given a wide rather than a narrow meaning and he has criticised the judge for adopting the submission of the employers that the word in the context was used intransitively. As he says, it is possible for a person to burst a pipe or, for example, a balloon by puncturing it from the outside and if the contents are under pressure such an event might properly be described as 'a burst'. However that may be, I have no doubt that in this context the bursting of tanks, apparatus or pipes is confined to the rupture of tank, apparatus or pipe from within typically caused by the exertion of forces, such as expansion or pressure within the vessel or pipe itself and I would reject the meaning of 'bursting of pipes' so expanded as to cover the event caused by the negligence of Mr. Chase in this case."

35. MW Wilson (Lace) Ltd. v. Eagle Star Insurance Co. Ltd. 1993 SLT 938 is a decision of the Inner House of the Court of Session. The pursuers employed the contractors to carry out building works at their factory. An employee of the contractors placed a bung on the open end of a pipe in the steam heating system. Owing to a fault in a time switch, the boiler started to operate in the middle of the night. Steam built up in the heating system and blew the bung off the end of the pipe. The escaping steam condensed and dropped onto machinery causing water damage. The pursuers were insured against "bursting or overflowing of water pipes, water apparatus or water tanks." The Inner House held that the incident did not fall within that cover and therefore the insurers were not liable. At p.943 Lord Ross, the Lord Justice Clerk, said this:

    "Counsel maintained that what occurred here could properly be regarded as a bursting of water pipes or water apparatus. He referred to the definition in the Shorter Oxford English Dictionary of 'burst'. The first meaning given is: 'To break suddenly, snap, crack – To break suddenly when in a state of tension or expansion, to fly asunder or in pieces.' He founded however on a subsequent definition which is there given as: 'To issue forth suddenly and copiously by breaking an enclosure or the like.' He maintained that when the bung was blown out of the open end of the pipe the steam issued forth suddenly, and could properly be described as breaking out of its enclosed position.

    I am not persuaded that this approach is a sound one. In the first place when the paragraph refers to bursting of water pipes or water apparatus, I regard that as a clear reference to the bursting of water in its liquid state. But quite apart from that I do not consider that what occurred here amounted to a bursting of a water pipe or water apparatus. What happened on the occasion in question was not any breaking or bursting of a pipe or part of the apparatus but the blowing out of a plastic bung. Moreover what issued forth when the bung was blown out was steam and not water in a liquid state."

    Lord McCluskey said this at p.944:

    "The purpose of inserting the bung was apparently to stop foreign matter from entering the open pipe or water from dripping out from it. The plastic bung was in no sense a part of the pipe or the system as designed; it was a temporary stopper inserted into a temporary break in the system. Overnight the boiler was accidentally switched on and the resultant steam pressure in the pipe forced the plastic bung to pop out."

    Lord McCluskey discussed the meaning of "bursting" at p.946. He said:

    "In ordinary parlance when a thing bursts -- whether it be a balloon, a water pipe or an ill fitting garment – it suffers damage. A burst pipe is a classic example; it is the pipe that bursts and the contents escape. But if, for example, the cork shoots out of a bottle of champagne it would be a bizarre use of language to say that the bottle had 'burst'. Equally, if one blew up a balloon, then held it by the neck before suddenly releasing it and allowing a sudden noisy de-inflation, it would not occur to the ordinary person to say that the balloon had 'burst'; indeed, one could show that it had not burst by repeating the trick many times. To phrase it more in line with additional perils No.10, there would have been no 'bursting' of the balloon. Of course, if the contents of a bottle or of a balloon or of a classroom suddenly issue forth it is usual to speak of the cork or of the champagne or of the air or of the pupils 'bursting out'; but that is a metaphor; and in any event it is not a bursting of the bottle, the balloon or the classroom. In my opinion, even if the equipment could properly be described as water apparatus or water pipes there was no bursting thereof when the temporary bung was expelled and the steam began escaping."

    Lord Kirkwood agreed with the judgment of Lord Ross. At p.948 Lord Kirkwood said this:

    "I cannot regard the blowing out of the bung by the steam, once the heating system was turned on, as constituting the 'bursting' either of the pipe in question or of the apparatus viewed as a whole. This was not a case where the integrity of the heating system had suddenly and unexpectedly been breached by the failure of a part of the system which was designed to contain steam passing through it under pressure."

36. In Rohan Investments Ltd. v. Cunningham, Court of Appeal transcript 20^th January 1998, while the plaintiff was abroad heavy rain fell and accumulated on the roof of his house. That water made its way into the house and caused damage. The plaintiff was insured under para.3 of his policy against "storm, tempest or flood" and under para.4 of his policy against "escape of water from … fixed water tanks, apparatus or pipes". The county court judge held that the ingress of water into the plaintiff's house constituted a "flood" within the meaning of para.3. The Court of Appeal dismissed the insurers' appeal against that decision. Robert Walker LJ reviewed the Court of Appeal's earlier decisions on the meaning of "flood". At p.5 of the transcript he said this:

    "I accept the importance mentioned by Lord Justice Beldam of achieving a measure of uniformity in the construction of standard words describing a peril, and the view of Lord Justice Beldam as to the meaning of flood, in which the other members of the court concurred, gives valuable guidance as to its scope. Nevertheless, it is not to be construed as if it were a statutory definition in an Act of Parliament.

    I respectfully doubt whether, by referring to an external source, Lord Justice Beldam intended to exclude in all possible circumstances any accumulation of water on the roof or otherwise on the exterior of the insured premises.

    "It is to be noted that the facts in both Young's case and the Computer & Systems case were fairly unusual. Nor, it seems to me, can Lord Justice Beldam have intended to lay down any precise test for a large volume of water or for its rapid accumulation. It must be, as Lord Justice Cairns said in Young's case, very largely a question of degree and the size and character of the insured premises may have to be considered.

    "I think the Judge was entitled to conclude that the build-up of 4 inches of rain on the roof during a period of about a fortnight from 15^th January 1995, the date of the last inspection by the Chief's handyman, was sufficiently rapid to be abnormal. I think the Judge was also entitled to infer from the extent of the damage caused that a relatively large volume of water must have found its way into the interior of the building. Its ingress must have been more than the slow seepage or percolation with which this court was concerned in Young's case. The precise volume of water that got in cannot in my view be decisive or even particularly important, but simple arithmetic indicates that a mere 1centimetre of rain on a flat roof 10 metres square amounts to 1 million cubic centimetres, which is 1,000 litres or about 220 imperial gallons. That, it seems to me, is more than a sprinkling.

    "The Judge was hampered in his findings by the absence of satisfactory evidence from either side as to exactly how the ingress of water occurred. He described the only available report from a

    Mr. Chambers, a roofing contractor, as superficial and inadequate. Had he had more expert evidence before him, the Judge might have been able to make more detailed findings but in my judgment it was open to him to make the findings that he did, and these are not really challenged, except perhaps for his implicit finding of a rapid accumulation, which I have dealt with. I consider that the Judge did, on those findings, rightly conclude that the damage was caused by a flood."

    Auld LJ agreed with the judgment of Robert Walker LJ and said this at p.6 of the judgment:

    "Here the flood is the escape of water, as the Judge found, from the roof into the property, regardless of the fact and cause of the previous accumulation on the roof giving rise to it. Looked at in that way, it seems to me confusing to require of that direct cause of damage various characteristics appropriate to climatic and widespread events such as storms and tempests. Flooding may or may not result from such weather extremes. It may result from prolonged and steady rain and steady slow build-up of water eventually damaging the property. It is nonetheless capable of causing severe water damage against which a household insurance of this sort is, I believe, intended to provide cover.

    "As to the volume of water, it is the water that enters and damages the property that is important, not the area or depth of flooding outside that counts. And, as Lord Justice Cairns observed in Young, whether there is a sufficiently large quantity of water to constitute a flood for the purpose is largely a question of degree. I add that that also depends on the size of the property affected relative to the amount of water.

    "As to the naturalness of the phenomenon, I share Lord Justice Beldam's caution in Computer Systems in so confining the origin of the accumulation giving rise to a flood causing damage to property.

    I doubt the relevance of the precise cause of that accumulation, notwithstanding the association of the word 'flood' with storm and tempest common in such policy conditions. A flood is no less a flood, whatever its originating cause."

37. I have carefully considered the whole of the judgments in those four cases, not merely the passages quoted above. The three Court of Appeal decisions are binding on this court. The decision of the Inner House of the Court of Session, although not binding, is of persuasive authority. Having reviewed those authorities, I derive the following four propositions:

    (i) Earlier judicial decisions on the meaning of words such as "flood" and "burst" constitute valuable and helpful guidance. Nevertheless, this guidance must be read having regard to (a) the context in which those words appeared and (b) the facts giving rise to dispute about their meaning in the earlier cases. The judgments in the four cases cited do not lay down rules of law as to the meaning of the words "flood" and "burst" in every insurance policy or construction contract.

    (ii) In determining whether the unwelcome arrival of water upon property constitutes a "flood", it is relevant to consider (a) whether the source of the water was natural; (b) whether the source of the water was external or internal; (c) the quantity of water; (d) the manner of its arrival; (e) the area and character of the property upon which the water was deposited; (f) whether the arrival of that water was an abnormal event. Ultimately, it is a question of degree whether any given accumulation of water constitutes a flood.

    (iii) In determining whether a pipe or apparatus "burst", it is relevant to consider (a) whether the incident occurred because of internal pressure rather than external intervention; (b) whether the integrity of the pipe or apparatus was broken; (c) whether the incident was sudden and violent.

    (iv) In construing terms such as "flood" or "burst", in an insurance policy or a related contract, the court must endeavour to do so in a manner which gives separate content to each term or phrase used by the draftsman.

38. With the benefit of the guidance and illumination of the earlier decisions, as well as counsel's submissions, I must now address issues 1(A) and 1(B). Mr. Bartlett submits that two pipes joined by a coupling collectively constitute a pipe, not apparatus. In my judgment, that is correct. Therefore the water main, the Viking Johnson coupling and the four to three inch reducer pipe collectively constituted a "pipe" within the meaning of para.(c) of Part J of Appendix 1 to the trade contract and also within the meaning of Memorandum 15 to Section One of the policy. When the Viking Johnson coupling slid along the water main, it did so because of internal water pressure and lack of external restraint. As the coupling moved horizontally an aperture was formed through which large quantities of water escaped. Thus the integrity of the pipe (a composite of water main, coupling and reducer pipe) was broken. In my judgment this constituted "bursting".

39. It is quite true that the process whereby the coupling moved away from the water main may have been a gradual one. Nevertheless, there must have been a specific moment when the integrity was broken and water started to escape. The incident may not have been accompanied by the same degree of violence which usually accompanies a "burst". That is a relevant consideration, but in my view it does not change the character of the event. A burst tyre may be a violent event, a burst appendix may not be. The crucial features in the present case are (a) the build up of internal pressure and (b) the breaking of the composite unit which constituted the pipe. Mr. Bartlett points out that the elements of that composite unit could all have been put together again and they would have functioned properly if restraint had been provided. In this respect the incident was unlike the bursting of a balloon. I agree with Mr. Bartlett that the individual components, namely water main, coupling and reducer pipe, were not broken. What happened was that, because of internal water pressure, the composite unit was separated into its component parts. That is a sufficient degree of breakage to bring the incident within the concept of "bursting".

40. I now come to the question of flood. Not every burst of water pipes generates a flood. These are separate terms within the definition of "specified perils", to which a separate meaning must be ascribed. Nevertheless, the two terms are not mutually exclusive. Whether or not the water which emerges from a burst pipe constitutes a flood must be determined by reference to all the circumstances of the case. In the present case the water which emerged from the burst pipe covered a large area both within and outside the Tate Gallery building. The depth of water in the basement of the gallery was 1.4 metres. That was more than sufficient depth to swim in. The inundation of the Tate Gallery in this case was a far cry from the three inches of water standing on the floor of a small room in Young v. Sun Alliance. The inundation in this case had at least some features of externality. The water came from outside the Tate Gallery and into the building. This process was analogous to the ingress of water in Rohan.

41. The volume of water in the present case was very substantial. It filled a large and deep hole in the external area. A ramp at the side of the building was totally submerged. A very large quantity of water accumulated within the Tate Gallery. Mr. Bartlett during argument very fairly accepted that, if quantity alone was the determining factor, then the water in this case would constitute a flood. In my judgment, quantity alone is not the sole or determining factor. It is, however, one highly relevant consideration. What I must do is to look at all the features of this case. I bear in mind in favour of the trustees that the water did not come from a natural event such as a rainstorm. I bear in mind that the source of the water, although outside the building, was within the boundaries of the site and Duffy's works. I bear in mind the huge volume of water and the manner of its arrival. This was certainly an abnormal event. I also bear in mind the area and character of the property upon which the water was deposited. I also bear in mind all the circumstances as pleaded by the trustees and as set out in the assumed facts. Taking all these matters into consideration, I am quite satisfied that what occurred at the Tate Gallery over the Easter weekend of April 2000 was a flood.

42. Mr. Bartlett has developed a separate argument to the effect that, even if there was a flood, that was not the effective cause of the damage. The effective cause was Duffy's error in leaving the pipe joint unrestrained, as pleaded in the amended particulars of claim. In support of this argument, Mr. Bartlett relies upon the reasoning of Viscount Cave in PUKSamuel & Co. Ltd. v. Dumas [1924] AC 431 at pp.446-7, and upon the judgment of Parker LJ (with whom Steven Brown and Ackner LJJ agreed) in Commonwealth Smelting Ltd. v. Guardian Royal Exchange Assurance Ltd. [1986] 1 Lloyd's Rep.121 at p.126. In the first case, Viscount Cave held that the proximate cause of the sinking of a vessel was the act of scuttling rather than the incursion of water which resulted from the scuttling. In the second case, Parker LJ held that the proximate cause of damage to a boiler house was the failure of an impeller, not the resultant explosion.

43. When one examines the facts of those two cases, the decisions on causation are unsurprising. As Hart & Honoré point out in Causation in the Law (Oxford University Press, 2^nd ed. 1985), judicial analysis of causation tends to coincide with common sense. In the present case, it does not make sense to say that the proximate cause or effective cause of the water damage was Duffy's failure to restrain a coupling installed in February 2000. In my judgment, the proximate or effective cause of the water damage was the bursting of the pipe and the flood which occurred in April 2000. This analysis is supported by the reasoning of the House of Lords in Scottish Special Housing Association v. Wimpey Construction (UK) Ltd. [1986] 1 WLR 995 at pp.998-999.

44. Let me now draw the threads together. For the reasons set out above, my answer to issues 1(A) and 1(B) is Yes.
    Part 5. Issues 2(B) and 3

45. Issues 2(B) and 3 are linked. Both counsel have stated that the answers to these two questions may well be academic. Nevertheless, they would like the court's decision on the issues in case the matter should become relevant.

46. The real dispute between the parties underlying issues 2(B) and 3 concerns the interpretation of the first sentence of clause 14.4 of the trade contract. Mr. Bartlett contends that the subject matter of this sentence is the external works which Duffy was undertaking. Mr. Wilmot-Smith contends that the subject matter of this sentence is the construction project as a whole. The first sentence of clause 14.4 identifies four things which the trustees must insure against the specified perils. They are, one, certain of the existing structures to be retained and incorporated in the works; two, the works; three, all work executed or in the course of execution; four, any goods and materials which have become the property of the client and which are located in the United Kingdom or Eire. I shall refer to these items as Item 1, Item 2, Item 3 and Item 4 respectively.

47. The phrase "the works" appears both in Item 1 and Item 2. This phrase is defined in Clause 1.2 of the contract and Appendix 1 as meaning "the design (as required) procure, supply and installation of external hard landscaping works." In other words, this refers specifically to Duffy's works. On the other hand, the phrase "the project" is defined as meaning the entire development project. It can be seen from the recitals to the contract that the draftsman is careful to us those two phrases in accordance with the definitions given in Appendix 1. Indeed, on looking through the contract I can see many places where the draftsman has used the phrase "the works" precisely in accordance with the definition given in Appendix 1. All of these considerations lead me to the provisional conclusion that "the works" in the first sentence of clause 14.1 is a reference to Duffy's own works; it is not a reference to the entirety of the project.

48. Now let me return to the four items to be insured by the trustees. Item 1 must be a reference to existing structures which were to be incorporated in Duffy's works. An example of such a structure would be the Millais statue and its base, which Duffy was required to relocate. Item 2 is Duffy's external landscaping works. Item 3 must be a reference to work executed or in the course of execution by Duffy. Item 4 must be a reference to goods and materials acquired by Duffy for the purpose of its landscaping works.

49. Mr. Wilmot-Smith urges that this court should take a different view of the first sentence of clause 14.4 because this clause is linked with Policy CR954980140. That policy provides a wider ambit of cover. Section One of the policy insures the entirety of the project works against the specified perils for the benefit of each trade contractor. Mr. Wilmot-Smith points out that the insurance policy, in conjunction with the co-insurance doctrine developed by the courts, exempts Duffy from liability for damage to the whole of the project works. Mr. Wilmot-Smith submits that it would be absurd if clause 14.4 only exempted Duffy from liability for damage caused to one part of the project.

50. In my judgment it is an overstatement to say that it is absurd for clause 14.4 to have such an effect. It is perhaps surprising that clause 14.4 has a narrower ambit than the insurance policy. On the other hand, Duffy is protected by the doctrine of co-insurance. The parties were perfectly free to limit the operation of clause 14.4 in the way that they have.

51. In appropriate cases the court will, of course, override the literal meaning of a contractual provision in order to give effect to what the parties clearly intended: see Investors' Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896 at 912-913 per Lord Hoffmann. Nevertheless, the courts must not be over-enthusiastic in this regard. In Skanska Rasheigh Weatherfoil Ltd. v. Somerfield Stores Ltd. [2006] EWCA Civ 1732 Neuberger LJ (with whom Richards and Leveson LJJ agreed) said this:

    "21. As already mentioned, the interpretation of the provision in the commercial contract is not to be assessed purely by reference to the words the parties have used within the four corners of the contract, but must be construed also by reference to the factual circumstances of commercial commonsense. However, it seems to me right to emphasise that the surrounding circumstances and commercial common sense do not represent a licence to the court to re-write a contract merely because its terms seem somewhat unexpected, a little unreasonable, or not commercially very wise. The contract will contain the words the parties have chosen to use in order to identify their contractual rights and obligations. At least between them, they have control over the words they use and what they agree, and in that respect the words of the written contract are different from the surrounding circumstances or commercial commonsense which the parties cannot control, at least to the same extent.

    "22. Particularly in these circumstances, it seems to me that the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood. Of course, in many cases, the commercial common sense of a particular interpretation, either because of the peculiar circumstances of the case or because of more general considerations, is clear. Furthermore, sometimes it is plainly justified to depart from the primary meaning of words and given them what might, on the face of it, appear to be a strained meaning, for instance where the primary meaning of the words leads to a plainly ridiculous or unreasonable result."

52. In the present case, policy CR954980140 is specifically referred to in Appendix 1 Part J. The ambit of that policy is undoubtedly one of the circumstances which I must bear in mind when interpreting clause 14. On the other hand, the cross-reference to Appendix 1 Part J in clause 14.4 is purely for the purpose of defining "specified perils". Neither as a matter of construction nor as an exercise of judicial rewriting is it appropriate for this court to interpret "the works" in the first sentence of clause 14.4 as meaning "the project". Furthermore, if clause 14.4 is given the interpretation for which Mr. Bartlett contends, it can be seen that clause 14.3 serves a useful purpose. The trade contractor is required under that clause to take out separate insurance cover against his possible liability for damage caused to the rest of the project outside his own works.

53. Let me now draw the threads together. The provisional conclusion which I indicated above is confirmed. Clause 14.4 of the trade contract has the narrower meaning for which Mr. Bartlett contends, not the broader meaning for which Mr. Wilmot-Smith contends. Because of the negative formulation of Issue 2(B) the answer "Yes" means that Duffy is not liable by reason of clause 14.4. The answer "No" means that Duffy is liable despite clause 14.4. Accordingly, my answer to Issue 2(B) is No; my answer to Issue 3 is Yes.
    Part 6. Issues 4 and 5

54. It is the trustees' pleaded case that the Viking Johnson coupling became detached because Duffy failed to provide appropriate restraint. The need for such restraint was made crystal clear in numerous documents which accompanied or were attached to the Viking Johnson coupling. Accordingly, say the trustees, Duffy was negligent, in breach of contract and reckless. The trustees will further contend that such reckless conduct by Duffy constituted a breach of general condition 4 of the policy and clause 14.5 of the trade contract. Whether or not Duffy was in breach of those provisions is not a matter for decision at the present trial. That is a question which will turn on factual evidence. The question will also involve legal argument concerning the status of the individual employees who, it is said, were responsible for providing restraint to the coupling. For present purposes, I shall assume, without deciding, that Duffy was reckless in such a manner as to be in breach of general condition 4 of the policy and clause 14.5 of the trade contract.

55. The consequences of Duffy's assumed breach are as follows:

    (i) Duffy has failed to fulfil the condition precedent set out in general condition 5 of the policy.

    (ii) Accordingly, under general condition 5 the insurers are under no liability to Duffy to make any payment in respect of the flooding of the Tate Gallery.

    (iii) Nevertheless, pursuant to general condition 6, Duffy's breach does not affect the trustees' rights under the policy. The trustees were still entitled to claim and did successfully claim an indemnity from insurers in respect of their losses caused by the flood.

56. Issues 4 and 5 raise the question whether this state of affairs deprives Duffy of (a) its contractual defence under clause 14.4 of the trade contract, and (b) its co-insurance defence arising from the fact that the trustees and Duffy are co-insured under policy CR54980140. Mr. Bartlett contends that the answer to both issues is Yes; Mr. Wilmot-Smith contends that the answer to both issues is No.

57. Before tackling these issues, I must first review the authorities upon which counsel rely. In PUKSamuel & Co. Ltd. v. Dumas [1924] AC 431, insurance of a ship was arranged for the joint benefit of the owner and the mortgagee against perils "…of the seas, men of war, fire, enemies, pirates, rovers, thieves, jettisons, letters of mart and counter-mart, surprisals, taking at sea, arrests, restraints and detainments of all kings, princes and people of what nation, condition or quality so ever, barratry of master and mariners, and of all other perils, losses and misfortunes that have or shall come to the hurt, detriment or damage of the said goods and merchandise and ship, etc., or any part thereof." The owner scuttled the ship without any connivance by the mortgagee. The House of Lords held, amongst other matters, that the mortgagee's rights under the insurance policy were not affected by the fraud of the owner. At p.445 Viscount Cave (with whom Lord Parmoor agreed) said this:

    "It may well be that, when two persons are jointly insured and their interests are inseparably connected so that a loss or gain necessarily affects them both, the misconduct of one is sufficient to contaminate the whole insurance: Philips on Marine Insurance, vol.1 para.235. But in this case there is no difficulty in separating the issues of the mortgagee from that of the owner; and if the mortgagee should recover on the policy, the owner will not be advantaged, as the insurers will be subrogated as against him to the rights of the mortgagee."

58. In National Oilwell (UK) Ltd. v. Davy Offshore Ltd. [1993] 2 Lloyd's Rep. 582, the plaintiff suppliers of sub-sea equipment resisted a subrogated counterclaim for defects made by the defendants at the instance of their insurers on the grounds of co-insurance. In relation to the defence of co-insurance, Colman J. said this at pp.614-5:

    "For these reasons I am firmly of the view that the conclusion arrived at by Mr. Justice Lloyd in Petrofina was right: an insurer cannot exercise rights of subrogation against a co-assured under an insurance on property in which the co-assured has the benefit of cover which protects him against the very loss or damage to the insured property which forms the basis of the claim which underwriters seek to pursue by way of subrogation. The reason why the insurer cannot pursue such a claim is that to do so would be in breach of an implied term in the policy and to that extent the principles of circuity of action operate to exclude the claim."

    At p.616 Colman J. said this:

    "Accordingly, if insurers then proceeded to pay DOL in respect of such losses and purported to exercise rights of subrogation against NOW, that exercise of rights of subrogation would fall outside the scope of the term which I have held to be implied in the policy preventing the making of subrogated claims against co-assured in respect of losses covered for the benefit of that co-assured. This would not be a case of an insurer trying to use rights of subrogation to recoup a loss insured for the benefit of a co-assured. In this case the co-assured could not have claimed under the policy in respect of those losses and therefore the whole basis of the subrogation defence would have gone."

59. In State of the Netherlands v. Youell [1997] 2 Lloyd's Rep. 440 the plaintiffs, the Dutch Navy, were the purchasers of two submarines under a contract made with a Dutch shipyard. The submarines were insured with the defendants. Under the policy of insurance, both the plaintiffs and the yard were named as assured. During trials, the submarines suffered debonding and cracking of their paintwork. Underwriters denied liability on a number of grounds, one of which was that there had been wilful misconduct in applying a primer coat of excessive thickness. On a trial of preliminary issues, Rix J. held that the assureds were severally insured in respect of their own interests. This was not a policy of joint insurance as contended by underwriters. Rix J. also held that wilful misconduct of the yard would not be a defence to a claim brought by the Navy. At p.450 Rix J. cited the first passage which I have quoted from National Oilwell, and then he said this:

    "The question then arises as to the width of such an implied term. In NOW v. DOL Mr. Justice Colman held, following Viscount Cave's dictum in Samuel v. Dumas, that there is a right of subrogation by an innocent co-assured against a co-assured guilty of wilful misconduct causing the loss in respect of which the innocent co-assured has recovered under the policy because the guilty co-assured is not covered under the policy in respect of losses caused by his own wilful misconduct or fraud."

    Rix J. then cited with approval the second passage which I have quoted from National Oilwell.

60. In Hopewell Project Management Ltd. v. Ewbank Preece Ltd. [1998] 1 Lloyd's Rep. 448, this court considered obiter the juridical basis of the co-insurance defence. At p.458 the Recorder said:

    "Assume, however, that I am wrong on the insurance point and that the defendant should be viewed as co-insured with the plaintiffs and the various contractors and sub-contractors on site. On that hypothesis, it would be necessary to consider the point which Mr. Justice Lloyd left open in Petrofina v. Magnaload. In my view it would be nonsensical if those parties who were jointly insured under the CAR policy could make claims against one another in respect of damage to the contract works. Such a result could not possibly have been intended by those parties. I have little doubt that they would have said so to an officious bystander. If, therefore, I were wrong on the co-insurance point,

    I would have held that there was an implied term as pleaded in par.22(16) of the re-amended defence."

61. In Co-operative Retail Services Ltd. v. Taylor Young Partnership Ltd. [2002] 1 WLR 1419, both the Court of Appeal and the House of Lords (albeit obiter) rejected circuity of action as the basis of the co-insurance defence. The better view was that the co-insurance defence rests upon the implication of a term. At para.56 of his speech, Lord Hope cited with approval the passage which I have quoted from Hopewell.

62. The conclusions which I draw from this review of authority are as follows:

    (i) The law in relation to co-insurance was correctly stated by Colman J. and Rix J. in the passages which I have quoted, except that Colman J's reference to circuity of action is no longer correct.

    (ii) It is an implied term in contracts such as the present that one party will not sue the other in respect of loss or damage for which they are both co-insured.

    (iii) That implied term does not extend to a situation in which the defendant's breach of policy has (a) caused the policy to be avoided vis a vis himself, or (b) made it impermissible for the defendant to claim under the policy in respect of the loss which is in issue.

63. Now let me apply these principles to the present case. On the assumed facts, Duffy was in breach of clause 14.5 of the trade contract and general condition 4 of the policy. Therefore, Duffy had no right to claim against insurers its own losses flowing from the flood (for example, additional landscaping costs). The operation of clause 14.4 is expressly stated to be subject to clause 14.5 which, in the present case, has not been complied with. In the circumstances, Duffy has no defence (a) based on clause 14.4, or (b) based on the fact of co-insurance to the trustees' claim in respect of the losses caused by the flood.

64. It is quite correct, as Mr. Wilmot-Smith submits, that the trustees have been indemnified by insurers. So in that sense the trustees have not suffered financial loss. But that does not render irrelevant Duffy's assumed breach of clause 14.5. On general principles, the fact that a claimant has been indemnified by insurers must be ignored when insurers bring a subrogated claim in the name of the insured against the tortfeasor or contract breaker who has caused the loss. If that tortfeasor or contract breaker is named as an insured but has lost the right to claim under the policy, then he does not have a co-insurance defence. For the above reasons, my answers to both Issue 4 and Issue 5 are Yes.
    Part 7. Conclusion

65. For the reasons set out in Parts 4, 5 and 6 of this judgment, my answers to the questions posed by the six preliminary issues are as follows. Issue 1(A) Yes; Issue 1(B) Yes; Issue 2(B) No; Issue 3 Yes; Issue 4 Yes; Issue 5 Yes. I request that the parties draw up an order which sets out the six preliminary issues and the answers given by this court.