Balfour Beatty v Gilcomston (2006)

Background

Balfour Beatty had entered into contract with MacFish Ltd (the Employer) for the construction of a cold store at a site adjacent to the Employer’s existing premises. The contract was the NEC2 Engineering and Construction Contract (November 1995) Option A: priced contract with activity schedule.

Balfour Beatty subcontracted the cladding and structural steel to Gilcomston (the first defenders and to Turner (the second defenders) for insulation work. The subcontracts were based on the NEC2 Engineering and Construction Subcontract core clauses reflecting similar clauses in the main contract.

The cold store building was at an advanced stage when a fire broke out in the insulation panels following welding operations by Gilcomston. Turner had warned Balfour Beatty of the risk of fire to the insulating panels and had made statements to this effect in its risk assessments. No fire blankets, extinguishers or fire watch was provided. The building was destroyed in the fire and had to be rebuilt by Balfour Beatty at its own cost.

Balfour Beatty took the matter to adjudication claiming that they were entitled to compensation by the Employer or the Employer’s insurance. The adjudicator disagreed so Balfour were faced with the full cost of rebuilding the cold store. Subsequently, Balfour applied to the court seeking to recover costs from its two subcontractors.

The Dispute

Balfour Beatty claimed that the two subcontractors were liable under the indemnity provisions of the subcontract, namely clause 83.1 which stated:

“Each party indemnifies the other against claims, proceedings, compensation
and costs due to an event which is at his risk”

Balfour Beatty also claimed that the provisions of clause 83.2, which has the effect of reducing the indemnity where the contractor contributed to the event, was not applicable. They argued that clause 83.2 would only operate where there was two events, one at the risk of the contractor and one at the risk of the subcontractor.

Gilcomston (the first defenders) did not agree with Balfour Beatty’s interpretation of clause 83.2. They argued that Balfour had been negligent and in breach of its statutory duty to provide effective safe management of the site and that this failure contributed to the fire. Gilcomston also claimed that Turner had been negligent when moving hardboard sheets used by Gilcomston as protection. Turner’s (the second defenders) refuted claims of their own negligence and, following similar arguments to that of Gilcomston, alleged that Balfour’s negligence had contributed to the fire. Consequently, the defenders argued that any liability to indemnify should be reduced in accordance with clause 83.2.

Court decision

In deciding on the true construction of clause 83.2, the courts first examined other

core clauses in section 8 (Risks and Insurance) of the subcontract as follows:

Clause 81.1: Subcontractor’s risks – which stated that “...risks not carried by the Employer or Contractor are carried by the Subcontractor.”

Clause 82.1: Repairs – requiring the Subcontractor to promptly replace loss of and repair damage to the subcontract works, plant and materials.

Clause 84: Insurance cover – requiring the Subcontractor to provide the insurances (in joint names) as stated in the insurance table for events that are at the Subcontractor’s risk.

Clause 85: Insurance policies – requiring the Subcontractor to submit policies and certificates to the Contractor for acceptance and that any amount not recovered from an insurer is borne by the party who under the contract bears the risk for the event.

Owing to the requirement for co-insurance the court concluded that if the Subcontractor failed to indemnify the Contractor (83.1), the Contractor would be compensated by making a claim under the Subcontractor’s policy. Further, that the need to enforce the indemnity arises only when the risk is not covered by insurance. It transpired that there were no joint insurance policies in place by either Gilcomston or Turner. Infact Gilcomston had no insurance at all. Accordingly, the rule against subrogation could not apply and the indemnity provisions of clause 83.1 could be invoked by Balfour Beatty. In response, both Subcontractor’s were permitted to invoke the provisions of clause 83.2 and seek a reduction in their liability.

Citing various cases,[1] Lord Uist dismissed the argument stating that “…for an indemnity clause to have effect of indemnifying a party for the consequences of his own negligence it must contain the word “negligence” or some synonym for it.”[2] He went on to say that the notwithstanding the indemnity provided under clause 83.1 and the Subcontractor’s obligation to provide insurance, the Contractor remains liable for the risks it carries under clause 80.1. Clause 83.2 was deemed to be in accordance with the law, and fair and sensible.

Conclusions

The main points learned from this case can be summarised as:

• The obligations to carry out repairs (clause 82.1) concern only actions to be taken and have no relevance to liability
• Indemnity contributions as expressed in clause 83.2 are fair and sensible
• Negligence by an Employer/Contractor should be taken into account when assessing liability

Whilst the obligation to provide insurance against a specified risk is not the same as the liability arising from that risk, discussions around liability and insurance are often held together. Disputes about liability and insurance can be complex matters involving long drawn out and detailed arguments between several parties. This case was brought before the court almost nine years after the fire, occupied six court days and had previously been the subject of an adjudication and commercial action.

[1]North of Scotland Hydro-Electric Board v D & R Taylor [1956] SC 1, Smith v UMB Chrysler Ltd [1978] SC (HL) 1

[2] [77]