The Court of Appeal handed down Judgment in this case today. The Judgment of Toulson, LJ, with which Richards LJ and Mummery LJ agreed, provides useful and important guidance concerning (a) the law on remoteness of damage in contract, (b) the simultaneous failure of multiple protection measures and (c) the difficulty of impugning a prior settlement on the grounds that it was an “unreasonable settlement”

Siemens and their insurers were represented by Watmores Solicitors and Tim Lord QC both at first instance and on appeal.

Factual Background

In 2000 a new office block was constructed in Bunhill Row in the City of London. The building was to house the new offices of the “Magic Circle” law firm, Slaughter & May. On 9 October 2001, whilst the fitting out works to the building were being completed, a basement flood occurred which resulted in extensive damage to electrical equipment and delayed Slaughter & May’s planned occupation of the building. The flood occurred after a nut and bolt connection failed on a float valve in a 180,000 litre basement water tank which supplied the building’s sprinkler system and the water tank overflowed.

The freeholder and prospective tenant (DEKA and Slaughter & May respectively) brought proceedings in the Technology and Construction Court claiming in excess of £5 million against the main contractor, Skanska. In turn, Skanska joined its mechanical and electrical sub-contractor, Haden Young, which sued its own sprinkler system sub-contractor, Siemens. Siemens finally joined in Supershield Ltd, to whom it had sub-contracted installation works in relation to the sprinkler system.

The sprinkler system water tank was supposedly constructed with a number of fail-safe devices or protective measures. The water tank itself was housed in a specially constructed tank room with a 600 mm bunded wall. There were 3 drains in the tank room, any one of which the experts agreed ought to have been able to cope with an escape of water from the tank. The tank itself was fitted with both high and low level alarms linked to the building’s central control centre and there were also moisture sensors on the tank room floor. However, an unidentified party had left rubbish or building materials on the tank room floor which caused each of the drains to become blocked when the water tank overflowed and no one responded to any of the alarms for a considerable period. Ultimately, the basement flooded when a security guard decided to open the door to the sealed tank room without first isolating the water supply.

The Proceedings

All of the Defendants right down the chain filed Defences indicating an intention to defend the claims, inter alia, on the issues of causation and remoteness of damage.

The Defendants contended that the true cause of the damage was the failure of the Claimants to keep the drains unblocked and/or to monitor the alarm. The Defendants also maintained that the loss was too remote as the number of protective measures available meant that it could not have been in the contemplation of the Defendants that a failure of the nut and bolt connection on the float valve of the water tank would lead to flood damage.

However, Siemens took the view that the pleaded Defences on causation and remoteness of damage, whilst arguable and useful in helping to procure a settlement at less than full value, were likely to fail. Siemens therefore settled the claims by the Claimants and the other parties up the chain for just under 50% of their full value. Siemens then proceeded to trial with its claim against Supershield in order to recover its outlay from Supershield.

First Instance Decision

The case was heard by Mr Justice Ramsey, the presiding Judge of the Technology and Construction Court.

At trial Ramsey J held that: -

1. Supershield had contracted to install the float arm and ball valve that later failed;
2. Supershield had, in fact, installed the float arm and ball valve;
3. As the pleaded causation and remoteness defences were not strong it had been reasonable for Siemens to settle the claims by the parties further up the chain for just under 50% of their pleaded value;
4. Siemens was entitled to a full indemnity from Supershield.

Supershield appealed to the Court of Appeal.

Court of Appeal Judgment

The Court of Appeal unanimously upheld the decision of Ramsey J and dismissed the appeal. The only substantive Judgment was handed down by Toulson LJ. Richards LJ and Mummery LJ agreed with his Judgment.

(A) – Remoteness of Damage in Contract

The starting point on remoteness is Alderson B’s classic statement in Hadley –v- Baxendale that: -
“….where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract is such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of the contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it”.

Toulson LJ states that the leading case about the degree of likelihood required in order for damage not to be regarded as too remote is Czarnikow –v- Koufos [1969] in which Lord Reid formulated the test as whether the loss was of a kind which the Defendant at the time of the contract ought to have realised was “not unlikely” to result from the breach, the words “not unlikely” denoting “a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable”. In that case Lords Morris, Pearce and Upjohn used the words “a serious possibility” and “real danger” as conveying the appropriate shade of meaning. Toulson LJ then refers to the more recent decisions of the House of Lords in the case of South Australia Asset Management Corporation –v- York Montague Ltd [1997] and Transfield Shipping Inc. –v- Mercator Shipping Inc.[2008].

In South Australia negligent surveyors had overvalued a property which was to be security for a loan and the lender’s loss was exacerbated by a fall in the market. It could not be said that downward movement of the market was unlikely, but loss from the market fall was nevertheless held not to be loss of a kind in respect of which the surveyors owned a duty to the lender. That conclusion was reached by considering the purpose of the contract and degree of responsibility which the lender was reasonably entitled to expect of the valuer.

In Transfield the late return of a vessel resulted in the owner having to re-negotiate a follow-on charter on significantly less favourable terms. Although arbitrators found that loss of such a kind was not unlikely, the House of Lords held that the damages recoverable by the owners were limited to the period of overrun and should not include any subsequent loss. Although Lord Rodger and Baroness Hale reached that conclusion on the ground that the subsequent loss was not an ordinary consequence of the breach, Lords Hoffmann and Hope took a broader approach, indicating that the question of remoteness is not simply one of probability, but of what the contracting parties must be taken to have had in mind in terms of an “assumption of responsibility” having regard to the nature and object of their business transaction.

In the most interesting part of his Judgment, Toulson LJ observes that: -

“The law on remoteness of damage in relation to claims for breach of contract is grounded on the policy that the loss recoverable by the victim should be limited to loss from which the party in breach may reasonably be taken to have assumed a responsibility to protect the victim. It follows that the question of remoteness cannot be isolated from consideration of the purpose of the contract and the scope of the contractual obligation”.

Slightly later in his Judgment Toulson LJ states that: -

“Hadley –v- Baxendale remains a standard rule but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contact breaker should ordinarily be liable to the other party resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. However, South Australia and Transfield Shipping are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties. In those two instances the effect was exclusionary; the contract breaker was held not to be liable for loss which resulted from its breach although some loss of the kind was not unlikely. But logically the same principle may have an inclusionary effect. If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances”. (emphasis added)

(B) – Simultaneous Failure of Separate Protection Measures

This aspect is dealt with at paragraphs 44 and 45 of the Judgment: -

“The distinctive feature of the present case is that the ball valve and the drains were both designed to control the flow of water involved in the operation of the sprinkler system. None of the cases cited to us had any comparable feature (i.e. simultaneous failure of separate protection measures) and, surprisingly as it may seem, Counsel were not able to find any. It is not uncommon in the case of a sophisticated engineering project (whether an aircraft, a car, a tunnel or a building) for the designer to incorporate multiple safety devices in the reasonable expectation that the risk of simultaneous failure of both or all the protection devices will be minimal. The fulfilment of that expectation will depend on those responsible for the protection devices doing as they ought. If those responsible fail to do so, and the unlikely happens, it should be no answer for one of them to say that the occurrence was unlikely, when it was that party’s responsibility to see that it did not occur. As Mr Lord (for Siemens) observed, the reason for having a number of precautionary measures is for them to serve as a mutual backup, and it would be a perverse result if the greater the number of precautionary measures, the less the legal remedy available to the victim in the case of multiple failures.

Mr Cannon (for Supershield) may be right in his submission that a failure of the connection between the ball valve and lever arm was very unlikely to result in a flood, because the probability was that the water would escape through the drains, but I do not accept that this made the loss resulting from the flood too remote to have been recoverable”.

In the view of Toulson LJ there was a “contractual duty to prevent” the flood, “even if it was unlikely”.

(C) – Reasonableness of Prior Settlement

It is implicit in Toulson LJ’s Judgment that the courts are in favour of parties attempting to settle claims and the Judgment re-emphasises observations in existing case law as to the difficulty a party will face in calling into question the “reasonableness” of a prior settlement.

That point is made forcefully in paragraph 28 of the Judgment: -

“Megarry J once described the law reports as charts of the wrecks of unsinkable cases. Because of its uncertainty and expense, prudent parties usually try to avoid litigation where possible ….The “settlement value” of a claim is ….a matter of subjective opinion, taking account of all relevant variables. Often parties may have widely different perceptions of what would be a fair settlement figure without either being unreasonable ….The issue which the Judge has to decide is not what assessment he would have made of the likely outcome of the settled litigation, but whether the settlement was within the range of what was reasonable. If he decides that it was, an appellate court will not interfere with his decision unless persuaded that he erred in principle or (which is intrinsically unlikely) that his decision was incapable of justification on any reasonable view”.


For further information about this case please contact Daniel Turner or Ron Mullins of Watmores.