Indemnity claims – A failure to detect a defect does not prevent a claim

The English Court of Appeal have recently clarified that a negligent failure to detect a defect that later causes damage will not prevent a party claiming under an indemnity (Greenwich Millennium v Essex Services [2014] EWCA Civ 960).

Greenwich Millennium concerned the development of two sets of flats on the Greenwich Peninsula. There were a number of subcontractors involved in the projects but this case focuses around the design and installation of a boosted water system in the apartment block. The contractor, HSE, entered into a labour only subcontract with Robson; that subcontract contained an indemnity for any liability arising from the subcontract or from any act default, or negligence on the part of the sub-contractor.

During the course of construction the contractor was made aware of a flaw in the design of the water system that rendered it vulnerable to a sudden surge in water pressure. To mitigate this defect the contractor installed surge arrestors. Throughout the contract two additional valves were installed by the subcontractor; these valves blocked the required air flow to the surge arrestors, rendering the protectors ineffective. The contractor did not notice this defect when inspecting the system. After construction had been completed a surge of water burst a pipe and caused extensive flood damage to the property. The damage totalled £4.75million.

The main question in the appeal was whether the contractor could rely on the indemnity given that they had been negligent themselves in failing to detect the defect during inspection.

The Court of Appeal in a unanimous decision found that the contractor could still rely on the indemnity. In making this finding the court distinguished an older case which, on an initial reading, seemed to indicate the opposite position. The Court found that to prevent reliance on the indemnity would defeat the commercial purpose of the contract and would go against the parties intentions. The Court also highlighted the important role indemnities play in projects where there are a number of contracts and subcontracts.

This provision highlights the importance that the courts place on contractual risk allocation and reflects the view most contracting parties have in relation to indemnities.

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