Legal Updates

Commercial Law – Contractual Construction – Indemnification – Damages – Breach of Contract

The case of Scottish and Southern Energy Plc v Lerwick Engineering & Fabrication Ltd [2008] involved a dispute over a breach of contract where a fire caused damage at the pursuers’ premises. The pursuers in this case owned and operated Lerwick Power Station.

They formed a contract with the defenders for them to carry out work on their boilers. When the defenders carried out the work a fire occurred. The pursuers claimed they suffered loss and damage and claimed from the defenders under the contract.

It was agreed that the relevant terms in the contract were clauses 13.1 and 6.1 of the pursuers' general terms and conditions. Clause 13.1 provided as follows:

“The Supplier shall indemnify the Purchaser against the following:

(i) loss, damage or personal injury (including death) whatsoever wheresoever and whensoever arising, due to the negligent act or omission of the Supplier or its servants, agents, or sub-contractors or arising from any breach of any terms and conditions of the Order or any alleged fault or defect (howsoever arising) in the materials, workmanship or quality of the Services supplied to the Supplier and against all claims, demands, proceedings, damages, costs, charges and expenses whatsoever in respect thereof or in relation thereto…

(ii) loss or damage to property of the Purchaser or third parties and all claims in respect of personal injury (including death), howsoever caused to or by any of the employees, servants, agents, or sub-contractors of the Supplier while on the Purchaser's premises in performance of this Order”.

Clause 6.1 stated:

“Without prejudice to the Purchaser's statutory rights or rights under these terms and conditions, it is a condition of this Order that the Services shall…

(ii) be of the very best materials and workmanship…”.

Legal counsel for the pursuers argued that on the basis of the facts, the contractual obligation to indemnify arose and that no proof in respect of that was required. The terms of the contract were admitted, including the indemnity in clause 13. The defenders further admitted that the fire developed in the pursuers' premises and was started by works carried out by the defenders.

This meant that there was a contractual requirement on the defenders under clause 13.1 to pay for damage caused by their employees, as they were the cause of the damage that occurred.

It was not a defence to wholly or substantially attribute the loss to the pursuers' own negligence. Additionally, it was not a defence to argue that there was any obligation to mitigate loss. It was argued that contributory negligence was no defence to such contractual claims.

It was argued that the indemnity claim under clause 13 was a claim for payment and not a claim for damages, and that the concept of mitigation of loss did not apply for a claim for payment due under a contract.

Legal counsel for the defenders submitted that the principle was that a party could not claim indemnity for losses suffered through negligence of that party unless either:

§   The indemnity expressly provided for recovery of such losses; or

§   There was no other loss that the clause might relate to.

It was argued that in the absence of clear terms, the indemnity must be construed as relating to a liability not based on negligence. If the pursuers' had no duty to mitigate their loss, it would imply that they were entitled to simply watch the building burn. However, that could not have been the intention of the parties when forming the contractual relationship.

There was no express reference in clause 13 relating to the pursuers' own negligence. Accordingly, it was argued by the defenders’ legal counsel that both the mitigation and the contributory negligence defences were relevant and should be allowed.

The court held as follows:

§   The court could not make a proper informed judgment about causation on the basis of the pleadings. The pursuers in this case were seeking an indemnity in respect of loss and damage to their property caused by the defenders' workers.

§   The terms of the indemnity made it unnecessary for the pursuers to prove fault or intent on the part of the defenders but it was essential that they offered to prove that the loss or damage was caused to their property by the defenders' employees within the meaning of clause 13. The court was not prepared to make a decision on the fact that the terms of the indemnity were satisfied.

§   There was no reference in clause 13 to the defenders being responsible in circumstances where the defenders' employees contributed to the loss and damage suffered by the pursuers to a material extent. It was held that the intention of the parties meant that it would be necessary for the pursuers to prove that their loss or damage was caused by the defenders' employees.

§   Contributory negligence was not available as a defence to the pursuers' claims. As far as the court was concerned, it was plain that clause 13 was not a clause which depended upon proof of fault.

§   It was a contractual indemnity clause stating where liability should lie in respect of various matters. They sought to prove that employees using the very best workmanship, which is a higher standard than reasonable care, would not cause a fire in the circumstances averred. However, the court was not persuaded that the pursuers' case must necessarily fail.

§   The defenders' arguments relating to mitigation of loss in connection with the indemnity claim were not relevant because that was no defence to the express terms of the indemnity clause 13(ii).

§   The principle of mitigation of loss had been developed in relation to claims for damages, and the claim under clause 13 was not a claim for damages for breach of contract. It was a claim for indemnification for loss occasioned caused by the defenders' employees, regardless of their fault or intention. There were no express terms dealing with mitigation of loss.

§   Finally, the submission that the pursuers had no duty to mitigate their loss with regards to the claim in terms of clause 6 was unacceptable. The claim in terms of clause 6 was held to be based in contract, but it was a claim for damages for breach of clause 6 of the contract. Accordingly, the principle of mitigation of loss was not restricted to claims for damages.

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© RT COOPERS, 2008. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.


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