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The perils of a joint names present

Call me Scrooge but, at this time of year, it’s nice to have a reminder that doing things jointly does not always bring benefits.

The case of SSE Generation Ltd v Hochtief Solutions AG (a decision of the Scottish Outer House) is a festive lesson in the importance of the joint names insurance defence.

The background

The dispute arose out of a project for the design and construction of a new hydro-electric scheme within the geological area known as the Great Glen Fault. The scheme began operating in January 2009 but, in August 2009, a major tunnel collapsed and the scheme ceased to generate electricity. The parties could not agree on the scope and nature of the remedial works and a third party was engaged to carry them out. SSE Generation Ltd brought a claim for the loss sustained as a result of the collapse and Hochtief Solutions AG counterclaimed for profits lost through not carrying out the remedial works.

The preliminary issue before the court was whether SSE was barred from bringing certain elements of its claim in circumstances where the contract between the parties (namely the NEC Engineering and Construction Contract (ECC) 2nd Edition (November 1995), together with various parts of option Y(UK)2 of April 1998), obliged Hochtief to procure a policy of insurance in the joint names of itself and SSE in respect of contractor’s risk events.

Clauses 84 and 85 of the NEC Contract stipulated that the policy should include a waiver by the insurers of their subrogation rights against directors and other employees of the insured, except in cases of fraud. Clause 85.4 provided that:

“Any amount not recovered from an insurer is borne by the Employer for events which are at his risk and by the Contractor for events which are at his risk.”

The parties’ submissions 

Hochtief contended that the construction all risks (CAR) policy for the works was intended to replace liability under the contract, with the effect that both parties were barred from bringing any proceedings against the other in respect of a loss covered by the CAR policy. Hochtief argued that as the CAR policy expressly waived subrogation rights, the parties intended that they could not make claims against one another in respect of risks it covered.

SSE said that Hochtief had conflated the distinct issues of subrogation between joint insured and a contractual provision for joint insurance. The relevant question was said to be whether:

“Where parties enter into a contract for insurance against certain risks, does the existence of that provision in isolation exclude the right of one party to sue the other for breach of contract, because the consequences could be covered by a joint names insurance policy?”

Clause 83.1 of the contract provided that:

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

This was said to demonstrate that the parties adopted the opposite position and expressly agreed to indemnify one another.

The justification for the joint names defence

As said by Mr Justice de Grandpre in Commonwealth Construction Co Ltd v Imperial Oil Ltd (1977) 69 DLR (3d) 558, the primary function of joint names insurance is that:

“…all the parties whose joint efforts have one common goal, eg the completion of the construction, [are] spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them.”

Similarly, Colman J in National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582 described the primary justification for the joint names insurance defence as follows:

“For the insurers who had paid the principal assured to assert that they were now free to exercise rights of subrogation and thereby sue the party at fault would be to subject the co-assured to a liability for loss and damage caused by a peril insured for his benefit.”

Despite such clear statements on the justification for the joint names defence, the precise basis on which it is said to operate, be it circuity of action (see Petrofina (UK) Ltd  v Magnaload Ltd [1984] QB 127) or an implied term in the construction contract (see Gard Marine & Energy Ltd v China National Chartering Co Ltd), has long been the subject of debate.

Lord Woolman’s golden judgment will have once frankly incensed commentators grinning with mirth.

The decision

Lord Woolman held that the contractual provision for joint names insurance did not displace the parties’ liability under the NEC contract, such that SSE was not barred from pursuing its action.

He held that there was nothing in the NEC contract that permitted the court to construe clause 84 (the obligation to procure joint names insurance) as supplanting the contractual allocation of liability set out in clause 83. In his view, the clauses dealt with quite different things and, if clause 84 had overridden clause 83, the allocation of liability under clause 83 would have been redundant from the outset.

Lord Woolman also went on to state that, if there had been a complete waiver of liability between the parties, he would have expected the contract to state so expressly, as it did in specifying that the insurance to be procured should include such a waiver.

It is clear from Lord Woolman’s reasoning that he considered the question of whether a claim is precluded by virtue of the obligation to procure joint names insurance to be one of contractual construction. While the language used by him of one clause “overriding” or “displacing” another may have been inappropriate (as the exercise is simply one of construing the contractual arrangements generally), he made some helpful comments that clarify how this question of construction is to be approached.

In Gard v China National, Longmore LJ said that:

“…the prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other.”

However, Lord Woolman noted that there was no irrebutable presumption that contracting parties have no liability to one another simply because a joint names policy is in place. He said that such a presumption would tend to merge the law of insurance with the law of contractual interpretation. It is respectfully suggested that this is an immaculate conception of the law.

Conclusion

The joint names defence can be a true saviour. However, this judgment warns against false idols and is a guiding star on how to approach such a defence. As ever, it starts from the lowly stable of contractual construction.

Charlie Thompson

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