Claim No. 1BM40094          
Neutral Citation Number: [2012] EWHC B10 (Mercantile)
IN THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

BIRMINGHAM DISTRICT REGISTRY

MERCANTILE COURT
Date: 8th August 2012

Before:

HIS HONOUR JUDGE SIMON BROWN QC
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BETWEEN:

AXA INSURANCE UK PLC
Claimant
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THERMONEX LIMITED (in liquidation)
Defendant

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JUDGMENT
Introduction
1.	This is an application by the Claimant (‘Axa’) for summary judgment against the Defendant (‘Thermonex’) pursuant to CPR Part 24.2.  Thermonex is in liquidation.

2.	Axa’s application was issued on 21 July 2012.  It was accompanied by four witness statements as follows
(a)	Mr Tom Davison of DAC Beachcroft, solicitors for Axa, and accompanying exhibits TD 1 and TD 2;
(b)	Mr Pierre Johnstone of Axa’s large loss unit;
(c)	Mr David Aulton, the Managing Director of Thermonex until it went into liquidation;
(d)	Mr Mark Docker, a process server.

3.	A further witness statement was subsequently submitted from Ms Carolyn Pilkington, an underwriter with Axa, exhibiting copies of the policy wordings over the years and confirming that it did not change in any material respect.

4.	The liquidator of the Defendant did not oppose the application and no evidence has been served on behalf of the Defendant.

5.	The Court considered all the documents filed including the crucial ones: 

(a)	the four witness statements referred to above;
(b)	the Particulars of Claim (exhibit to witness statement of Mr Docker);
(c)	the following extracts from the Policy (TD 1/29ff)
(i)	general insuring clause and choice of law (TD 1/29)
(ii)	General Conditions 3 and 15 (TD 1/30, 33)
(iii)	Public Liability section (TD 1/126) and especially clauses 1 and 3 (TD 1/126-7), Exclusions 2, 3 and 6 (TD 1/128-9) and Special Conditions 1 and 4 (TD 1/132)
(iv)	Contractors All Risks section (TD 1/134) and especially clauses 1 and 2 (TD 1/134-5) and Exclusion 10 (TD 1/135)
(d)	in the Irish proceedings, the Statement of Claim (TD 2/69-87), the Notice for Particulars (TD 2/158-71), the Replies to Particulars (TD 2/172-81) and Thermonex’s Defence (TD 2/535-45);
(e)	the correspondence between Gem’s solicitors Matheson Ormsby Prentice (‘MOP’) and Axa: TD 1/5-9, 22, 23 and 2/1-3. Gem is an Irish construction company seeking to claim indemnity from Axa as insurers of Thermonex.
(f)	the correspondence between MOP and DAC Beachcroft: TD 1/10-13 and 25
(g)	the correspondence between DAC Beachcroft and Foreman & Co: TD 1/1-5

6.	By its application Axa seeks declarations that it is under no liability to indemnify the Defendant (‘Thermonex’) under a Commercial Combined policy of insurance, policy number CW COM 6100218 (‘the Policy’), pursuant to which Axa insured Thermonex initially for the period 22 April 2004 to 21 April 2005 and thereafter by renewal for the periods 22 April 2005 to 21 April 2006 and 22 April 2006 to 21 May 2007.  The Policy included public liability (‘PL’) contractors’ all risks (‘CAR’) sections.

7.	The potential claims in respect of which the negative declaratory relief is sought by Axa arise from Thermonex’s alleged involvement in a construction project in the Republic of Ireland between about 2004 and 2008 for the development of 118 Golf Villa residences at Leinster Wood South, Carton Demesne, Maynooth, County Kildare, Republic of Ireland (‘the development’).  In September 2009 the main contractor, Gem Construction Company Limited (‘Gem’) started proceedings against Thermonex and a company known as Orchardville Limited in the High Court of Ireland claiming inter alia damages for breach of contract and/or warranty and/or negligence arising out of Thermonex’s involvement in the design, supply and installation of some basements at the development.  Leaks were alleged to have occurred and remedial works were carried out to the basements.  According to the most recent estimate prepared for Gem by Cyril Sweett on 18 March 2011 (TD 2/47-56, the remedial works have cost just under €4.1 million, including an estimate for incoming claims.  These costs comprised principally the direct costs of the remedial works to the basements but there is a substantial element of site supervision costs and finance costs allegedly incurred by Gem.
 
8.	Judgment in default was entered against Orchardville on 1 March 2010 but damages have yet to be assessed.  

9.	The case is rather unusual in that Thermonex has never notified Axa of any claim under any part of the Policy at all.  Indeed, in his witness statement for these proceedings, Mr Aulton, the former Managing Director of Thermonex has explained quite candidly that he took the view, following consultation with the company’s insurance broker in 2010 after proceedings were started against the company in Ireland, that Thermonex did not have any claim under the Policy and that the only policy which might respond to the claims made against the company in Ireland was its professional indemnity policy with Chartis Insurance.  Thermonex duly notified Chartis in 2010 and it appears that Chartis retained solicitors, O’Hare O’Connor Walshe, to represent Thermonex in the Irish proceedings.

10.	However, Gem has taken a different view.  Having commenced proceedings against Thermonex in September 2009 and having learnt in about November 2010 that Thermonex had gone into liquidation, in about the middle of 2011 solicitors for Gem, Matheson Ormsby Prentice (‘MOP’), wrote to Axa stating  that unless Axa confirmed cover for Thermonex in respect of Gem’s claims it would seek to join Thermonex to the Irish proceedings pursuant to section 62 of the Civil Liability Act 1961 (the Irish equivalent of the Third Parties (Rights against Insurers) Act 1930) and enforce any judgment which it obtained against Thermonex directly against Axa.  Despite this threat, Gem has not made any application to join Axa to the Irish proceedings. 

11.	That is the context in which these proceedings were started by Axa in England in November 2011.  The Irish proceedings had been underway for over two years and costs in excess of €200,000 had apparently already been incurred by MOP on behalf of Gem.  The underlying claim is substantial.  Threats had been made to join Axa to those proceedings but not yet carried out in the period of six months since they were first made.  Axa was therefore placed in a position of considerable, and unenviable, uncertainty with the prospect hanging over it of potentially being drawn, at any time, into costly and time-consuming litigation in Ireland over which, as a defendant, it might have very little control and without the ability itself to force the issue by initiating proceedings in Ireland because, given that Thermonex is domiciled in England the only jurisdiction in which Axa could initiate proceedings to resolve this uncertainty and to seek declaratory relief was England.  For reasons set out in the witness statement of Mr Johnstone of Axa, it is important to Axa to achieve some resolution of these issues as quickly as possible providing there is no injustice to Thermonex in granting the negative declarations sought. 

Summary of Axa’s Position
12.	In the Irish proceedings it has been alleged that Thermonex owed duties in contract and tort to Gem in relation to the design, supply and installation of basements at the development but that negligently and in breach of contract the relevant designs were flawed and the workmanship was defective such that some of the basements leaked and had to be repaired.  The claims were also advanced as claims for breach of warranty and negligent misrepresentation and in restitution.  The claim, as indicated, has now been estimated at a sum in excess of €4 million.

13.	Axa insured Thermonex under a commercial combined policy of which only the PL and CAR sections are relevant for the purposes of this action.  The Policy (TD 1/26-189) was governed by English law (TD 1/29).

14.	The claim which was threatened against Axa in Ireland was pursuant to section 62 of the Civil Liability Act 1961 which provides (effectively in the same manner as the Third Parties (Rights against Insurers) Act 1930) that where a third party claimant obtains judgment against an insolvent company which has ‘effected a policy of insurance in respect of liability for a wrong’ the third party has a direct action against the liability insurer of that company.

15.	Had Axa been joined to the Irish proceedings it would only have been its liability under the PL section of the policy which would have been relevant, the CAR cover being a property policy, and so a declaration purely in relation to the PL section of cover would defeat any claim which Gem might have against Axa.  However, for reasons of certainty and finality, Axa also seeks declarations under the CAR section to close off the possibility that Thermonex might seek some indemnity under that section.

16.	For the purposes of this application Axa proceeded on the basis that the facts as asserted by Gem in the Irish proceedings would be established at trial, albeit that  Thermonex does not accept the factual basis of the claim at all.

17.	However, as a matter of English law, even assuming that Gem could make out the factual basis of its claim against Thermonex, it is Axa’s contention that any claim for an indemnity under the PL section of the Policy is bound to fail because it is a claim for pure economic loss, the only loss alleged being damage to the very thing which Thermonex is alleged to have designed and/or installed.  There is no allegation that Thermonex damaged any other property.  Axa submits that, a PL policy provides cover only for accidental damage to property of third parties.  It follows, it is submitted, that even if the claim against Thermonex was successful it would not be covered under the insuring clause of the PL section because it would not be for accidental damage to material property.

18.	Even if Axa is wrong about this point, Axa submits that there are further issues about coverage under the PL section in respect of which Axa seeks negative declaratory relief.  Axa contends that the indemnity under the PL section of the Policy applies only to damage occurring within the Territorial Limits of the policy (TD 1/126-7).  Prima facie these do not include the Republic of Ireland and the indemnity would therefore apply only if the damage occurred in a ‘member countr[y] of the European Community … in connection with temporary visits undertaken in the course of the Business by any person normally resident in the [UK]’.  Thermonex is an English company and all of the damage occurred in the Republic of Ireland.  There is no allegation against Thermonex in the Irish proceedings that any damage did occur in connection with any temporary visit by Thermonex.

19.	Further, even if Thermonex was legally liable to Gem on the assumed facts, iAxa submits that its liability would be

(a)	in respect of property comprising the permanent or temporary works undertaken by it and would be excluded by virtue of exclusion 2(c) of the PL section (TD 1/128), and/or

(b)	in respect of the cost or value of the works executed by it or the replacement, repair, rectification or reinstatement thereof and any claim would be excluded by virtue of exclusion 3(a) of the PL section (TD 1/129), and/or

(c)	as regards the contractual claims including the claim for breach of warranty, would be excluded by virtue of exclusion 6 of the PL section (TD 1/129).

20.	Furthermore, Axa submits that any liability which Thermonex might have in respect of restitutionary relief is not a legal liability for damages and AXA has no liability to indemnify Thermonex in respect thereof.

21.	As regards the CAR section of policy, Axa’s position is that if Thermonex was to seek indemnity in respect of any damage to the contract works, any such claim would fail by reason of exclusion 10 to the CAR section (TD 1/135).

22.	Leaving aside all of the coverage issues set out above and assuming that, contrary to all of Axa’s arguments, Thermonex would otherwise be entitled to an indemnify under either the PL or the CAR section of the policy, Axa submits that on any view Thermonex have no claim under any policy because there has been a breach of the notification requirements applicable under the Policy both of which are expressed to be conditions precedent to the liability of Axa.

23.	The factual position about this is set out in the witness statements of Mr Johnstone of Axa (at paragraphs 10-15) and Mr Aulton of Thermonex (at paragraphs 21-44).  Thermonex was aware of reports of leaks from about May 2006.  It has never notified Axa of any claim (whether under the PL or CAR section) taking the view that if it had any liability the appropriate insurer was its professional indemnity insurer which it did notify.  The first information which Axa ever received about disputes relating to the development was in about May/June 2011.  However, this was not a notification by Thermonex pursuant to the policy terms.  Even if it could be considered a notification under the Policy (and it is not accepted that it was), it is submitted that it could never be said to have been made ‘immediately’ as required under the Policy generally (TD 1/30) and the PL section specifically (TD 1/132).  At the very latest notification should have been made immediately after the start of proceedings in Ireland in September 2009.  Although it is not necessary for Axa to show any prejudice, it is widely acknowledged that, particularly in the context of liability claims, insurers are dependent upon prompt notification so that they can initiate investigations before, for instance, remedial measures are carried out (see Mr Johnstone’s witness statement at paragraph 12). 

24.	By its pleaded case Axa has also sought declarations in relation exclusion 13 of the CAR section (damage post completion) and Exclusion 7 of the PL section and Special Condition 3 of the CAR section.  These raise issues of fact which are not suitable for consideration under CPR Part  24.2 and they are not pursued in this application but Axa’s position was reserved in respect of them should the matter go further.

Position of Thermonex
25.	Thermonex was incorporated in England and Wales with its registered office at Delcon House, 65 Manchester Road, Bolton.  It was placed into a creditors’ voluntary liquidation on 21 September 2010 and Mr Martin Halligan of Anderton Hall Limited was appointed liquidator of the company pursuant to section 98 of the Insolvency Act 1986.  Prior to 21 September 2010 Thermonex’s principal place of business was its registered office in Bolton and it carried on business from that office as a construction company.

26.	The Claim Form in these proceedings was issued on 23 November 2011 and served on Thermonex on the dame day (TD 1/1).  Particulars of Claim were subsequently served on Thermonex on7 December 2011.

27.	Foreman & Co, solicitors for the liquidator of Thermonex wrote to Axa’s solicitors, DAC Beachcroft on 15 February 2012 (TD 1/2) referring to the proceedings and in a subsequent telephone conversation between solicitors on 20 February 2012, the details of which are recorded in an attendance note of the same date (TD1/3-4), DAC Beachcroft informed the liquidator’s solicitors that it was Axa’s intention to seek summary judgment on the claims.  The liquidator’s solicitor stated that the liquidator had no interest in contesting Axa’s summary judgment application.

28.	The liquidator’s solicitors was served with the application and all of the evidence served in support.  Counsel instructed by them attended the hearing but, consistently with the indication given in February 2012, did not be oppose the application for summary judgment.

Position of Gem
29.	Given that these proceedings were prompted by Gem’s threat to join Axa to the Irish proceedings, Axa, quite rightly took the view that Gem should be appraised of these proceedings and gave them the opportunity to intervene if it wished.  It has chosen not to do so.

30.	It is instructive to trace the procedural history of the Irish proceedings and the contact between Gem and Thermonex and MOP and Axa.

31.	Gem’s solicitors were in correspondence with Thermonex from at least 21 September 2009 when it served the Plenary Summons in the Irish proceedings on Thermonex (TD 2/13). Thermonex responded to that correspondence immediately and also wrote to the Court in Ireland (TD 2/14 and 35) denying that it had ever entered into any contract with Gem and/or that it had any link with Orchardville.  However, Thermonex failed to enter any formal notice of appearance.  There was an application for default judgment by Gem by notice dated 23 December 2009 (TD 2/21) and although judgment was entered against Orchardville on 1 March 2010, as against Thermonex the application was adjourned (TD 2/32).

32.	After further pressure from Gem, solicitors for Thermonex eventually entered an appearance in the Irish proceedings on 13 May 2010 (TD 2/153) and the adjourned application for judgment was dismissed.  In advance of service of the Defence, there was a request for further information by Thermonex’s solicitors in September 2010 (TD 2/158) and it was provided in October 2010 (TD 2/172).  There was a yet further delay, leading to an application by Gem on 23 December 2010 (TD 2/478) for judgment in default of Defence, and following an Order on 28 March 2011 (TD 2/534) the Defence was eventually served on 8 April 2011 (TD 2/535).

33.	MOP, on behalf of Gem, became aware of the liquidation of Thermonex in October 2010 (TD 2/511) and seems to have got confirmation in November 2010 (TD 2/526).  On 20 May 2012 (TD 2/5) MOP wrote to Axa, having apparently been (erroneously) informed by Quinn Insurance (TD 2/7) that Orchardville was insured by Axa for the period 2005/06.  Albeit, at this stage, the correspondence concerned Orchardville (on the erroneous understanding that Axa insured that company) this was the first occasion on which Axa received any information about the Irish proceedings or about any disputes relating to the development.  MOP sought confirmation from Axa that it would indemnify Orchardville and, in default, it threatened to bring proceedings in Ireland directly against Axa, as insurer of Orchardville, to enforce its judgment against Orchardville.

34.	There was an exchange of emails between Axa and MOP in June 2011 (TD 2/22-23).  First, on 6 June 2011 (TD 2/22) Axa informed MOP that it had never insured Orchardville but had insured Thermonex.  It went on to provide MOP with the relevant policy numbers and policy periods but stated that, although it had been notified of (other) claims by Thermonex, it had received no notification in relation to the matters raised by MOP.  By way of response on 13 June 2011 MOP stated that it had issued proceedings against Orchardville and Thermonex in September 2009 and that, on the basis of the information provided by Axa, it believed that the Axa policy responded to Gem’s claims as described in its letter of 20 May 2011 (see above).  Axa disputed this and MOP responded by letter dated 24 August 2011 (TD 2/1).  This letter summarised the steps taken in the Irish proceedings and enclosed a substantial amount of material from those proceedings, including the pleadings.  The enclosures are re-produced in exhibit TD 2 to Mr Davison’s witness statement at pages 6-545.  MOP stated that Gem had suffered losses of approximately €4.1 million by reason, inter alia, of Thermonex’s breach of contract and negligence and that it had already incurred costs of €200,000.  The firm invited Axa to confirm that it would indemnify Thermonex in respect of the claim.

35.	As indicated above, although Gem had threatened to join Axa to the Irish proceedings it had not done so by November 2012 and so, for the reasons set out above, Axa decided to take the initiative and issued a Claim Form in England in November 2011.  By letter dated 12 December 2011 (TD 1/10) (and also by email to both fee earners apparently engaged on the case for Gem) DAC Beachcroft sent MOP copies of the Claim Form and Particulars of Claim and informed MOP of precisely what it had done on Axa’s behalf and why, but it specifically drew to MOP’s attention the fact that Gem could apply to be joined to the proceedings in England.  On behalf of Gem, MOP did not respond to that letter and Gem has made no attempt to seek to be joined to these proceedings.

36.	By a subsequent letter dated 11 February 2012 (TD 1/25) (and, once again, emails of the same date) DAC Beachcroft informed MOP of AXA’s intention to seek summary judgment on the claims set out in the Particulars of Claim.  MOP did not respond to that letter.

37.	The position appears to be that, despite being specifically advised of its right to make an application to be joined to the proceedings in England, Gem has chosen not to do so.

Summary Judgment
38.	The principles applicable in an application for summary judgment were summarised by the Court of Appeal in Attrill & Ors v Dresdner Kleinwort Ltd, Commerzbank AG [2011] EWCA Civ 229 at paragraphs 22-23.

(a)	the Court must consider whether the respondent has a ‘realistic’ as opposed to a ‘fanciful’ prospect of success;

(b)	a realistic claim is one that is more than merely arguable; 

(c)	in reaching its conclusion the court must not conduct a mini-trial;

(d)	this does not mean that a court must take at face value everything that a party says in statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents;

(e)	however, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but the evidence that can reasonably be expected to be available at trial;

(f)	although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on a summary judgment hearing. Thus the court should hesitate about making a final decision without a trial, even when there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case;

(g)	if one part of the claim is to go to trial it may be more appropriate for the entirety of the claims to go to trial rather than divide the history up and strike out other parts of it.

39.	Where declarations are sought and the declarations could have implications for third parties then the Court should consider (i) whether it is necessary to the Claimant to give such relief; and (ii) if so, whether it would be preferable that such declarations are only granted on the basis of findings of fact following a trial. 

Negative declaratory relief
40.	CPR Part 40.20 permits the Court to make a declaration without any other remedy.  However, relief is discretionary.  The Court will need to be satisfied that there is a matter in dispute and that the issue is not purely hypothetical.  As regards negative declaratory relief some caution has to be exercised but that test is more easily satisfied in a context such as the present where an insurer is seeking a declaration of non-liability.

41.	In the present case, foreign proceedings have been threatened.  The potential liability of Axa is substantial.  There was no reason to think that those foreign proceedings were not imminent when these proceedings were commenced.  The English court obviously has jurisdiction to hear the issues given that Thermonex is an English company.  The Policy is governed by English law and the issues which arise are issues of policy construction in the context of English law.  These are therefore best determined by an English court and such determination will avoid the need for lengthy and costly proceedings abroad.

The Policy
42.	It is convenient at this juncture to set out the Policy terms which remain relevant for the purposes of this application by reference to the wording at TD 1/26ff.

43.	There is a general insuring clause at the outset along with a choice of law clause as follows [TD1/29] 

Your Policy 
The Company in consideration of the payment of the premium shall provide insurance against loss destruction damage or liability for injury or damage occurring at any time during the Period of Insurance (or any subsequent period for which the Company accepts a renewal premium) in accordance with the Sections of the Policy shown as operative in the Schedule subject to the exclusions provisions and conditions of the Policy

The law applicable to this Policy
You are free to choose the law applicable to this Policy Your Policy will be governed by the law of England and Wales unless You and We have agreed otherwise

44.	The General Conditions of the Policy start at TD 1/30.  Two are relevant for present purposes 
General Conditions
…
3 Claims Conditions
1) In the event of any loss destruction or damage or event likely to give rise to a claim under this Policy the Insured shall

a)	notify the Company immediately
…
d) 	deliver to the Company at the Insured’s expense
(i) full information in writing of the property lost destroyed or damaged and of the amount of loss destruction or damage
ii) details of any other insurances on any property hereby insured within 30 days after such loss destruction or damage or such further time as the Company may allow
iii) all such proofs and information relating to the claim as may be reasonably required
…
2) No claim under the Policy shall be payable unless the terms of this condition have been complied with
…
15 Condition Precedent
It is a condition precedent to any liability on the part of the Company under this Policy that a) the terms hereof so far as they relate to anything to be done or complied with by the Insured are duly and faithfully observed and fulfilled by the Insured and by any other person who may be entitled to be indemnified under this Policy …

45.	The PL section of the Policy applicable to building and allied trades starts at TD 1/126.  The following parts are relevant

Public Liability – Building and Allied Trades Section (TD 1/126)
1.	Definitions
…
Business
the business stated in the Schedule conducted by the Insured at or form premises in Great Britain Northern Ireland the Channel Islands or the Isle of Man …
…
Territorial Limits
a)	anywhere within Great Britain Northern Ireland the Channel Islands or the Isle of Man other than Offshore
b)	member countries of the European Community other than Offshore in connection with temporary visits undertaken in the course of the Business by any person normally resident in the territories described in a) above
...
Works Executed
Works executed including goods or materials used by or on behalf of the Insured in the course of the Business
…
3. Indemnity (TD 1/127)
The Company will indemnify the Insured against all sums that the Insured shall become legally liable to pay as damages and costs and expenses in respect of accidental
a)	injury to any person
b)	loss of or damage to material property
c)	nuisance or trespass obstruction loss of amenities or interference with any right of way light air or water
…
occurring within the Territorial Limits during the Period of Insurance and happening in connection with the Business
…
Exclusions (TD 1/128-9)
The Indemnity will not apply to legal liability
…
2.	Property under Insureds Control
in respect of loss or damage to
…
c) property comprising the permanent or temporary works undertaken by the Insured in the course of any contract or agreement and which are under the control of the Insured or for which the Insured is responsible
…
3. Rectification Costs
a) in respect of the cost or value of any Works Executed or replacement repair removal rectification or reinstatement thereof where legal liability arises from a defect in or the unsuitability of such Works Executed
…
6. Liability under Agreement
assumed by the Insured under agreement unless the conduct and control of all claims is vested in the Company but indemnity shall not in any event apply to
…
c) liability which attaches solely by reason of an agreement relating to the performance of work outside Great Britain Northern Ireland the Channel Islands or the Isle of Man
…
Special Conditions (TD 1/132)

1.	Observance of Terms
It is a condition precedent to any liability on the part of the Company under this Section that the terms hereof so far as they relate to anything to be done or complied with by the Insured shall be duly and faithfully observed
…
4. Notification of Claims
In the event of any occurrence which may give rise to a claim under this Section the Insured shall immediately
a) 	give written notice with full particulars to the Company
b)	forward to the Company upon receipt every letter claim writ summons or process

46.	The CAR section of the Policy starts at TD 1/134.  The following parts are relevant
Contractors All Risks Section

1.	Definitions (TD 1/134)
…
Territorial Limits
Shall mean anywhere within Great Britain Northern Ireland the Channel Islands or the Isle of Man

2. Indemnity
The Company agrees (subject to the terms exceptions and conditions contained herein or endorsed hereon) to indemnify the Insured by payment or at its option by reinstatement or repair in respect of loss or damage to the property described in the Schedule to this Section
…
3. The Property Insured
…
The Permanent or Temporary Works
The Permanent or Temporary Works executed in performance of the Contract and Materials for use in connection therewith
…
4. Exclusions (TD 1/135)
This section does not cover
…
10. Defective Design Material or Workmanship
The cost necessary to replace repair or rectify any of the Property Insured which is in a defective condition due to a defect in design plan specification materials or workmanship notwithstanding anything contained herein to the contrary this exclusion shall not apply to the remainder of the Property Insured which is free of such defective condition but is damaged as a consequence of such defect 
 
The Development
47.	The Development was in three phases:

(a)	as regards Phase 1, by a contract dated 9 December 2004 (TD 2/189)  between Swindon Investment Company Limited (‘Swindon’) as employer and Gem as contractor, Gem agreed to construct 33 Golf Villa residences at the development and by a Purchase Order dated 7 January 2005 (TD 2/351) Gem sub-contracted the design, supply and installation of basements at 23 of these residences to Orchardville Limited trading as Thermonex (‘Orchardville’), a company incorporated in Ireland whose registered office was at 39 The Studio, Ballyreddin, Bennettsbridge, County Kilkenny.

(b)	As regards Phase 2, Gem entered into a further contract with Swindon dated 8 December 2005 (TD 2/250) for the construction of a further 49 villas and Gem sub-contracted the design, supply and installation of basements at 29 of those villas to Orchardville by a Purchase Order dated 3 February 2006 (TD 2/384).

(c)	As regards Phase 3 Gem entered into a contract with Carton Residential Developments Limited (‘Carton Developments’) dated 3 November 2006 (TD 2/295) for the construction of a further 36 villas and Gem sub-contracted the design, supply and installation of basements at 26 of those villas to Orchardville by a Purchase Order dated 3 November 2006 (TD 2/386).

48.	In the course of its business Thermonex was instrumental in developing a product known as ThermoneX X-Concrete which was a lightweight concrete suitable for use in forming load-bearing reinforced insulated wall panels for domestic and commercial buildings and basements.

49.	Between about 2005 and 2008 Orchardville (and according to Gem, Thermonex) designed, supplied and installed basements at some 78 of the 118 villas at the site using the ThermoneX X-Concrete product and over the period 5 September 2005 to April 2008 Orchardville (or, according to Gem, Thermonex) provided standard 10 year structural and waterproofing guarantees in respect of each basement assignable to each purchaser or subsequent owner (‘the warranties’).

50.	Gem completed the development in or about August 2008.

51.	Gem claims that a leak occurred at one of the basements on 10 May 2006 and was immediately reported to Orchardville and Thermonex (see TD 2/427 for the contemporaneous complaint to Orchardville TD 2/7-8 for a schedule subsequently drawn up showing the location and dates of all alleged leaks).  It says that leaks occurred thereafter on a progressive basis between June 2006 and March 2009 and were reported to Orchardville and Thermonex as soon as they occurred and that by March 2009 leaks had occurred at 44 of the 78 basements constructed at the site, in some cases on more than one occasions at the same basement such that there were 82 separate leaks reported to Orchardville and Thermonex between May 2006 and March 2009.

52.	Gem says that the leaks necessitated extensive remedial works to the basements.  It seems that initially the remedial works were carried out by Orchardville through a sub-contractor known as Larsen but that Orchardville could no longer afford the works and they were then carried out at Gem’s expense from May 2006 until August 2010.

The Irish Proceedings
53.	Such documents as Axa has relating to these proceedings were supplied by Gem’s solicitors MOP on 24 August 2011 (TD 2/1) and they are contained in exhibit TD 2.

54.	Gem commenced the Irish proceedings against Orchardville and Thermonex by a Plenary Summons (TD 2/58) issued on 18 September 2009 which was served on Thermonex by MOP by registered post on 21 September 2009.  By that Summons Gem claimed against Orchardville and Thermonex, inter alia, declarations that the Defendants were liable to indemnify it against all costs, expenses, losses, liabilities and claims arising from the design, fabrication, supply, works supervision and installation of basements and/or Thermonex X-Concrete basement units at the site and/or damages for negligence and/or breach of duty and/or breach of contract and/or negligent misrepresentation and/or restitution on the grounds of unjust enrichment.

55.	Gem served its Statement of Claim (TD 2/69) on Orchardville and Thermonex on 23 December 2009.  It claimed as follows

(a)	In or about 2004 Gem entered into discussions and correspondence with Orchardville and Thermonex in the course of which Orchardville and Thermonex proposed the use of the ThermoneX X-Concrete system for the basements at the site and represented that the system was independently certified and accredited by the Building Research Establishment and that each basement carried a 10 year structural waterproofing guarantee.  Gem understood that the product would be supplied by Orchardville and Thermonex and it liaised with Mr Mulligan of Orchardville and Mr Burr of Thermonex in relation to the design of the basements (SoC paragraphs 7-8).

(b)	Gem appointed Orchardville and Thermonex as its sub-contractor in relation to the design, fabrication and installation of the basements at the site for each of Phases 1-3 and to provide a 10 year guarantee.  Both Orchardville and Thermonex were therefore responsible for the entire design of the basements (SoC paragraphs 11-12).

(c)	On the basis of prior discussions and representations, in January 2005 Gem gave a purchase order to Orchardville in respect of phase 1.  Although Gem constructed the basement slab all other design and works in respect of the basements was done by Orchardville and Thermonex or their sub-contractors (SoC paragraphs 15-17).

(d)	Gem believed that it was contracting with Orchardville and Thermonex.  Further Orchardville and Thermonex owed Gem a duty of care in tort in respect of the design and works, and/or Orchardville acted as agent for Thermonex and/or Thermonex acted as a sub-contractor to Orchardville (SoC paragraphs 18-21).

(e)	On the basis of prior discussions and representations, in February 2006 and November 2006, Gem issued purchase orders to Orchardville in respect of phase 1 and 2.  Gem says that Orchardville and Thermonex owed it the same duties as pleaded in respect of phase 1 and/or that the relationship between Orchardville and Thermonex was the same as for phase 1 (SoC paragraphs 24-29 and 32-37).  As regards phase 3 Gem specifically requested that a collateral warranty be issued on a basement by basement basis (SoC paragraph 33).

(f)	In May 2006 a leak was reported to Orchardville and Thermonex in relation to one of the phase 1 basements (SoC paragraph 30).  Thereafter further leaks were reported (SoC paragraph 40).  Gem required Orchardville to carry out remedial works but it was unable to so satisfactorily and Gem took over the remedial works (SoC paragraph 39).

(g)	Thermonex provided the warranties in relation to each basement and each warranty was signed by an authorised signatory of Orchardville (SoC paragraph 41).

(h)	As a result of the defective works and/or design conducted in respect of the basements, they suffered from extensive leaks which caused loss and damage to Gem and exposed it to claims by Carton Developments and/or purchasers (SoC paragraph 42).

(i)	The structural design of the basements alternatively the ThermoneX X-Concrete basement units was flawed on several grounds including 11 grounds set out in the pleading (SoC paragraph 42).

(j)	The workmanship on the basements alternatively the ThermoneX X-Concrete basement units was flawed on several grounds including three set out in the pleading (SoC paragraph 42).

(k)	Each of Orchardville and Thermonex was in breach of contract in failing to ensure that the design, fabrication, supply, works supervision and installation of the basements alternatively the ThermoneX X-Concrete basements units was carried out competently and in a workmanlike manner using specified and proper materials, in accordance with the contract and the relevant designs and industry guidelines and to the standard that had been represented so that the basements were fit for purpose and suitable for the relevant conditions (SoC paragraph 43).

(l)	Each of Orchardville and Thermonex was in breach of the warranties in failing to execute remedial works to eradicate water penetration at basements affected by leaks (SoC paragraph 43).

(m)	Each of Orchardville and Thermonex was guilty of negligence and breach of duty (including statutory duty) in failing to ensure that the design, fabrication, supply, works supervision and installation of the basements alternatively the ThermoneX X-Concrete basements units was carried out in the same manner and to the same standard as alleged in relatiin to the contractual claim above (SoC paragraph 44).

(n)	Each of Orchardville and Thermonex was guilty of negligent misrepresentations in relation, inter alia, to the performance of the ThermoneX X-Concrete system and/or as to the manner in which the works would be done and principally because the basements designed and provided by them did not meet the standard represented by Orchardville at the outset of the development (SoC paragraph 45).

(o)	Each of Orchardville and Thermonex made an unjustified gain at the expense of Gem in that they have not provided the design and system which they were obliged to provide and/or failed to carry out their obligations under the warranties (SoC paragraph 46).

(p)	By reason of these breaches of contract, negligence, breaches of duty and misrepresentations on the part of Orchardville and Thermonex Gem has suffered loss and damage in the sum of €3,817,656.06 plus general damages measured by reference to potential claims by third parties (SoC paragraph 47).  The special damages claimed by Gem included a total sum of €1,952,405.08 in respect of remedial works to the basements (SoC paragraph 42).

(q)	The relief sought included declarations that Orchardville and Thermonex were obliged to indemnify Gem in respect of all losses etc arising from the design, supply and installation of the basements including the costs of all remedial works executed and compensation paid by Gem as well as damages for breach of contract, negligence, breach of duty (including statutory duty) and negligent misrepresentation and restitution (SoC prayer).

56.	Prior to service of Thermonex’s Defence some further information was provided by Gem (TD 2/172).  This added little to the particularisation save that, at paragraph 1, it noted that Orchardville had informed Gem that the majority of basement calculations were carried out in the UK by Thermonex and at paragraphs 32-34 there was a breakdown of the properties which were alleged to have sustained leaks and there was a summary of the remedial processes used.

57.	Thermonex served its Defence on 8 April 2011 (TD 2/535).  There was no positive case pleaded but rather a series of bare denials and non-admissions.  Thermonex denied that it was guilty of any of the wrongful acts or omissions alleged in the Statement of Claim and/or that it had acted in breach of contract, negligently or in breach of duty and/or that it was guilty of any negligent misrepresentations and/or had unjustly enriched itself at the expense of Gem.  It claimed to have no knowledge of the reporting of any leaks in May 2006 and/or any subsequent leaks and/or any contracts involving Gem and Swindon and/or Carton Developments and/or Gem and Orchardville.  In particular Thermonex denied that it

(a)	was appointed by Gem as a sub-contractor on the development to design, fabricate or install the basements and/or to provide the warranties;

(b)	was responsible for the design of the basements;

(c)	owed any duty of care to Gem in respect of the design and works;

(d)	had ever been a sub-contractor to Orchardville.

Axa’s Case
58.	Axa has raised a number of reasons as to why it has no liability under the Policy.  They can be conveniently grouped and dealt with under the following headings
(1)	The PL insuring clause
(2)	Restitutionary Claims
(3)	PL Territorial Limits
(4)	PL Exclusions
(5)	CAR Exclusions
(6)	Non/late Notification

(1)	The PL insuring clause
59.	In the Irish proceedings Gem’s case is that Thermonex owed it duties in contract and tort in relation to the design, supply and installation of the basements at the site and that it breached those duties in that the design of the basements was defective and the workmanship in relation to the basements was also defective with the result that the basements developed leaks and had to be repaired by remedial works.

60.	However, and significantly, it is not alleged that Thermonex’s breaches of its duties caused accidental loss or damage to any other property or any property belonging to any third party (or accidental injury to any person).  Gem’s case is purely that the basements themselves were defective and required remedial work.  To the extent that Gem’s case succeeds the only liability which Thermonex can have is a liability for pure economic loss.

61.	On a true construction of the Indemnity clause in the PL section of the Policy Axa is liable to indemnify Thermonex against all sums that Thermonex is liable in tort to pay as damages for accidental injury to third parties or accidental physical damage to property other than property being constructed by Thermonex.  The indemnity does not extend to liability for economic loss.

62.	James Longley & Co v. Forest Giles Ltd is a Court of Appeal authority almost directly on point in support of this construction. 

63.	In the Tesco case Tuckey LJ said as follows at paragraphs 14 and 18
‘A public liability policy provides cover against liability to the public at large. By contrast private liability arises from contracts entered into between individuals. Public liability in this sense arises in tort; it does not and cannot arise only in contract. As a general rule a claim in tort cannot be founded upon pure economic loss. So the judge was right to say that the fact that this was public liability insurance was important and that such policies do not generally cover liability in contract for pure economic loss. It is a strong pointer to the meaning of the words used. Of course it is not conclusive: the wording may extend cover to third party claims in contract even for pure economic loss although one would expect it to say so clearly and for such insurance to be described as contract liability, financial or consequential loss cover.
…
Looking at the insuring clause it is common ground that the words “shall be liable at law” are wide enough to include liability in contract. But it is the following words which make clear that the cover is against liability in tort; there is nothing in the wording to indicate that liability in contract under a contract of indemnity such as this was intended to be included. A tort gives rise to a liability “at law for damages”. Although a breach of contract does give rise to a liability at law for damages the critical question is what the liability must be for. The answer to this question is that the damages must be “in respect of” one or more of the classes of liability set out in (a) to (c). Each class of liability corresponds with a familiar class of liability arising in the law of tort, or its effect, from physical interference with a third party’s person, property or property rights and is typical of the harm associated with a project of this kind.

64.	In addition to the Tesco case,  Levine & ter Haar: Construction Insurance and UK Construction Contracts (2nd ed, 2008) paragraphs 8.6-8.14 concludes at paragraph 8.14
‘It therefore appears clear in respect of claims relating to construction projects that in order to bring a claim within a public liability policy it is necessary to show physical damage to property other than the property which is being constructed. Mere economic loss does not fall within the policy, nor does the cost of making good defects.’

65.	In my judgmentany claim by Thermonex for an indemnity under the PL section would be bound to fail.

(2)	Restitutionary Claims
66.	Restitutionary claims cannot be within the scope of cover provided by the PL section.  Restitution is concerned with the reversal of a gain not with compensating a claimant for its loss.  In my judgment even if Thermonex did have any liability to Gem to make restitution, it would not be legally liable to pay damages.

(3)	Territorial Limits
67.	The Indemnity clause of the PL section of the Policy provides cover in respect of accidental loss or damage to property occurring within the Territorial Limits as defined.  The primary definition of the Territorial Limits does not include the Republic of Ireland but there is an extension as regards countries in the EC.  The extension provides that the territorial limits include EC countries ‘in connection with temporary visits undertaken in the course of the Business by any person normally resident in the [UK]’.

68.	The claim against Thermonex is that it was responsible for the design, supply and installation of the basements.  All of the damage occurred in the Republic of Ireland.  There is no suggestion that any damage was in connection with any temporary visits by Thermonex.

69.	In my judgment, this claim would in any event be outside the territorial limits of any cover. 

(4)	PL Exclusions
70.	In my judgment there are three separate exclusions that are fatal for any potential claim under this policy: exclusions 2(c), 3(a) and 6.  In short if Thermonex has any liability in respect of the basements

(a)	it is a legal liability for loss or damage to property comprising the permanent or temporary works undertaken by Thermonex in the course of a contract with Gem where the works were under the control of Thermonex and it was responsible for them.

(b)	To the extent that Gem has particularised its claim for loss and damage, it is a claim for the costs of remedial or rectification works to the basements themselves.  If Thermonex has any liability to Gem in respect of the costs of remedial or rectification works to the basements themselves, such liability arises from defects in works executed by Thermonex at the site and/or goods or materials used by Thermonex or from the unsuitability of works executed by Thermonex at the site and/or goods or materials used by Thermonex.

(c)	To the extent that Thermonex has any liability to Gem by virtue of any agreement entered into by Thermonex and Gem, including the warranties, by reason of exclusion 6 of the PL section of the Policy Axa is not liable for any liability so assumed by Thermonex.

(5)	CAR Exclusion
71.	Exclusion 10 of the CAR section of the Policy provides that Axa has no liability to Thermonex in respect of the costs necessary to replace repair or rectify any insured property which is in a defective condition owing to any defect in design or workmanship on the part of Thermonex save that the exclusion does not apply to property which is free of such defective condition but is damaged as a consequence of such defect.

72.	Gem’s case is that Thermonex is liable to it in contract and tort for defective design and workmanship in relation to the basements and its claim is for the costs of remedial or rectification works to the basements themselves required as a result of such defective design and/or workmanship.  There is no suggestion that any other property was damaged as a result of the defective condition of the basements.

73.	In my judgment any potential claim under this policy would be excluded.  

(6)	Non/Late Notification
74.	In my judgment, even if contrary to the above, it could somehow have been demonstrated that Axa is liable to indemnify Thermonex either under the PL or the CAR section of the Policy, Axa has a complete defence to any claim under either section of the Policy on the grounds that Thermonex failed to notify Axa of any claim either at all or timeously.: see the evidence on notification at paragraphs 10-15 of the witness statement of Mr Johnstone of Axa and paragraphs 21-44 of the witness statement of Mr Aulton of Thermonex.

75.	As regards the PL section the notification provision is at Special Condition 4 (‘SC 4’) (TD 1/132).  There is a similar provision in the General Conditions attaching to the entire Policy at General Condition 3 (‘GC 3’) (TD 1/30).  SC 4 does not expressly state that compliance with the notification provisions is a condition precedent to liability but Special Condition 1 states that due observance of the conditions of the Policy is a condition precedent to the liability of Axa.  It is well-established that such general provisions in insurance contracts are effective to create conditions precedent.  The General Conditions take a slightly different approach.  GC 3 expressly states the consequences of non-compliance and there is also a general provision at GC 15 (TD 1/33).  Either is sufficient, in my judgment to create a condition precedent.

76.	SC 4 stipulated that in the event of any occurrence which may give rise to a claim ‘the Insured shall immediately’ give written with full particulars to Axa and forward to AXA immediately upon receipt any letter claim writ summons or process.  GC 3 also required immediate notification.

77.	On the facts Mr Aulton of Thermonex has frankly conceded that he never intended to notify Axa of any claim and never did so.  It follows that Thermonex simply cannot have complied with any part of GC 3 and/or SC 4.

78.	It may be argued that the correspondence initiated by MOP with Axa in the middle of 2011 constituted sufficient notification for the purposes of the Policy.  Leaving aside the fact that it could not on any view be said to have been given immediately the argument runs into the fundamental difficulty that the conditions require the insured to give notice and full particulars and, as regards SC 4 and part of GC 3, to do so in writing.  The recent trend of authorities suggests that the formal requirements of notification are fairly undemanding but that where they do impose specific requirements they have to be met.

79.	If reliance was sought to be placed upon the MOP letter dated 24 August 2011 as constituting notification, it was not given by Thermonex and/or did not contain full particulars of such occurrences and, in any event, was not given immediately, having been provided up to 5 years after the relevant occurrence, viz the discovery of leaks in 2006 alternatively was not immediately after the issue of proceedings in Ireland in September 2009.

80.	Notification under the CAR section of the Policy is governed by GC 3.  The arguments are similar to those arising above as regards the PL section.  However, the obligation here was to provide immediate notice of any loss destruction or damage.  Gem’s case is that the first report of a leak at one of the basements was made to Thermonex on 10 May 2006 and that further reports were made to Thermonex thereafter on a continuing basis up to about August 2009.  Had Thermonex wanted to make a claim under the CAR section it would have had to give immediate notice to Axa of such occurrences from about May 2006 onwards.  It has never done so and never intended to do so.

Conclusion
81.	In my judgment, the Claimants are entitled to the declarations sought, namely that it is under no liability to indemnify the Defendant (‘Thermonex’) under a Commercial Combined policy of insurance, policy number CW COM 6100218 (‘the Policy’), pursuant to which Axa insured Thermonex initially for the period 22 April 2004 to 21 April 2005 and thereafter by renewal for the periods 22 April 2005 to 21 April 2006 and 22 April 2006 to 21 May 2007.  

His Honour Judge Simon Brown QC 
Specialist Mercantile Judge 
Birmingham Civil Justice Centre 
Clerks: Alison Wood & Caroline Norman
birmingham.mercantile@hmcts.gsi.gov.uk 
Tel: (0121) 681 3035 
Website: http://www.justice.gov.uk/courts/rcj-rolls-building/mercantile-court
8th August 2012