A recent House of Lords Scottish law decision has given employers and their insurance companies reasons to be cheerful.
The House of Lords has refused to allow the insurance provisions in a subcontract to prevent recovery of damages from a subcontractor that allegedly caused damage to an employer's property.

The decision in British Telecommunications plc vs James Thomson and Sons (Engineers) Ltd concerned an appeal from the Scottish courts, but it is also important for those elsewhere dealing with the same contract conditions.

Thomson was the domestic steelwork subcontractor on a repair contract for BT's premises in Glasgow. Its contract with the main contractor, MDW, incorporated JCT80's main contract provisions, including the insurance arrangements found in clauses 20 and 22.

During the course of the works, a fire broke out and BT's building was damaged. BT sued Thomson which it alleged started the fire through negligence.

Before the facts of the case could be dealt with, Thomson objected to the basis of BT's case. The case had been brought under the law of delict (tort) as BT had no contract with Thomson. As a starting point, BT had to establish that Thomson owed it a duty of care not to cause damage by fire. Thomson claimed that no such duty existed.

The parties and the courts accepted that one requirement for establishing that a duty of care exists is that it should be fair, just and reasonable to impose it in the circumstances of the case. The significant factor in applying this test was the contractual setting against which the case took place.

The main contract placed an obligation on BT to insure against damage to existing buildings by fire. The main contractor could not be held liable by the employer (or more likely the employer's insurer suing in his name) for such damage – whether caused by its own employees or its subcontractors.

  • Domestic and nominated subcontractors do not enjoy the same legal rights
  • Insurers can sue domestic subcontractors for any losses suffered

Thomson argued that in tendering for the subcontract, it would be reasonable to assume that it would be taking on no greater liability than the main contractor, and that BT was taking the risk in respect of this specified peril. On that basis it would not be fair, just and reasonable to impose the duty of care.

The lower courts in Scotland accepted Thomson's argument and dismissed the case, but BT appealed to the House of Lords.

BT urged the Lords to consider the whole of the insurance provisions, and not simply the obligation on BT to insure against this event. In particular, the fact that, unlike nominated subcontractors, domestic subcontractors were not protected against any action by the employer's insurer for damage to existing buildings and contents.

The court supported BT's arguments. Ordinarily, an insurer that had to indemnify the employer for loss or damage would be entitled to take action against a party responsible. A domestic subcontractor did not have the benefit of the contractual exclusion enjoyed by nominated subcontractors.

A subcontractor could not assume that simply because an obligation existed for the employer to insure, that this would free it from responsibility for its negligent acts; it would still be answerable to an action by insurers suing in the employer's name. BT's case was therefore allowed to proceed.

The House of Lords' decision will be welcomed by employers and their insurers. The facts of this case are not unusual – subcontracts often incorporate main contract terms, and the conditions here are commonplace. For existing policies, insurers will be grateful that the right of relief is not excluded. As for future policies, premiums will take account of the insurer's right to pursue responsible parties; the loss of this right would mean greater premiums. For this reason, employers will welcome the decision, but also because they will not have to become concerned with the contractual set-up for domestic subcontractors.