Bowen Construction Ltd v Kelcar Developments Ltd

• Jurisdiction: Ireland
• Judge: Mr. Justice Ryan
• Judgment Date: 16 October 2009
• Neutral Citation: [2009] IEHC 467
• Docket Number: No. 242 S.S./2009
• Court: High Court
• Date: 16 October 2009

[2009] IEHC 467

THE HIGH COURT

No. 242 S.S./2009

Bowen Construction Ltd v Kelcar Developments Ltd

IN THE MATTER OF THE ARBITRATION ACTS 1954 TO 1998 AND

IN THE MATTER OF SECTION 35 (1) OF THE ARBITRATION ACT 1954

AND IN THE MATTER OF ORDER 62 OF THE RULES OF THE SUPERIOR COURTS, 1986

AND IN THE MATTER OF A SPECIAL CASE STATED BY AN ARBITRATOR IN THE COURSE OF A REFERENCE TO ARBITRATION

BETWEEN

BOWEN CONSTRUCTION LIMITED

PLAINTIFF

AND

KELCAR DEVELOPMENTS LIMITED

RESPONDENT

ARBITRATION ACT 1954 S35

LINDEN GARDENS TRUST v LENESTA SLUDGE DISPOSALS LTD 1994 1 AC 85

ALBACRUZ CARGO OWNERS v ALBAZERO 1977 AC 774

DARLINGTON BC v WOLTSHIRE NORTHERN LTD 1995 1 WLR 68

MCALPINE v PANATOWN 2001 AC 518

BURKE (A MINOR) v DUBLIN CORP 1991 1 IR 341

CONTRACT

Building contract

Privity of contract - Exceptions to privity of contract - Whether employer in building contract can sue for losses incurred by third party - Whether party can sue for losses incurred by third party where no other remedy available - Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 and Linden Gardens Trust Ltd v Linesta Sludge Disposals Ltd. [1994] 1 AC 85 followed - Rules of the Superior Courts 1986 (SI 15/1986), O 62, rr 2 and 5 - Arbitration Act 1954 (No 26), s 35 - Questions answered (2009/242SS - Ryan J - 16/10/2009) [2009] IEHC 467

Bowen Construction Ltd v Kelcar Developments Ltd

JUDGMENT of

Mr. Justice Ryan

delivered on the 16th day of Oct 2009

1 Blarney Golf Resort, Co Cork consists of a golf course, a clubhouse, a hotel and 56 cottages. The course is owned by Kelcar Lands Ltd. and the clubhouse and hotel by a group of private investors. Eighteen of the cottages have been sold while the remaining 38 continue to be held by Frank and Derek McCarthy, the shareholders in Kelcar Developments Ltd. party to these proceedings. The resort is operated by BGR Limited, a wholly owned subsidiary of Kelcar.

2 The construction work for the development was carried out pursuant to a building contract between Kelcar Developments Ltd. [Kelcar] as employer and Bowen Construction Ltd. [Bowen] as contractor. Kelcar transferred the ownership of the buildings to others, including associated persons and companies, on foot of development agreements. Under one of the terms of the building contract, Bowen agreed to execute collateral warranties to give the transferees of the buildings similar rights to sue for defects as were contained in that agreement. The development agreements also contained warranties by Kelcar as to the quality of the buildings.

3 Pursuant to the undertaking in the building contract Bowen executed collateral warranties under seal in favour of the private investors, who own the clubhouse and the hotel, which conferred on them the right to pursue the contractor for defects. However, in the case of the cottage owners, although Kelcar and Bowen agreed that such warranties would be given, they have not, in fact, been executed. Bowen submitted that it is willing do to so but has not been called upon to execute any such warranty. Kelcar does not contest this proposition.

4 The arbitrator in a dispute under the building contract for the development has sought directions from the court in respect of issues that have arisen in the course of the hearing. Under s. 35 of the Arbitration Act1954, he has stated questions of law in the form of a special case for the decision of the court. The legal issue raised is whether the employer who is party to the building contract can counterclaim and set off in the arbitration the costs of remedying defects, and anticipated consequential losses arising therefrom, in circumstances where those losses have been or will be sustained by other persons or companies who were not parties to the building contracts. The question has not been the subject of a written decision by a court in this jurisdiction but the English Courts have done so and the House of Lords considered the question as recently as 2001. In this reference, Bowen Construction Limited [Bowen] is the contractor and Kelcar Developments Limited [Kelcar] the employer in the building contract.

5 Kelcar does not have any legal interest in the buildings that have the alleged defects; neither does it operate the resort. The buildings are owned by different but (for the most part) associated persons or companies and the resort is operated by a wholly owned subsidiary company, BGR Ltd. When these issues came to light during the proceedings, the arbitrator gave leave for Kelcar to amend its points of defence and counterclaim, but he rejected an application to join BGR as a party in the arbitration. The amended pleading set up the cost of remedying the defects in the buildings, plus projected consequential losses ascribed to BGR, by way of counterclaim and set off, in reduction of the claim for extra payment under the contract. An amended answer by Bowen denied the legal validity of these claims on the grounds that Kelcar was not entitled to make them because it had not and would not sustain any losses itself and that the parties that had done so or would do so were not parties to the building contract.

6 It is claimed that there were serious defects in the buildings, particularly in the construction of the roofs, giving rise to a substantial claim for compensation in respect of repair costs and consequential loss. The claim for loss includes that of BGR which, it is said, will have to close the resort for the duration of the repair work and will suffer disruption of business. Bowen does not admit that any of these losses has arisen or will arise. It is however accepted that, for the purpose of answering the questions posed by the arbitrator, it is to be assumed that there were defective roofs and that they will give rise to the alleged losses, or some of them.

7 The contractor relies on the doctrine of privity of contract. Only a party to a contract can sue for breach. And a claimant can only recover losses that he has sustained or will sustain. Kelcar counters this argument on two grounds, which, to say the least, are not wholly consistent. In written submissions, it contends that the facts of the case come within an exception to the privity rule that has been recognised in a series of English cases, which reflect the development of the Common Law and ought to be followed. In oral argument on the reference, Counsel for Kelcar adopted these written submissions but also made the case that the provisions of the building contract itself enabled the third party losses claims to be maintained. If this latter submission is correct, it means that it is unnecessary to rely on the privity exception and it would also seem that the amendments sought by Kelcar in the arbitration would not have been needed, because the claims could simply have been advanced under the building contract. I consider the second of these arguments before turning to the privity issue.

8 This contention is that clauses 21(A) and 21(B) apply to losses sustained by third parties and authorise the employer to make a claim in respect of such losses under the terms of the contract. Section 21(B) deals with insurance against damage to persons and property and it is contended that this has relevance because it requires a building contractor to arrange for insurance against the liability that is described in s. 21(A) but it does not appear to have any other significance. Clause 21(A) at para. (i) imposes liability on the contractor and an obligation to indemnify the employer in respect of any loss, damage or injury to personal property that "arises out of or in the course of or by reason of the execution of the works" if that is due to negligence or fault on the part of the contractor or a sub-contractor or their servants or agents. Paragraph (iii) excludes the building works themselves from the above liability up to the date of practical completion or earlier if the contractor's function is terminated. It is suggested that these provisions introduce a liability for loss or damage suffered by third partiesafter the date of practical completion or determination of the contractor's employment.

9 I cannot accept this interpretation. These contractual provisions in my view are intended to apply to entirely different situations from the one proposed. They dealinter alia with personal injury and damage to personal property that arise out of or in the course of the works, due to the negligence of the contractor or a sub-contractor or a servant or agent of either. For obvious reasons, the contract imposes or recognises that liability on the part of the contractor and provides for an indemnity for the employer and this liability comes to an end when the building work is practically completed. A reading of s. 21(B) which relates to insurance, confirms this meaning. It is simply a misreading to think that Clause 21(A) extends the contractor's liability to parties claiming losses by reason of defective execution of the building work, when para (iii) expressly excludes the works themselves. The time period specified is a limitation of liability not a commencement date.

10 Turning to the other argument made by Kelcar in its written submissions, this is that the case comes within the exceptions to the privity rule that have been recognised by the English Courts in order to avoid injustice. Kelcar says that Bowen's argument would result in a situation where the building contractor would be "entitled to escape all liability for its...