St Paul Fire & Marine Insurance Company (UK) Ltd v Mcdonnell Dowell Constructors Ltd
| Jurisdiction | England & Wales |
| Judge | Nourse,Evans,Rose L JJ |
| Judgment Date | 03 May 1995 |
| Court | Court of Appeal (Civil Division) |
| Date | 03 May 1995 |
Court of Appeal
Nourse, Evans and Rose L JJ.
Patrick Phillips QC and Tom Weitzman (instructed by Herbert Smith) for the contractors.
Murray Pickering QC and Nicholas Hamblen (instructed by Kennedys) for the insurers.
The following cases were referred to in the judgment of Evans LJ:
Carter v BoehmENR(1766) 3 Burr 1905; 97 ER 1162.
Container Transport International Inc v Oceanus Mutual Underwriting Association (Bermuda) LtdUNK[1984] 1 Ll Rep 476.
Davis Contractors Ltd v Fareham Urban District CouncilELR[1956] AC 696.
Edgington v FitzmauriceELR(1885) 29 ChD 459.
Ionides v PenderELR(1874) LR 9 QB 531.
JEB Fasteners Ltd v Marks Bloom & CoUNK[1983] 1 All ER 583.
Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co LtdUNK[1993] 1 Ll Rep 496 (CA); [1994] CLC 868; [1995] 1 AC 501 (HL).
Smith v ChadwickELR(1884) 9 App Cas 187.
Insurance: Material non-disclosure and misrepresentation Contractors' all risks insurance of design and construction of buildings Plans with piled foundations provided to insurers Policy issued Difference of expert opinion on required foundations Buildings redesigned with shallow foundations without safeguards Insurers not notified of alteration During construction extensive subsidence damage discovered Whether material non-disclosure and misrepresentation by contractors Whether insurers entitled to avoid policy.
This was an appeal by contractors against a decision of the Commercial Court that insurers were entitled to avoid an insurance policy in respect of a building damaged by subsidence caused by inadequate foundations.
The appellant contractors were appointed by the government of the Marshall Islands to design and build a parliament building and a four storey administration block. The contractors were directed to proceed with phase 1 of the design in October 1989. In November the contractors instructed insurance brokers to obtain quotations for contractors all risks (CAR) insurance, for which purpose various drawings and plans were provided. Those plans showed that the projected buildings had piled foundations, which were recommended by consulting engineers in 1982, although in view of the ground conditions shallow spread footings with additional safeguards were regarded as feasible. A proposal was made to the respondent insurers in London early in 1990. The quotation slip dated 9 January 1990 included a contract description and copies of the plans. The policy, dated 27 November 1990, made no reference to the foundations. In fact the buildings were constructed on spread foundations without safeguards, a shallow alternative which was much cheaper than piled foundations, and which in 1990 consulting engineers advised the contractors were adequate. The insurers were not informed of the alteration to the design of the foundations.
While the buildings were being constructed subsidence damage was discovered on 21 December 1990 affecting the entire parliament building and two-thirds of the administration block. The contractors made a claim under the insurance policy. The insurers, discovering that the design of the foundations had been changed without their knowledge, and that the shallow foundations had proved insufficient to support the buildings, sought a declaration that they were entitled to avoid the policy on the grounds of material misrepresentation and non-disclosure. Potter J, applying the notional prudent underwriter test, held that the insurers were entitled to the declaration sought. The contractors appealed.
Held, dismissing the contractors' appeal:
1. The insurers had a right to avoid the policy only when the misrepresentation or nondisclosure by the insured was material and when the actual insurer was induced thereby to enter into the contract. All matters were material which would have been taken into account by the underwriter when assessing the risk, whether or not those factors increased the risk. (Pan Atlantic Insurance Co Ltd & Ors v Pine Top Insurance Co Ltd[1994] CLC 868applied.)
2. The true facts, that the contractors intended to use spread rather than piled foundations, that ground conditions made it questionable whether such foundations without safeguards were adequate for the site in question and that conflicting views had been expressed by experts, were not disclosed to the underwriters before the contract was made. If those facts had been disclosed they would certainly have affected the prudent underwriter's estimate of the risk, therefore they were material. Similarly the statements in the quotation slip that piled foundations formed part of the project, were misrepresentations. Accordingly the insurers were entitled to avoid the policy on those grounds, subject to proof that the actual underwriters were thereby induced to enter into the contract of insurance on the terms which they did.
Evans LJ: This is an appeal from a decision of Potter J, whose judgment is reported at [1993] 2 Ll Rep 503. The appellants were the contractors for a construction project in the Marshall Islands. Their client was the government of that territory and the project comprised the Hall of Islands' Parliament (the Parliament building) and a four storey administration block. The contract was for design as well as construction. The appellants were instructed to proceed with phase I of the design in October 1989. The contract is dated 12 December 1989.
In early November the appellants instructed Sedgwick James Ltd, insurance brokers in Auckland NZ, to obtain quotations for contractors all risks (CAR) insurance from among others the London market. The immediate need was to obtain a potential insurance cost for the purposes of the overall construction budget. Some time after 7 November, Mr Andreas Kung, a senior accounts executive, visited the offices of McDonnell Dowell (NZ) Ltd and obtained information which included various drawings and plans dated 9 November. These plans, which are in evidence, were schematic only but they showed that the projected buildings had piled foundations, with a certain amount of detail as to the positioning and dimensions of the piles.
This led ultimately to a proposal made to the respondent insurers in London in January/February 1990. The quotation slip dated 9 January included the following contract description:
The capital project comprises of two main buildings as follows:
(1) Mitijela Hall
The Mitijela Hall is approximately 1982 sq metres in floor area with concrete slab floor, steel frame work, cement fibre exterior panels and plywood shingle roofing.
(2) Administration Building
The administration building is approximately 4159 sq metres in floor area in four levels with each floor being set in from the next giving a terrace effect to each end of the building.
The floor will be concrete slab supported on approximately 50 piles 450 & 350 millimetres in diameter. The structure will be all concrete, cast in situ or utilising precast beams. Exterior will be glass curtainwall and two lifts will be incorporated in the building.
The work method included:
The major items of plant required to carry out the contract will be an estimated 40 ton crawler crane plus a piling rig.
The quotation slip was accompanied by copies of the plans dated November 9 and by a bar chart which showed a period of 4-5 months for design of the foundations. The slip was initialled by the lead insurer on 15 January. The final acceptances dated 22 February so far as relevant are in the following terms:
Period: 22 months from 16 February 1990 plus 12 months maintenance period thereafter.
Interest: In respect of the capital project which comprises of the Mitijela Hall and an administrative building.
Sum assured: US$9,000,000 representing the total contract value.
Situation: Majuro, Marshall Islands.
Minimum and deposit premium: US$26,100 adjustable at 2.90 per cent on final contract value.
Brokerage: 27.5 per cent plus tax as applicable.
The policy issued subsequently is dated 27 November 1990. The subject-matter is described in the same terms as the slip, and the sum insured as follows:
US $9,000,000 Representing the total contract value and in respect of contract works completed or in progress '
The policy contained no reference to the foundations.
Meanwhile, the foundations had been designed and constructed and construction of the buildings was in progress. On 21 December 1990 subsidence damage was discovered which affected two-thirds of the administrative building and all of the Mitijela Hall (judgment, p. 508). No findings are called for at this stage as to the causes of the subsidence or as to the extent of the insurers' liability, if any, under the terms of the policy for damage suffered thereby, or for the cost of remedial works. The respondents as plaintiffs in the action claim a declaration that they are entitled to avoid the policy on grounds of material misrepresentation and non-disclosure. This arises from their discovery, after the subsidence and damage occurred, that the buildings were not supported on piles or any other kind of deep foundations, but on a shallow alternative known as spread foundations. These were constructed after excavations no more than about 7.5 feet deep. The ground conditions being a combination of coral limestone and layers of gravelly sand, with some cavities and pockets of loose sand (judgment, p. 505), the shallow foundations proved insufficient to support the buildings even before they reached their full heights.
This error in presentation was the result of a mistake which it is accepted was made in good faith by the appellants and their insurance brokers, Sedgwicks, and which would at once have been communicated to the respondents had anyone been aware that it had been made (judgment, p. 508). This said, however, it is not clear whether the mistake lay in giving Mr Kung on behalf of Sedgwicks the drawings dated 9 November which explicitly showed piled...
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