Tesco Stores Ltd v Constable & Ors

The question in this case is whether Tesco, the claimant insured, can recover from the defendant excess public liability insurers a large sum which it became liable to pay under the terms of a deed of covenant for economic loss to a third party affected by its activities. At a trial of preliminary issues Field J. decided that it could not ([2007] EWHC 2088 (Comm)). Tesco say he took too restrictive a view of the cover.

In 2003 Tesco embarked on a project to build a supermarket over a railway cutting near Gerrards Cross station. The railway was to be enclosed in a tunnel and the supermarket was to be built upon the infill site above it. Whilst this work was being carried out on 30 June 2005 part of the tunnel collapsed. The railway line between Beaconsfield and Denham stations had to be closed for 51 days.

The railway track and surrounding land were owned by Network Rail. Chiltern Railway Co. Limited operated the railway under a Track Access Agreement with Network Rail which gave it a contractual licence to run trains on the track and carefully defined rights to compensation if it was unable to do so. But additionally Chiltern entered into the deed of covenant with Tesco to which I have referred which by clause 4.2 required Tesco to pay Chiltern

As a condition of carrying out licensed activity on the railways Tesco were required by the rail regulator to take out public liability insurance of £155m. “in respect of legal liability which may be incurred by [the insured] in respect of death or bodily injury to any person and loss or damage to property arising from the activities authorised by each licence holder”.

To this end Tesco obtained its first £5m. layer of public liability cover as part of a Project Insurance Package written by Royal and Sun Alliance. The excess layers above £5m were written on separate slips by the 1^st to 5^th defendants (£15m) and the 1^st and 4^th to 7^th defendants (£30m). The insurers of the layers above this level are not involved.

The public liability cover on each of the excess insurances was “as per underlying policy wording” – in other words in the same terms as the public liability cover provided in the Project Insurance Package. This was a standard form combined policy which also provided cover for construction all risks, increased costs of construction and non-negligence. The insured included Tesco and all its contractors, sub-contractors, suppliers, manufacturers and consultants. Cover was provided as if separate policies had been issued to each insured and the insurers agreed to waive all rights of subrogation which they might have against any of them, absent fraud or the like.

The relevant terms of the public liability section of the policy are as follows:

death of or bodily injury to or illness or disease of any person

loss or damage to material property …

obstruction, loss of amenities, trespass, nuisance or any like cause

arising solely under fines, pre-determined penalty or liquidated damages clauses in any contract or agreement, or any punitive or exemplary damages

Fortunately no-one was injured by the collapse of the tunnel. The track and signalling equipment belonging to Network Rail were damaged and the track was obstructed but there was no damage to any property belonging to Chiltern. It had a claim against Network Rail under the Track Access Agreement which public liability insurers have paid on the basis that this claim could have been passed on by Network Rail to Tesco as part of a claim in tort because its liability to Chiltern flowed directly from the damage to its property or property interests.

The major part of Chiltern’s claim under the deed of covenant was for loss of passenger revenues from the time the line was reopened to 2010. Tesco has agreed its liability for this claim in a confidential settlement agreement. If Tesco are entitled to be indemnified against this liability it will involve the first and second excess layers – the underlying cover is already exhausted.

The preliminary issues determined by the judge were:

The judge essentially accepted the submissions of Mr Edelman Q.C. counsel for the insurers. He said that the fact that this was public liability insurance was very important. Public liability policies covered liability to the public at large for claims in tort or for the type of damage protected by the law of tort; they were not generally regarded as affording cover against liability in contract for pure economic loss. The words of the insuring clause had to be read as a whole. Each of paragraphs a), b) and c) contemplated harm for which there was liability in tort. Giving due weight to the linking phrase “in respect of” the judge had no doubt that the core meaning of the words “all sums for which the insured shall be liable at law” was all sums for which the insured shall be liable at law in the torts of nuisance and trespass and such torts as provide compensation for the harm identified in paragraphs a), b) and the balance of c). Although this was the core meaning of the words used the clause was nevertheless to be construed as covering any liability in contract which was co-extensive with the liability in tort comprehended by paragraphs a), b) and c). The contractual liability extension did not radically extend the cover. It did no more than provide cover for an insured who was liable in contract for a tort comprehended by a), b) or c) committed by another party in the course of a project.

There is no issue between the parties that the wording of the cover has to be construed as a whole and that the words used have to be given their ordinary and natural meaning in the contractual and commercial setting in which they appear. This of course includes the requirement for public liability insurance by the rail regulator and the fact that the deed of covenant was not seen by the insurers.

There is however an issue as to the importance to be attached to the fact that this was a public liability insurance. Mr Fenwick Q.C. for Tesco submits that the judge attached too much importance to this. In this context he says that all it means is liability to third parties as opposed to the private liabilities arising between the various parties involved in the project itself. It gives no clue as to whether the insurance is intended to cover third party claims in contract.

I do not agree. 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 first at the wording of the insuring clause as a whole, ignoring for the moment the extension and exception, it strikes me as a typical public liability cover. This is what one would expect in a standard form such as this. It self evidently covers liability for tort claims as Mr Fenwick accepts.

But Mr Fenwick says it does not follow that other liability at law was not covered. The words “all sums for which the insured shall be liable at law” are quite wide enough to cover contractual claims and there is no legal or commercial imperative to limit cover to liability in tort or simply to co-extensive contractual liability. The cover is not for any contractual liability because the liability must be “in respect of” one or more of the events identified in a) to c). That is the controlling mechanism. Looked at in this way Tesco’s liability to Chiltern was typical of a public liability claim: liability to a third party carrying on a business over land on or adjacent to the insured project who suffered loss as a result of material damage to the line and/or “obstruction, loss of amenities, … nuisance or any like cause” arising out of the project.

In support of these submissions Mr Fenwick said that it would be extremely unfair to interpret the wording so as to confine the cover to liability in tort. He accepted that the consequence of doing so would be that Chiltern’s claim was not covered because it had suffered no material damage and did not have a sufficient proprietary interest in the railway upon which to base tortious claims for obstruction, loss of amenity or nuisance. If Chiltern had been the owner or lessee of the land over which the railway ran, as British Rail had been before its privatisation, it could have recovered its financial loss consequent upon the physical damage to its property and obstruction of the line. As a licensee it suffered in exactly the same way but had no claim in tort because its proprietry interest was insufficient. Why should it not have sought to protect itself against the consequences of this insufficiency by an agreement of the kind contained in the deed of covenant and why should Tesco not be entitled to indemnity against a claim made under this deed subject to the controlling mechanisms contained in the insuring clause?

Eloquently though Mr Fenwick advanced these arguments I remind myself that sympathy is not an aid to construction. 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.

Mr Fenwick’s submissions involve giving the words in class c) a non-technical meaning so that Tesco can escape from the consequences of having to show that its liability to Chiltern was tortious. As a matter of ordinary language he said there had been obstruction, loss of amenity and nuisance as a result of the collapse. I cannot accept this. The words could not be intended to bear such an ill-defined meaning. If one gets away from the clearly defined situations in which tortious liability will arise one enters a realm of enormous uncertainty. Many things can be described colloquially as a nuisance or loss of amenity and on this approach “any like cause” could mean almost anything disagreeable.

Now the judge accepted that the wording could be construed to cover contractual liability co-extensive with liability in tort on the ground that to decide otherwise would be decidedly uncommercial. Although I do not think the language itself entirely supports this construction, I would agree with this because sometimes the niceties of the language have to give way to a commercial construction which is more likely to give effect to the intention of the parties.

Before considering the effect of the extension and the exception it is necessary to look further at the meaning of the words “in respect of” in the insuring clause because they are important.

Put shortly these words mean “for” and not merely “caused by”, “consequential upon” or “in connection with”. So in the context of the insuring clause a) the insured’s liability must be for death or injury, that is to say to the person who has been killed or injured; b) the liability must be for loss or damage to material property of the person whose property it is – liability for loss suffered by someone else as a consequence of such damage is not “ in respect of” it; and c) liability for any of these torts must be to the person who has the right to claim – liability for loss suffered by someone else as a consequence of the tort is not “in respect of” it.

Mr Fenwick did not seriously dispute that the words “in respect of” had this limiting effect. I think he was right not to do so because this is established by authority. Mr Edelman relied on three decisions of this court: AS Screenprint v British Reserve Insurance Limited [1999] 1 Lloyds Rep. IR 430, Rodan v Commercial Union [1999] Lloyds Rep IR b499 and Horbury Building Systems v Hampden Insurance [2007] Lloyds Rep IR 237 and a decision of Moore-Bick J. in James Budgett Sugars Limited v Norwich Union Insurance [2003] Lloyds Rep IR 110. Each of these cases was concerned with product liability cover and whether the insured’s contractual liability to its customers for economic loss was covered. Broadly speaking the covers in each case were for liability “in respect of” damage to property. In each case claims for economic loss consequential upon but not directly the result of physical damage to property were rejected. In Rodan at page 500 Hobhouse LJ said:

So I turn to the contractual liability extension. It is common ground that this is not some general extension to the cover provided by the insuring clause. It remains faithful to that clause by the words “shall be the subject of indemnity under this section”. Thus for the extension to apply the contractual liability assumed must still be “in respect of” the physical impact on a third party claimant’s person, property or property rights.

Various suggestions are made as to what the extension could apply to. A third party potentially affected by the project might contract with Tesco or one of the other insured that it would be liable in the event that he suffered harm of the kind identified in the insuring clause arising out of the project irrespective of the identity of the actual tortfeasor. The various parties involved in the project might also, between themselves, have assumed contractual liability for torts committed by others. The contractual extension would ensure that this did not impair the cover.

Mr Fenwick accepts that the contractual extension may have been designed to deal with situations like this but submits that the wording is not limited in that way. Why should the extension not apply equally to a third party like Chiltern whom Tesco have agreed to compensate even though it has no claim in tort?

I think the simple answer to this question is that it does not apply because any loss which Chiltern suffers is not in respect of physical impact on its property or property rights. Its loss is only the consequence of such impact on the property and property rights of others. In other words Chiltern’s claim under the contract extension runs into precisely the same difficulties as its claim in tort. Mr Fenwick sought to get round this by suggesting that Tesco had a contractual claim for obstruction, loss of amenity or even nuisance which would not encounter such difficulties. But this reintroduces his argument, which I have already rejected, that the words in class c) should be given a non-technical meaning. If, as I think, the words define the insured’s liability in terms of the law of tort the fact that the third party claims in contract can make no difference. So for these reasons I do not think the contractual liability extension assists Tesco.

Nor do I think that the exception casts any real light on the true construction of the policy. The fact that it appears before the extension in the wording is not significant. One would normally consider an exception once the full extent of the cover had been determined. The extension can readily be explained if it is considered after the contract extension. Even if it is not, it adds some weight to the conclusion that the insuring clause was intended to cover coextensive contractual liability but goes no further than this. On any view it cannot transform of this policy into one which covers contractual liability for pure economic loss.

It follows from what I have said above that I think Tesco’s claim under b) fails because Chiltern has not suffered material damage to its property. It is not enough to say, as Mr Fenwick did, that it has suffered in respect of Network Rail’s damage to property. That ignores the limiting effect of the words “in respect of” which require the loss to be directly caused by physical damage to the third party claimant’s property. Tesco’s liability was not in this sense in respect of material damage to property, but in respect of its contractual obligations under the deed of covenant. Nor for much the same reasons does Tesco have any claim under class c). It was not liable to Chiltern in tort for any interference with Chiltern’s property rights; nor was it liable in contract in respect of liabilities defined by the law of tort. It was only liable to Chiltern under the deed of covenant for economic loss.

Chiltern’s claim against Tesco was not typical of a public liability claim. It was a straightforward contractual claim for economic loss. Tesco had not damaged Chiltern’s property or property interests and could not found its liability to Chiltern on the ground that it had damaged Network Rail’s property or property interests.

If of course Chiltern had itself suffered such damage things might have been different. But Chiltern did not suffer the necessary damage because it only had a limited interest in the railway. That was the result of the arrangements which these sophisticated commercial parties had made with one another. Chiltern might have secured a more favourable agreement with Network Rail in the event that it could not use the line or, say, obtained its own business interruption cover. But Tesco’s claim under its public liability insurance cannot be built upon the fact that Chiltern did not do so. Instead Chiltern elected to obtain from Tesco a very extensive contractual indemnity against economic loss which was independent of any tortious liability and of which the insurers were unaware. In these circumstances there is no basis for giving the contractual liability extension clause or any other provision of the policy the construction for which Tesco contend either on the strict wording of the policy or by giving the wording a wide purposive construction. It is not without significance that, if Tesco had wished to cover the liability it had expressly undertaken, it would have been a simple matter to provide a copy of the deed of covenant to insurers and agree a simple clause to cover that liability, if insurers had been prepared to do so at a premium acceptable to Tesco.

So for these reasons, which are much the same as the judge’s, I would dismiss this appeal.