On 16 January 2019, Mr Andrew Burrows QC, sitting as a Deputy High Court Judge, handed down judgment in the case of Palliser Ltd v Fate Ltd (in liquidation) and The National Insurance and Guarantee Corporation Ltd, a long running dispute involving a restaurant fire in January 2010. At issue was whether an insured freeholder was covered for its legal liability in negligently causing damage to the leaseholder’s demised premises, and whether it had the benefit of a Berni Inns defence to the claim brought by the leaseholder.
Fate Limited (“Fate”) was the freeholder of 228 York Road, London, SW11 (the “Property”). Palliser Ltd (“Palliser”) was a property developer. Fate ran a restaurant from the ground floor and demised the “Upper Floors” to Palliser under a long lease (the “Lease”), which it converted into seven flats.
Fate took out a Licensed Trade (Master Chef) Policy (the “Policy”) that provided combined cover, the Buildings Section of which enured for the benefit of Palliser. Significantly, the buildings had been underinsured.
On 1 January 2010, a fire occurred at the Property causing major damage. The Buildings Section responded to the reinstatement of the Property, including the “Upper Floors”, but there was a shortfall due to the application of average. Consequently, Palliser expended monies in reinstating the “Upper Floors” totalling £300,000, and allegedly lost profits due to the inability to sell the converted flats totalling almost £4m. Palliser sued Fate for negligently causing the fire, and Fate in turn claimed an indemnity under the Public Liability (“PL”) Section of the Policy, which provided cover for legal liability in respect of damage to property “not belonging to [Fate]”. Fate later went into liquidation and Palliser’s claim was brought against Insurers under the Third Parties (Rights Against Insurers) Act 2010.
The central issue before the Court
The central issue in the case concerned the interpretation of the words “not belonging to”. If the “Upper Floors” were property belonging to Fate then there was no cover under the PL Section of the Policy.
Principles of construction
The Judge explained that a Court has to ascertain the meaning of the words used by applying an objective and contextual approach, and it has to ask what the term, viewed in the light of the whole contract, would mean to a reasonable person having all the relevant background knowledge reasonably available to the parties at the time the contract was made. Business common sense and the purpose of the term may be relevant (see Investments Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896, and Rainy Sky SA v Kookmin Bank  UKSC 50) but the Court should be careful to avoid placing too much weight on business common sense at the expense of the words used.
The Judge’s decision
The Judge applied an objective contextual approach, and took into account business common sense and purpose, and he agreed with Insurers’ submissions that the words “not belonging to” were synonymous with “not owned by”. The Judge held, whilst Palliser owned a long lease of the “Upper Floors”, the buildings at 228 York Road belonged to Fate as freehold owner. This interpretation was reinforced by the fact that Fate had insured the whole of the “Property”, Palliser’s lenders’ had noted an interest on the Policy, and the Buildings Section and the PL Section fitted together “coherently” to provide cover for the buildings, including the “Upper Floors”, under the Buildings Section alone. Also, Insurers had already indemnified Fate for the damage to the “Upper Floors” under the Buildings Section (although the Judge acknowledged that the subsequent conduct of the parties was not strictly relevant to the issue of interpretation).
Accordingly, there was no cover for Fate’s liability for damage to the “Upper Floors”, so Palliser’s claim for an indemnity failed in its entirety (except for a nominal sum for damage to Palliser’s chattels lost in the fire).
The Judge nevertheless proceeded to find that Palliser’s claim for loss of profits was entirely speculative and had not been proved on a balance of probabilities.
The Judge considered it unnecessary to decide whether Berni Inns operated in favour of a negligent landlord on the basis that the parties could not objectively have intended it would apply to the extent that the landlord (Fate) had underinsured the buildings, in breach of the covenant to insure for the full reinstatement value.
This case makes clear that the negligence liability of a freeholder, in causing damage to demised premises, is not a liability that is covered by a typical PL policy. So the risk of losses flowing from such damage must be separately covered by the tenant.
This decision is a victory for business common sense.
The Judge did not take the opportunity to clarify whether Berni Inns operated in favour of a negligent landlord. He considered that such a situation would be rare and arise only in circumstances where there was a problem with the insurance, such as underinsurance. But also there was no practical possibility of a subrogated claim being made by Insurers (against the negligent freeholder in whose name the policy was taken out). This may be viewed as a lost opportunity to provide clarification on this issue.
Paul Cha and Faye Brennan of Plexus Law represented the successful Insurers, and they instructed Graham Eklund QC and Carl Troman of 4 New Square.
If you would like to know more about this matter, please speak to your contacts at Plexus Law:
Paul Cha, Partner
T: 020 7469 6235 | M: 07918 768 898 | E: firstname.lastname@example.org
Faye Brennan, Solicitor
T: 020 7469 4934 | E: email@example.com
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