(back to preceding text)

    89. The contractors' second defence is that insofar as the action is a subrogated claim, their liability to the operator has been discharged by the payments made by the underwriters. This is at first sight a bold argument, because it has been settled law for over two centuries that payment under an insurance policy does not relieve the liability of a third party against whom the insured has an action in contract or tort to recover the insured loss: see Mason v Sainsbury (1782) 3 Dougl 61. By right of subrogation the insurer may prosecute the claim in the name of the insured.

    90. Mr Keene, who argued this point on behalf of the contractors, accepted the general principle but said that there was an exception when the claim against a third party is, like the claim against the insurer, a claim to indemnity. In such a case, the two indemnifiers stand upon an equal footing. Payment by either discharges the liability of the other. The one who has paid the whole loss may have an action for relief against the other for a contribution which may in an appropriate case amount to a complete counter-indemnity. But there cannot be a subrogated claim in the name of the party indemnified.

    91. In support of this principle, Mr Keene relied upon a number of cases of high authority which state that a person who has a right to be indemnified by more than one person cannot recover more than once. So, for example, in Sickness and Accident Assurance Association Ltd v General Accident Assurance Corporation Ltd (1892) 19 R 977, 980 Lord Low, in a judgment approved on appeal by the Inner House, said:

"In marine insurance a rule which has long been recognised is that when the insured has recovered to the full extent of his loss under one policy, the insurer under that policy can recover from other underwriters who have insured the same interest against the same risks a rateable sum by way of contribution. The foundation of the rule is that a contract of marine insurance is one of indemnity, and that the insured, whatever the amount of his insurance or the number of the underwriters with whom he has contracted, can never recover more than is required to indemnify him. The different policies being all with the same person, and against the same risk, are therefore regarded as truly one insurance, and if one of the underwriters is compelled to meet the whole claim, he is entitled to claim contribution from the other underwriters, just as a surety or cautioner who pays the whole debt is entitled to claim rateable relief against his co-sureties or co-cautioners."

    92. Mr Keene deduces from this and other similar statements his general rule that when two or more persons have separately agreed to indemnify someone against the same risk, payment by one discharges the others. But in my opinion, that is not what Lord Low meant. It is certainly a general principle, as he says, that a person who has more than one claim to indemnity is not entitled to be paid more than once. But there are different ways of giving effect to this principle. One is to say that the person who has paid is entitled to be subrogated to the rights against the other person liable. The other is to say that one payment discharges the liability. The authorities show that the law ordinarily adopts the first solution when the liability of the person who paid is secondary to the liability of the other party liable. It adopts the second solution when the liability of the party who paid was primary or the liabilities are equal and co-ordinate.

    93. It was therefore an essential part of Lord Low's reasoning, in coming to the conclusion that a right of contribution existed, that not only was insurance a contract of indemnity but also that the policies could be regarded as "truly one insurance." Or, as Barwick C.J. said in Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342, 350, they were "co-ordinate liabilities". On the other hand, in Mason v Sainsbury (1782) 3 Dougl 61, when insurers who had paid the loss on a house damaged by rioters made a subrogated claim under a statute which made the hundred liable for riot damage, Lord Mansfield said, at p 64:

"The question, then, comes to this, can the owner, having insured, sue the hundred? Who is first liable? If the hundred, it makes no difference; if the insurer, then it is a satisfaction, and the hundred is not liable."

    94. The liability of the hundred was held to be primary and therefore not discharged by the insurance payment. Similarly in North British and Mercantile Insurance Co v London, Liverpool and Globe Insurance Co. (1877) 5 Ch D 569 the customary strict responsibility of a wharfinger for the safe custody of goods entrusted to him by customers was held to be primary and his liability for the loss of the goods by fire was not discharged by a payment under the customer's insurance policy.

    95. Mr Keene submitted that these cases were distinguishable because the liability of the party held to be primarily liable was not truly one of indemnity. But what is a liability for an indemnity? It surely includes a liability to make good a loss. The question cannot turn upon whether the contract uses the word indemnity. That would be an extraordinary technicality in a branch of commercial law based upon principles of fair dealing. In my view the hundred was liable to indemnify the house owner against riot damage to his house and the wharfinger was liable to indemnify the owner of the goods against damage. The judges in the North British case, faced with an argument similar to that now advanced by Mr Keene, did not deny that the liability of the wharfinger was a liability to indemnify. They said that it was not a contract of insurance. So James LJ said (at p 581) that the rule of contribution "only applies where there is the same person insuring the same interest in more than one office" and cited Mason's case as an example of primary and secondary liability. Mellish LJ said (at p 584) that the liability of the bailee was "the terms of the contract of bailment" and "not a contract of insurance".

    96. Further authority is in my view unnecessary, but it is worth observing (as did the First Division) that in Larrinaga Steamship Co Ltd v The King [1944] KB 124; [1945] AC 246, three very eminent commercial judges (Mackinnon LJ and Lords Wright and Porter) seem to have thought it went without saying that a ship owner's underwriters would be entitled to be subrogated to his claim for indemnity against a charterer in respect of losses caused by the master's compliance with the charterer's orders as to the employment of the ship, under a standard term of a charterparty. Sir Sydney Kentridge QC, who appeared for the operators, also referred us to a number of cases in the United States in which insurers were held entitled to be subrogated to a contractual right of indemnity (expressly so called) to which the insured was entitled under the terms of a commercial arrangement. The latter was held to be the primary liability.

    97. Likewise in this case, I am of opinion that the indemnity under clause 15.1.c. was not secondary to or co-ordinate with any insurance that the operators might choose to obtain in respect of the same losses. I suppose that it would have been theoretically possible to frame the clause to confer an indemnity only insofar as the operator was unable to recover from its insurers, although one cannot imagine the parties in practice entering into such a contract. But this contract did not require the operator to take out any insurance at all. It therefore follows that the contractual indemnity was a primary liability and the underwriters were entitled to be subrogated.

    98. The contractors third and final defence was that part of their liability was excluded by clause 21 of the contract, which provided that they should not be liable for "indirect or consequential losses suffered". This defence was based on the fact that the amounts of compensation agreed with the claimants was at a level higher than would have been awarded in a Scottish court. The increase reflected the possibility that, in the absence of a settlement, the claimants might have brought proceedings in Texas, where the levels of damages would have been a good deal higher still. The Lord Ordinary held that it was reasonable for the operator to settle at the agreed level because there was a real possibility that the claimants might have been able to sue in Texas. Although the operator was an English company, it had commercial links with Texas which might have been sufficient to found jurisdiction there. The Lord Ordinary also found that the contractors would not have been aware of these links.

    99. Mr Currie submitted, on the basis of a number of decisions in the English Court of Appeal, that "indirect or consequential losses" should be construed to mean losses which would have been recoverable, if at all, under the "second rule in Hadley v Baxendale (1854) 9 Ex 341". Indirect or consequential loss, it was said, means loss which does not follow in the natural course of things from the breach of contract, or loss which might reasonably have been supposed to have been within the contemplation of the parties. It is loss which follows from special circumstances such as the links with Texas. If the contractors had known about these links, the extra damages would in principle have been recoverable under the second rule. But the effect of clause 21 is altogether to exclude recovery, whether the contractors knew or not: see Hotel Services Ltd v Hilton International Hotels Ltd [2000] BLR 235.

    100. My Lords, I would wish to reserve the question of whether, in the context of the contracts in the Hotel Services and similar cases, the construction adopted by the Court of Appeal was correct. But I do not think that they have any application to this case. Clause 21 limits the liability of the parties for losses caused by breach of contract. Certain kinds of loss are excluded. But this is not a claim for breach of contract. It is a claim to an indemnity for a liability incurred by the operator outside the contract. In my opinion clause 21 has no application to such a claim. The liability either falls within the scope of the indemnity or it does not. The kind of loss for which indemnity was claimed fell within the indemnity simply because it was loss arising out of liability for death or injury in respect of the contractor's employees. As for quantum, the Lord Ordinary's finding that it was reasonable to settle at the agreed level is sufficient to make the sums which were paid recoverable.

    101. In any case, even if the Hadley v Baxendale dichotomy had any relevance, I do not think that the increase in the quantum of damages can be regarded as a different kind of loss from the amount which would have been recoverable in Scotland. It remains compensation for death or injury. If such compensation falls in principle within the scope of the indemnity, I do not think that it matters that, perhaps for reasons of which the indemnifier was unaware, it turns out to be greater than he might have expected.

    102. For these reasons as well as those given by my noble and learned friend, Lord Mackay of Clashfern, I would dismiss the appeal.

LORD SCOTT OF FOSCOTE

My Lords,