What is "Damage" in Contract Works Claims?

1.

Need for Physical Alteration

There are two recent product liability cases that demonstrate what is meant by physical alteration.

Bacardi v Thomas Hardy Packaging¹¹

The first case is Bacardi v THP and concerns the manufacture and bottling of Bacardi Breezers. The facts are that Thomas Hardy Packaging (THP) agreed with Bacardi to bottle Bacardi Breezers. One of the ingredients is carbon dioxide, which THP bought from Messer. Unfortunately, a batch of carbon dioxide was contaminated with benzene. Benzene is a chemical which can cause cancer in sufficient quantities, although it was made clear in this case that the level of the contamination in the carbon dioxide did not represent a health hazard.

However, Bacardi did not wish to take any chances and organised a major product recall, which cost £2.125 million. Bacardi recovered those costs from THP who in turn sought recovery from Messer. The contract between THP and Messer included a limitation of liability clause which stated that:

the liability of Messer…in respect of…direct physical damage to property… whether through negligence or otherwise, shall be limited to £500,000 in respect of any one incident.

Messer sought to rely upon the limitation of liability clause. THP argued that the loss incurred did not amount to "direct physical damage" so that the limitation of liability did not apply. The issue, which is relevant to our discussion, is whether the contamination of the Bacardi Breezer by benzene constitutes "direct physical damage to property".

The Court of Appeal decided that the addition of the contaminated carbon dioxide did not constitute damage. Mance LJ, with whom the other two judges agreed, said:

Although there were ingredients owned by Bacardi which were separate from the defective carbon dioxide and water supplied by THP, THP's activity involved creating a new product by mixing all of these elements. The new product was not damaged, but merely defective at the moment of its creation.¹²

Applying a Ranicar analysis, the property cannot be considered to have gone through a physical alteration until it is complete. In this case, the defects occurred before the property was complete and consequently did not undergo damage. Specifically, there was no evidence that the introduction of the benzene had altered the characteristics or effected a physical change in the concentrate or the water.

The legal discussion in the Bacardi case is very interesting. In coming to his conclusions, Mance LJ considered at length the House of Lords decision in Murphy v Brentwood.¹³ The House of Lords decided in Murphy that the loss suffered by a purchaser of a defectively constructed building is economic rather than physical loss, in circumstances where the defect was discovered before any injury to person or damage to property had been done. This is because the purchaser simply has bought less than he had bargained for. Relevantly the House of Lords rejected the 'complex structure' theory.¹⁴ The complex structure theory seeks to argue that defects in one part of a building (which in the case of Murphy was the foundations) could be said to have damaged another part of it. Although not expressly stated, in coming to the conclusion that the Bacardi was not damaged, Mance LJ appeared to apply the reasoning of the House of Lords in Murphy. The loss suffered in Bacardi is not physical damage, but economic loss.

Commentators have criticised the Bacardi judgment. For instance, what if one of the defective ingredients in a drink was glass particles or alternatively what if a contaminant was deliberately added to the drink prior to its final creation? On a Bacardi analysis of 'damage', these sorts of claims may not fall within the insuring clause at all.

Parallels can be drawn between the Bacardi case and claims for damage in the construction industry. For instance, will the addition of an inappropriate admixture into concrete constitute damage or the production of defective concrete? On the Bacardi analysis, the addition of an inappropriate admixture would presumably result in the production of a defective product rather than damage.

On the brighter side for contractors, there could be arguments that the addition of an inappropriate admixture has caused loss or damage to the constituent elements of concrete, for instance the reinforcement. In Bacardi, the Court of Appeal considered a similar argument in respect of the ingredients of the Bacardi Breezer. It was rejected on the basis that the loss pleaded arose from the uselessness of the finished drinks and from the recall. As Mance LJ put it, "The real complaint relates to the finished product"¹⁵ not to the ingredients. However claims for constituent parts remain open if losses can be identified.

Pilkington v. CGU Insurance¹⁶

The second case rose out of the installation of heat-soaked toughened glass panels manufactured by Pilkington and installed in the roof and vertical panelling of the Eurostar Station at Waterloo, London. The glass panels were defectively manufactured and fractured after they were installed. Luckily no one was hurt. To prevent further fractures, Eurostar elected to put into place safety features including the installation of transparent material. Eurostar sued the main contractor, Tarmac, who in turn sued Pilkington. Pilkington ultimately settled by paying in excess of £1 million in damages and costs.

Pilkington claimed against its product liability insurance provided by CGU. The CGU Insurance covered liability for:

Loss of or physical damage to physical property not belonging to the Insured…caused by any commodity, article or thing supplied by the Insured.

The Insurers rejected the claim and ultimately the insurance claim went to the Court of Appeal.

To succeed with the claim, Pilkington had to show that there was loss or physical damage within the meaning of the insuring clause. It was accepted by Pilkington that there was no physical damage to any part of the terminal apart from the failure of the glass itself. Pilkington's claim was that:

The Court of Appeal rejected this argument. It held that the incorporation of the defective glass itself cannot be considered as damage to property. The insurance contract required physical damage to property of another. Potter LJ said:

Damage requires some altered state…it will not extend to a position where a commodity supplied is installed in or juxtaposed with the property of a third party in circumstances where it does no physical harm, and the harmful effect of any later defect or deterioration is contained within it.¹⁸

Temporary Damage

It will be recalled that the test in Ranicar was that the damage did not need to be permanent or irreparable for it to be actionable. In the case of The Orjula,¹⁹ a ship's deck was found to have been damaged when Hydrochloric acid was spilt onto it.²⁰ The acid was neutralised by the addition of soda and then washed off. In fact, it was not pleaded that there was an actual 'alteration' of the deck²¹ and perhaps therefore this case sits on the borders of what can be considered 'damage'. However the Court of Appeal had no hesitation in deciding that acid contamination in itself constituted damage.