Litigator's View

in 1992 Baileys Motor Works contracted with D&K Electronics (which subsequently went out of business) to install a burglar alarm, including the provision of an alarm monitoring service. The monitoring element of the contract was subcontracted to HSS Alarms.

That contract included a clause whereby HSS would indemnify D&K for loss resulting from HSS's negligence, with an exclusion clause limiting liability to £100,000.

When Baileys was burgled in January 1994 it alleged that certain actions taken by HSS were negligent and causative of the loss it suffered.

In an action brought in negligence by Baileys against HSS, the Court of Appeal, applying the Caparo three stage test, rejected HSS's submission that it would be unfair, unjust and unreasonable to impose a duty of care and held HSS liable.

HSS argued that the exclusion clause in its contract with D&K would be effectively circumvented by the imposition of a direct duty to Baileys.

This potential interference with the contractual framework, it was argued, made it unfair to impose such a tortious duty. The court disagreed and HSS's appeal was dismissed.

Since 11 May 2000 the Contracts (Rights of Third Parties) Act 1999 has applied to many agreements which purport to confer benefits on third parties. If the Baileys situation arose today, the claimant could bring an action under the act as well as in tort. But would they want to? Perhaps not in cases where a contractual exclusion of liability applies. Under the act, the claimant would only have the same rights as the contracting party (for example D&K) and would be bound by the same contractual restrictions.

But it would seem that following Baileys, in tort the scope of the duty would be unbridled and not limited by such contractual restrictions.

The Baileys decision is potentially a significant weapon in the hands of any litigator wishing to circumvent contractual restrictions. It provides an attractive alternative to pursuing quasi-contractual rights under the act. Quite how the courts will reconcile the act with the approach taken in Baileys remains to be seen.

Nick White is an associate in the insurance litigation department at Beachcroft Wansbroughs.