Case No: 2002 Folio 853
Neutral Citation Number: [2003] EWHC 2110 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 9 September 2003

Before :

DEPUTY JUDGE IAN GLICK QC

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Between :

	HORBURY BUILDING SYSTEMS LIMITED	Claimant	
	- and -		
	HAMPDEN INSURANCE NV	Defendant	

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Nicholas Davidson QC (instructed by DLA) for the Claimant
Graham Charkham (instructed by Davies Arnold Cooper) for the Defendant

Hearing date : 3 July 2003
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Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Ian Glick Q.C.

Deputy Judge Glick QC  : 

Introduction

1.	This action concerns the construction of a Contractors All Risks Policy issued by the Defendant (“Hampden”) to the Claimant (“Horbury”) and in force from 11 June 2001 until 16 May 2002 (“the policy”). By the Amended Particulars of Claim, Horbury seeks declarations as to the meaning and effect of the policy if certain facts and circumstances are assumed to be the case. Those facts and circumstances relate to the collapse, in December 2001, of a ceiling erected by Horbury at a cinema complex in Manchester. The declarations sought are intended to establish the extent of Hampden’s liability to Horbury arising out of this incident.
2.	The ceiling that collapsed formed part of one of 16 cinemas in the complex. But the operator immediately closed the whole complex for several weeks. Thus the most significant dispute between the parties is whether Hampden is liable to indemnify Horbury if Horbury is held liable for the operator’s loss of profit in respect of the entire complex during the period of closure.
3.	Hampden, whilst denying that it is so liable, says that this, and the other questions raised, are not ones the Court can sensibly answer as matters stand. No one has yet sued Horbury at all, let alone to judgment. And one of the matters that I am asked to consider is how far it is appropriate for the Court to grant declarations in circumstances such as these.
Facts
4.	Although Horbury originally sought declarations on the basis of facts the Court was to be asked to assume, at the hearing it became clear that certain matters were accepted by both parties as being factually correct and that some other matters were treated by the parties as very likely to be correct. Horbury, however, was not prepared publicly to admit certain things, in particular negligence, that might affect its liability to third parties, without the prior consent of Hampden. 
5.	I recite here first the facts that the parties, as I understand them, accept the Court can treat as true, and not as merely assumptions.
6.	AMC Europe SA or an associated company or companies (“AMC”) proposed to construct, open and operate a cinema complex at Great Northern Warehouse, Manchester. This consisted of a shell of a building, the interior of which was to be partitioned. The eventual partitioning decision was to have 16 auditoria, with an aggregate seating capacity of approximately 3,726.
7.	The main contractors for the building work were Galliford Northern or an associated company or companies (“Galliford”).
8.	Horbury was sub-contracted to Galliford to provide partition walls and ceilings to all auditoria, public areas and back-of-house areas at the complex, contracting on the Sub-Contract Conditions for use with Domestic Sub-Contract DOM/2 Articles of Agreement, or on terms which were not materially dissimilar. Horbury was to provide suspended ceilings throughout the auditoria.  It was also to provide the foyer and box office ceiling arrangements: these were also mainly suspended, although of a different construction from those for the cinemas and, for aesthetic reasons, there were some narrow strips between sections of these ceilings which were left open to roof level.
9.	The ceilings for the auditoria were to be suspended from the roof structure by hangers, and Horbury was responsible for the installation of these.
10.	Horbury carried out the work and erected the ceilings.  The complex opened on about 19 December 2001.  However, during the early hours of 21 December 2001, when the complex was empty, the ceiling of auditorium 6 collapsed. The reason for the collapse was not at first known, and AMC immediately closed the whole complex; and it stayed closed until about 25 January 2002.  
11.	It was also common ground that the damage caused by the collapse of the ceiling did not physically prevent use of the rest of the complex: for example, by obstructing access.
12.	At the relevant time Horbury was insured under the policy. 
13.	Horbury asks the Court to assume the following additional facts and circumstances.
“5. The suspension system [for the ceilings] also provided the support for metal ductwork passing between two layers of ceiling. The ductwork was to contain cabling not in the lower-risk categories mentioned in Regulation 22(5)(b) of The Cinematographic (Safety) Regulations 1955 (as amended), and also heating/ventilation ductwork for air circulation. All ductwork suspended from the hangers was intended to be rigid. It was intended to be and was supplied and installed by parties other than Horbury.

6.	The cinema premises obtained from Manchester City Council a licence under the Cinemas Act 1985. The licensing system allowed the Council time to evaluate the premises before deciding whether to grant the licence. At all material times the practice of the Council was to obtain reports from the City Architects, the Building Control Department, the Environmental Health Department, and the Police and Fire authorities, before deciding whether to grant the licence.

7.	The licence contained the following (among other) provisions:

“1.	The licensed premises shall not be open for the purposes for which this Licence is granted on any occasion when the Licensing Authority may signify their desire in writing to the occupier or other person having at the time the care and management of such premises that the same should not be open.

33.	All parts of the premises and fittings and apparatus therein, including the seating, door fastenings and notices, and the lighting, electrical heating, ventilating, mechanical and other installations, shall be maintained at all times in good order and condition.”

8.	The licence was subject to the proviso that

“… subject to the provisions of the said regulations”, [The Cinematographic (Safety) Regulations 1955 (as amended)] “made by the Secretary of State, such licence shall be liable to be suspended by the said Council in the event of any failure on the part of the licensee to carry out the said Regulations, or of the building becoming otherwise, unsafe, or of any material alteration being made in the building or enclosure without the consent of the said Council.”

…

11.	Some of Horbury’s work had been carried out unskilfully and not in conformity with contract, in that:

11.1	in the following locations the wrong washers had been used throughout or effectively throughout Horbury’s work:
Auditorium 6
Auditorium 10
Auditorium 12
Auditorium 15
11.2	in Auditorium 4 approximately half the hangers had the wrong washers and half had the correct ones.

…

16.	AMC’s closure of the complex was a voluntary decision. AMC provided assurances to Manchester City Council that the complex would not be re-opened until such time as the problem had been fully investigated and a programme of remedial works implemented, satisfactory to Manchester City Council.

17.	All interested parties were notified or became aware, among them Manchester City Council, Horbury, and via insurance brokers, Horbury’s insurers, Hampden, who appointed as loss adjusters Ashworth Mairs.

18.	The City Council’s officers considered the situation so dangerous that they would not allow Council staff onto the premises until satisfied with temporary protective measures.

19.	The cause of the collapse of the ceiling of auditorium 6 was identified as being and was the use of the wrong washers. [I note here that, although it is not mentioned in the Statement of Assumed Facts, the collapse was being attributed to “incorrect fittings” used by Horbury by 24 December 2001.]

20.	The effect of the use of the wrong washers was that individual hangers disconnected. Each disconnection (1) removed or significantly reduced the support which that hanger had provided to the suspended ceilings (2) increased the load on adjacent hangers and (3) removed or significantly reduced the support which that hanger had provided for the ductwork.

21.	All other auditoria were checked. Of these, 11 were discovered to be virtually free from defect. However, it was discovered that the wrong washers had been used almost throughout auditorium 10, 12 and 15, and in about half of auditorium 4. In each of these auditoria some individual hangers had disconnected.

22.	Had remedial measures not been taken it is probable that some or all of the ceilings in auditoria 4, 10, 12 and 15 would have collapsed in due course either in part or in the same way as that of auditorium 6.

23.	Alternative A

No damage had occurred to any part of auditoria 4, 10, 12 and 15 (as distinct from damage to the complex as a whole).

Alternative B

One or more or all of those auditoria were damaged in whole or in part in that the electrical ductwork and therefore the wiring which it contained was no longer securely fixed in position within the meaning of regulation 22(2) of the Cinematographic (Safety) Regulations 1955. The fixing was insecure because of the loss of support from some hangers and the risk of disconnection of others.

24.	Auditorium 6 was cleared, reconstructed and refurbished.

25.	The suspension systems in auditoria 4, 10, 12 and 15 were reconnected.

26.	      When but only when satisfied that the
licensing officer were themselves satisfied with the state of affairs did AMC re-open the complex to the public.”

The policy
14.	The policy provides, in Section 1, cover for Material Damage (which was not taken) and, in Section 2, cover for Public, Products and Employers Liability (which was).
15.	The policy contains, near the beginning, a Definitions section. This provides, so far as material, as follows. 
“The following expressions shall have the specified meanings given to them wherever they may appear in this Policy.

…

3.	Contract

3.1	Contract shall mean any Contract or agreement for the performance of work in connection with the Business.

…

7.	Products

7.1	Any goods or products (including containers labelling instructions or advice provided therewith) sold supplied erected repaired altered treated or installed or work carried out by or on behalf of the Insured in the course of the Business from or in Great Britain Northern Ireland the Channel Islands and the Isle of Man.

8.	Property
8.1	Material property.”
16.	Paragraph 2 of this section, read with the Schedule to the policy, defines “Business” as including the business of “Dry Lining, Partitioning and Suspended Ceiling Contractors”.
17.	Part B of Section 2 deals with products liability. So far as material it provides as follows.
“4.	Insurance Cover
	4.1	Indemnity
The Company will indemnify the Insured against liability at law for damages and claimants costs and expenses in respect of Injury to any person and loss of or damage to Property occurring within the Territorial Limits during the period of Insurance and caused by any Products after they have ceased to be in the custody or under the control of the Insured.

…..
	Exceptions to Part B
5	The Company will not indemnify the Insured against liability in respect of

….
5.3	Contractual Liability
Injury loss of or damage to Property which is assumed by the Insured by agreement (other than liability arising out of a condition or warranty of goods implied by law) unless such liability would have attached in the absence of such agreement.
5.4	Damage to Products Serviced or Treated
The cost of recalling removing replacing repairing reapplying rectifying or refunding payment for anything sold supplied constructed erected installed repaired serviced or treated by the Insured caused by any defect therein or the unsuitability thereof for its intended purpose.”

18.	The relevant “Territorial Limits” are anywhere in the world, except North America.
19.	Hampden has reserved the right to argue in the future about the ambit of clause 5.3. I shall refer to the excepted area of liability as “exclusively contractual liability,” without seeking to delimit it precisely.
The dispute

20.	Within weeks of the collapse of the ceiling Horbury and Hampden were in dispute as to the extent of that cover. For present purposes I do not think it is necessary for me to record the stages of that argument. Horbury relies on the fact that, for a time Hampden was seeking a quick adjudication of the legal issues between them, in support of its case that declarations are appropriate. But Hampden has changed its mind; and it does not seem to me that this history affects the question of whether such relief is in truth appropriate. For it is not suggested that Hampden is precluded from asserting that declarations should not be granted. 
21.	More important, in my view, is the fact that on 27 March 2002 Galliford wrote to Horbury to indicate its intention of passing on claims made by AMC; and on 17 June 2002 AMC, by its solicitors, wrote to Galliford indicating its intention to claim for loss of revenue, the cost of physical repair, and additional marketing and advertising costs. The loss of revenue claim relates to the whole complex.
22.	 In the result, on 22 August 2002, Horbury issued a Claim Form under CPR Part 8 to seek to resolve its differences with Hampden.  
23.	By the Amended Particulars of Claim, as further amended at the hearing, Horbury seeks declarations that on the true construction of the policy and on the basis of  the facts and circumstances already referred to:
“(1)	the liability of [Hampden] in respect of the claim to indemnity by Horbury includes liability to indemnify in respect of any liability of [Horbury] to others for the costs of remedying the damage to auditorium 6 other than the costs of repairing the ceiling installation (including in this expression ductwork); 

(2)	the liability of [Hampden] in respect of the claim to indemnity by Horbury includes liability to indemnify in respect of any liability of Horbury to others for the costs of remedying the damage to the ductwork above auditorium 6; 

(3) 	……

(4)	the liability of [Hampden] in respect of the claim to indemnity by Horbury includes liability to indemnify in respect of any liability of [Horbury] to Galliford and/or AMC for the costs of remedying the damage (if any had occurred before inspection) to the ductwork above auditoria 4, 10, 12 and 15;

(5)	the liability of [Hampden] beyond that is not restricted to liability to indemnify in respect of any liability of [Horbury] to others for loss of profits which would have been earned from auditorium 6;

(6)	if [Horbury] are liable to third party claimants in terms which include liability for loss of profits calculated by reference to the closure of the cinema complex as a whole from 21 December 2001 to 25 January 2002, then the liability of [Hampden] to indemnify extends to include [Horbury’s] liability for such loss of profits.”
Of these, the most important is proposed declaration (6).  (Proposed declaration (3) was not pursued.)
24.	Horbury also claims a declaration that from no later than 14 December 2001 the complex (including its fixtures and fittings) constituted “Property” within the meaning of the policy.  
25.	Horbury made clear in its Skeleton Argument that these declarations, if granted, should be subject to any relevant exceptions contained in the policy.
The parties’ cases
26.	What follows is necessarily only a summary of the parties’ respective arguments. These were set out in substantial Skeleton Arguments and canvassed extensively in oral argument. I do not pretend to recite exhaustively every point made. 
Horbury’s case
27.	Horbury argues that there is nothing exceptional about construing a policy on hypothetical facts. Hampden itself was the first to suggest an early resolution (by arbitration). The fact that Hampden could not compromise the claim by a Part 36 payment is not a valid objection. Moreover settlement with Galliford and AMC will be more difficult if Horbury and Hampden are in doubt as to their respective situations under the policy and are at odds with one another over the meaning of the policy.
28.	The words “liability at law” in clause 4.1 indicate Hampden’s liability is co-extensive with Horbury’s liability to third party claimants, as long as that liability is consistent with ordinary implied terms and does not arise from more stringent contractual terms. The policy covers any such liability of Horbury to third parties for damages.
29.	The words “in respect of” connect that liability for damages with the “injury to any person” or the “loss of or damage to Property”, as the case may be. The collapse damaged the ceiling itself, the ductwork installed on the suspension system installed by Horbury, and items (such as carpets and seats) on to which the ceiling fell; and it prevented cinema 6 from being used. It also caused the closure of the other 15 cinemas either because some or all of them suffered from the same fault, or because it was feared that they might. Either way, the complex needed to be closed for investigations and any repairs discovered to be necessary.
30.	The “Property” damaged was the cinema complex as a whole. The complex is one building with one licence. Horbury’s sub-contract related to the whole complex, not to individual cinemas within it. The collapse of the ceiling in one cinema would have led any prudent operator to close the whole. Indeed if AMC had not voluntarily closed the complex, the licensing authority would have done so. (Indeed one of the facts I am asked to assume is that the complex did not reopen until the licensing authority was satisfied with what AMC had done: which is consistent with the information sent on behalf of AMC to Galliford on 17 June 2002.)  If a contractor damages part of a building he is liable for the consequences to the whole; the fact that the building may be partitioned into units, for example separate cinemas, does not affect this.
31.	Once there has been any physical event by which the Product (here the ceiling) has caused physical damage to any Property (here the complex), the policy has to respond in respect of any resulting legal liability of Horbury. Hampden’s liability is co-extensive with that of Horbury. This is supported by the fact that similar language is used in the public liability section of the policy.
32.	As the Property damaged was the complex, not merely cinema 6, if as a result Horbury is legally liable (directly or indirectly) to AMC for its loss of profit from closing the complex, Hampden is obliged to indemnify Horbury in respect of that liability.
33.	Horbury accepts that, because of exception 5.4, Hampden would not be liable for the cost of repairing the collapsed ceiling itself; or for any loss of profit for which Horbury might be liable attributable solely to the making of such repairs.
34.	Moreover, the policy would not respond if faults in the ceiling construction were found before any collapse, enabling such a collapse to be prevented, but causing the closure of the complex for safety checks. If, however, some actual damage occurs resulting in the complex being closed for safety checks, the financial consequences of that closure are covered if Horbury is liable for damages for them. Such liability for damages is “in respect of” the damage to property.
35.	It does not matter whether there were in fact similar faults elsewhere in the building (though there were). Closure for safety checks and any resulting works will naturally and foreseeably follow. The closure is consequential upon the damage that occurred to the complex. Such consequential loss is within the policy.
36.	A third party is unlikely to be able to hold Horbury liable for damages (except under contractual terms more extensive than would be implied by law) unless it can satisfy a court that the damage to its property caused its loss and was not too remote to be recovered.
37.	Moreover if Hampden’s liability was not co-extensive with Horburys, very difficult problems of apportionment would arise, especially in relation to the costs and expenses of any action defended by Horbury.
38.	In any event, even if Horbury is not entitled to an indemnity for revenue losses in respect of the whole complex, it is for any such losses in respect of cinemas 4, 10, 12 and 15, where defects were found.
39.	As to the fourth declaration claimed, Horbury is entitled to be indemnified for the cost of damage (if any) done to ductwork by improper fixing of the ceiling, but not for the cost of damage (if any) caused by rectifying such improper fixing.
Hampden’s case
40.	Hampden argues that the declarations sought are too wide to be useful, are vague, are based on hypothetical and not proved facts, and are thus speculative; and that Horbury does not identify to whom it is supposed to be liable.  It is impossible at this stage to articulate clearly how a third party might present its claims or for what heads of loss it might claim to be compensated.  Horbury’s claims are premature.  
41.	The assumed facts may be wrong.  The collapse may have been partially caused by the ductwork suspended from the ceiling fixing being too heavy.  Moreover there are various alternative assumed facts, which is unsatisfactory.  Without real facts the exercise is of no value.
42.	Despite Horbury now accepting that the declarations must be subject to the exclusions and policy, they cut across them.  The pleaded case is unsustainable.  
43.	The claim causes rather than saves expense, and is a waste of the Court’s time.  Hampden accepts that it did not apply to strike out Horbury’s claims:  but that would probably have taken as long as hearing them.
44.	Hampden is under no present liability to Horbury (this being an indemnity policy), and the proper course, if there are disputes as to the extent of cover, is for Horbury to join Hampden in any relevant proceedings brought by a third party claimant.  
45.	Hampden admits that if Horbury is liable to a third party in respect of loss or damage to property, and if that liability was caused by the ceiling which collapsed in Cinema 6, then (subject to any relevant exclusions) Hampden will prima facie be liable to Horbury.  That covers the physical damage to, for example, seats, carpets and walls, caused by the collapse to Cinema 6 itself.  That is not in dispute and no declaration is required.  
46.	Contrary to paragraph 16 of the Statement of Assumed Facts, AMC has made no direct claim against Horbury.  Moreover, if it did, it would not be able to recover pure economic loss.  
47.	Galliford has no claim in tort against Horbury because it neither owned, nor had any possessory title to, the cinema complex.  Galliford will rely on its contract with Horbury.  Moreover, any liability in respect of AMC’s economic losses can only be recoverable under a contractual indemnity and will be excluded from cover under the policy by exception 5.3.  Indeed Galliford’s own loss is only its liability to AMC.  
48.	Moreover, it is for Horbury to prove any claim it may have will be outwith the exclusions in the policy.  Or at least Horbury must give Hampden full particulars of each item of Galliford’s claim and how it is put before Hampden can fairly be asked to deal with it.
49.	Hampden, however, does accept that the policy would respond if Horbury were held liable for loss of profits where that financial loss was suffered as a direct result of damage to property.  That would not be pure economic loss.  Thus if the collapse of the ceiling made Cinema 6 unusable, loss of profits that flowed from the closure of that cinema for the time necessary to rectify the damage will be recoverable.  But for this no declaration is necessary as Hampden has openly admitted as much before.  The same would apply to any other cinema which had suffered physical damage.  But none had.  Hampden does not say that liability necessarily stops at the door of Cinema 6.  For example, if (contrary to the fact) the collapse of the ceiling rendered the entire building physically unsafe, the policy would cover a liability of Horbury for the operator’s resulting loss of profits.  
50.	The policy must be construed against the background of the Consumer Protection Act 1987 (though not strictly relevant in this case, relevant to contracts with identical wording), the absence of any non-contractual liability at law for pure economic loss caused by defective products or for loss of or diminution in value of the product itself, and the distinction between tortious and contractual product liability. 
51.	The parties’ intention was to cover the contractor in respect of liability at law for the loss or damage that the product might cause to property belonging to a third party.  It was not intended to extend to the loss or diminution of the income stream of a third party.
52.	The loss must be caused by the defective Product.
53.	As regards the cinemas where the ceilings were properly fixed, or where any damage was forestalled by inspection and repair, the position must be the same as it would have been had the problem in Cinema 6 been discovered and dealt with before the collapse occurred:  that is, there is no claim under the policy.
54.	The relevant “Product” is the ceiling, and the relevant “Property”  damaged is not the entire complex, but the particular property damaged.  The only part of the complex physically damaged was Cinema 6.  “Material property” is used in the policy in contrast to intellectual property.  
55.	There is no implied term of the policy obliging Hampden to indemnify Horbury in respect of preventative measures.  
56.	The complex was closed because the ceiling collapse in cinema 6 alerted AMC, and the licensing authority, to the risk that there might be similar defects elsewhere.  Safety checks had to be made and remedial measures taken.  But the actual damage to cinema 6 did not cause the closure.  
57.	The problems of apportionment identified by Horbury are likely to arise under the policy in any event because the exclusions will lead to some liabilities of Horbury being covered and others not. 

The authorities

58.	Mr. Davidson Q.C. (for Horbury) and Mr. Charkham (for Hampden) referred me to two authorities. In these the Court of Appeal had to consider public liability and products liability policies that indemnified the insured against legal liability to make payments “in respect of” certain eventualities. 
59.	In A S Screenprint Ltd v British Reserve Insurance Co Ltd [1999] Lloyd’s Rep. I.R. 430(CA), the Plaintiffs were insured under a policy that indemnified them, “against all sums which the Insured shall become legally liable to pay in respect of…loss or damage…during the period of insurance and caused by goods (including containers)…altered…or treated in the course of the Business…”.  The plaintiffs were supplied with boards by a customer, LMG, to be screenprinted.  The plaintiffs carried out the work, and redelivered the boards to LMG which in turn supplied them to Mars to make boxes for Maltesers.  Mars complained that the packaging had contaminated the sweets.  LMG claimed from the plaintiffs (1) the sum it had paid Mars as compensation for the contamination and (2) loss of profits on further orders from Mars.  The plaintiffs sought a declaration that they were entitled to an indemnity from insurers if they were held liable for LMG’s loss of profits.  
60.	The Court of Appeal held that, if the plaintiffs were liable for the loss of profits, the liability did not fall within the terms of the cover.  Hobhouse LJ (as he then was) said this (at page 434, column 1).

“The indemnity is in respect of sums which the insured shall become legally liable to pay.  There is no problem about that because the declaration asked for assumes that there will be such a legal liability.  If there is no such legal liability then of course there is no liability to indemnify.  It goes on.  “Legally liable to pay” has to be “in respect of” - I stress the words “in respect of” - “death, bodily injury, illness, loss or damage happening anywhere in the World (excluding the United States of America and Canada) during the period of insurance”.  The liability to pay has to be in respect of what, in its context, is clearly some physical event.  It is something which can be said to have happened somewhere. It is an event which is happening during the period of the insurance.  The event can be death, bodily injury, illness or loss or damage.  The words “loss or damage” must, in my judgment, be construed in context as something that relates to a physical event.  It goes on:  “And caused by goods (including containers) … supplied … or created in the course of the Business” of the insured.  There is no difficulty about that last step provided it is understood what it relates to.

The plaintiffs in the present case did treat and/or supply printed material.  They treated it for LMG or supplied it to them.  That supply of those goods has caused further events.  It has caused the contamination of the package itself and it has caused the contamination of the Maltesers.  So the plaintiffs are able to progress from the third element to the second element, namely they can show the goods which they treated have caused damage - which is a physical event occurring somewhere and occurring during the period of insurance - to the packaging and to the Maltesers.  That is the limit of what they can prove as a matter of physical causation.

One then asks whether the legal liability to pay is in respect of that loss or damage.  It is at this point that, in my judgment, the train of reasoning upon which the plaintiff’s argument has to be based breaks down.

They have to progress from legal liability in respect of the damage to the packaging and damage to the Maltesers to a loss of goodwill by LMG and loss of profits over a period in the future.  The loss of profit in 1990, 1991 and 1992 are not events which are either directly or indirectly covered by this policy.  They cannot be correctly described as loss or damage which has happened somewhere; nor have they happened at least partially during the period of insurance.

The conclusion at which I arrive is similar to that of the judge:  the relevant head of loss is not caused by any defects in the packaging but is caused by Mars choosing not to place further orders with LMG.  The same point can be demonstrated by appreciating that causation is, in the context of this cover, a physical concept:  the loss or damage has to happen physically during the period of insurance.  It is not possible to treat a liability to pay compensation in respect of an economic loss which arises from a loss of goodwill as being in respect of physical loss or damage physically caused.  Loss of goodwill is not covered by this policy.  The plaintiffs have failed to bring themselves within the relevant part of the cover. The declaration made by the judge was correct.”

61.	In Rodan International Limited  v Commercial Union [1999] Lloyd’s Rep. I.R. 495, the claimants were entitled to an indemnity against, “all sums which the Insured shall become legally liable to pay for compensation…in respect of any Occurrence to which this cover applies…in connection with the Business.”  “Occurrences” were defined as, amongst other things, “Loss of or physical damage to physical property not belonging to the Insured...”.  The claimants supplied Newbrite with soap powder.  Newbrite arranged for another company to box the soap powder in cartons for onward resale.  The soap powder was defective in that it caused the cartons to stain and absorb moisture so that, in turn, the powder itself became caked.  The claimants had to pay Newbrite compensation for (1) Newbrite’s losses incurred in selling off the balance of the powder at reduced prices; (2) Newbrite’s additional costs incurred in the handling rejected and unsold powder; (3) the cost of unused cartons into which Newbrite had intended to pack further soap powder from the claimants; and (4) Newbrite’s loss of anticipated profits for eighteen months.
62.	The majority of the Court of Appeal found items (1) and (2) to be within the scope of the insuring clause, but outside cover by reason of one of the exclusions; and the whole court found items (3) and (4) to be outside the scope of the insuring clause.  Hobhouse LJ said this (at page 499, column 2).   

“In my judgment on the facts found by the Official Referee, Judge Kershaw was right to include as a consequence of that Occurrence the damage that was caused to the commodity itself, that is to say the caking of the powder which was caused by the hygroscopic effect of the staining of the cartons which had been caused by a defect in the commodity.  But I do not consider that Judge Kershaw was right to construe the clause as if an Occurrence could include mere damage caused by the commodity to itself.  Such a construction fails to give effect to the natural meaning of the language which clearly contemplates that the commodity will cause physical damage to something else.  Further, that view would contemplate that, without more, the products liability policy could cover deterioration in the commodity supplied.  In my judgment the correct analysis is that that there was an Occurrence - the staining of the cartons - of which a consequence was the damage to the commodity - the caking of the powder.  Thus in considering what liability on the part of Rodan has arisen from the Occurrence one also has to take account of that physical consequence of the Occurrence.

The next step in the analysis is to consider which, if any, of the Items of damage are referable to a legal liability of Rodan to pay compensation “in respect of” the Occurrence.  It is hard to see what effect Judge Kershaw was giving to the words “in respect of”.  He seems to have treated them as equivalent to “arising out of the same cause of action as gave rise to the assured’s liability for the Occurrence”.  He does not seem to have asked himself whether the relevant Item represented a liability to pay compensation in respect of the Occurrence.  This is most clearly illustrated by his conclusion that Rodan were entitled to an indemnity in respect of their liability for future loss of profits and expenditure thrown away on the purchase of cartons to be used for further powder that it was intended should be supplied by Rodan to Newbrite but never was. These future losses of Newbrite related not to the supply of the 80 tons but to the non-supply or the non-acceptance of further powder.  They certainly do not relate to any physical consequence of the damage to the cartons in which the 80 tons were packed by Newbrite’s packers.  The phrase “in respect of” carries with it a requirement that the liability relate to the identified Occurrence.  It is not sufficient that it should simply have had some connection with the Occurrence.

The effect of the decision of the judge to treat the words “in respect of the Occurrence” as meaning no more than “in connection with the same causes of action as gave rise to the liability for the Occurrence” transforms this cover from a products liability cover to a policy covering general contractual liabilities.  A products liability policy in which the cover provided is defined in words such as those used in the present policy is confined to liability for physical consequences caused by the commodity or article supplied.  The liability of the assured in damages will have to be expressed in terms of money but that liability must be in respect of the consequences of the physical loss or damage to physical property (or some personal - “bodily” - injury).  

Provided that the commodity or article supplied has caused the physical consequence, the compensation payable by the assured to the third party will include, and the liability of the insurer to indemnify the assured, will extend to the totality of the loss which the third party is entitled to recover from the assured by way of damages in respect of that physical consequence.  Thus, if a defective article supplied by the assured causes bodily injury to the third party disabling him or, for example, causes his premises to be destroyed by fire, the third party will be entitled to recover from the assured the full value of what he has lost which will, in the two examples I have given, include compensation for future loss of earnings.  They are part of what the third party has lost as a consequence of the physical loss or injury and they are accordingly part of the liability of the assured in respect of that physical consequence.

Items 3 and 4 in the claim of Newbrite were not of such a character.  They relate to the future non-performance of obligations of Rodan towards Newbrite.  They do not relate to any quantification of the loss which Newbrite suffered as a result of the relevant physical Occurrence, the staining of the cartons in which Newbrite packed the first 80 tons delivered.  In my judgment the judge’s decision in favour of Rodan on Items 3 and 4 was clearly wrong and cannot stand.”

63.	It is not suggested that either of these authorities deals with an identical policy or identical facts. Both do, however, deal with similar contractual provisions and both emphasise the need to examine the structure, language and context of the relevant provisions.
Discussion
64.	The relevant indemnity in this case (reading into clause 4.1 certain relevant definitions) is:
“…against liability at law for damages … in respect of … loss of or damage to Property [that is, material property] occurring within the Territorial Limits during the Period of Insurance and caused by any Products [that is, any goods or products supplied, erected or installed or work carried out by the Insured in the course of the Business] after they have ceased to be … under the control of the Insured.”
65.	Thus for clause 4.1 to apply, Products must cause damage to material property; and Horbury must be liable at law for damages in respect of that damage. In my judgment it is clear from the context that, as in A S Screenprint and Rodan, the damage to property in question must be physical damage.  Moreover, because of clause 5.3,  the “liability at law” in question must not be an exclusively contractual liability.
66.	The ceiling of auditorium 6 falls within the definition of Products, and by the time it collapsed it had ceased to be under the control of Horbury. 
67.	When it collapsed, the ceiling did physically damage material property within the Territorial Limits and during the Period of Insurance: but what material property? Horbury says that, in terms of the policy, what the ceiling damaged was the cinema complex as a whole. Hampden says that it damaged whatever in and around cinema 6 was harmed: for example, the seats broken and the carpets and decorations destroyed. Thus in argument there was lively debate as to how many seats on a bus would need to be damaged before it could be said that the bus itself was damaged.
68.	In my judgment it is plain that the relevant property damaged included all the individual items (except the ceiling itself – see clause 5.4) harmed: seats, carpets, decorations and so on. And if the collapse damaged the walls or the floor of cinema 6, or the roof from which the ceiling was suspended, or the ductwork, those too were damaged property. Moreover as a matter of language it is perfectly sensible to say that damage to cinema 6 was damage to the complex as a whole. However the fact that this is so does not seem to me to affect the extent of Hampden’s liability under the policy.
69.	Hampden is obliged to indemnify Horbury against Horbury’s liability for damages in respect of the physical damage done by the collapse of the ceiling. That damage grows no greater by calling it damage to the complex than by calling it damage to cinema 6 and its surrounds. The physical damage that occurred was what it was. It is conceded that the collapse did not render the complex as a whole physically unsafe or unusable. Calling the damage in and around cinema 6 damage to the complex does not change that, or its contractual consequences.
70.	Hampden must indemnify Horbury for the damages Horbury is liable at law to pay in respect of the physical damage that occurred. Those damages will include compensation for the economic consequences of that physical damage: for example loss of profits caused by the closure of cinema 6 itself (or indeed caused by the closure of any of the other cinemas in which the ceiling fixings were defective, if those defects caused damage that caused their closure, or would have caused their closure if they had not in fact been closed already).  In this the policy seems to me to be similar to that discussed in Rodan:  see page 500, col. 2.  
71.	In fact, not just cinema 6 was closed, but the whole complex. That was to enable the cause of the collapse to be ascertained, all the ceilings in the complex to be inspected, and remedial works to be done. Whether the closure was voluntary or was required formally or informally by the licensing authority does not seem to me to matter. Similar faults were found elsewhere and further collapses prevented. AMC, of course, could earn no revenues at all from the complex during the closure. Horbury argues that if it has to compensate Galliford or AMC for the loss occasioned by the closure, that will be a liability for damages in respect of the damage to the complex caused by the collapse of the ceiling, and (if I understand correctly) that it will not be an exclusively contractual liability.
72.	Conversely, Hampden argues that if Horbury is held so liable that liability will not be for damages in respect of damage to property and can only be an exclusively contractual liability.
73.	Clearly I cannot predict the outcome of an action that may be brought by Galliford or AMC against Horbury. I do not know what facts may be found, and even if they mirror the assumptions presently before the Court, I do not know how the common law may be developed.  The question before me is whether, assuming Horbury is liable to Galliford or AMC otherwise than on an exclusively contractual basis for damages for profits lost as a result of the closure of the whole complex (other than cinema 6), are such damages in respect of the damage to material property that has occurred?  In my judgment they are not.
74.	Horbury (in my view correctly) concedes that if the faults in the suspension system for the ceiling of cinema 6 had been discovered before any collapse, and the collapse had been prevented, Hampden would not be liable for Horbury having to pay damages for profits lost by closing cinema 6.   Moreover, of course, Hampden would not be liable if, in such a case, the rest of the complex had been closed to see if the faults were repeated elsewhere, and Horbury held liable in damages for the resulting lost profits. That must be because, in relation to both cinema 6 and to the rest of the complex, and independently of clause 5.3, such damages would not be in respect of damage to material property. Indeed, ex hypothesi there would have been no damage to material property.   
75.	In the present case there was damage to material property in and about cinema 6.  Damages for profits lost as a result of closing that cinema would be, as Hampden (in my view correctly) concedes, damages in respect of damage to  material property.  But the closure of the rest of the complex was not itself damage to material property.  Nor was it the consequence of damage to material property.  It was the consequence of a prudent and foreseeable decision or instruction to close the whole complex until the faults that had resulted in the collapse that had caused damage to material property were discovered;  until the rest of the complex had been inspected to see if similar faults existed elsewhere;  and until any necessary remedial works had been completed.  
76.	As Hobhouse L.J. said in Rodan in words I regard as equally applicable to the policy in the present case:
“A products liability policy in which the cover provided is defined in words such as those used in the present policy is confined to liability for physical consequences caused by the commodity or article supplied.”

The closure of the rest of the complex was not such a consequence. Thus it does not seem to me that lost profits relating to the rest of the complex are any more covered by the policy when the ceiling in cinema 6 has actually collapsed than when the faults have been detected in time to forestall such a collapse.  
77.	Finally it seems to me clear that under the policy Hampden’s liability to Horbury is not intended to be co-extensive with Horbury’s liability to third parties. The policy contemplates circumstances in which Horbury will be liable to third parties, but Hampden will not be liable to Horbury: for example where Horbury has to pay damages pursuant to an exclusively contractual liability.
Conclusions
78.	For the reasons I have attempted to state, in my judgment Horbury is not entitled to proposed declaration (6), relating to lost profits for the complex other than cinema 6; and a declaration that the complex  (including its fixtures and fittings) constitutes “Property” would not assist it.  Moreover, as I understand proposed declaration (5), it is simply intended as a step towards (6) and falls with it.  Insofar as it implicitly asserts that lost profits in respect of cinema 6 may be covered by the policy, that (subject to the application of any relevant exception) is accepted by Hampden, and no declaration is necessary.  As far as the first three declarations are concerned, the first is not in dispute at all and the others (despite complaints about their wording) are not really disputed subject to proof of Horbury’s liability to third parties and to the application of any relevant exception.  None of them appear to me to be necessary.  
79.	In the circumstances the question whether it would be appropriate to grant declarations on partly agreed and partly assumed facts in the circumstances of this case falls away.