UK: Who Said There Was No Liability For Pure Economic Loss Whether You Are A Contractor Or A Designer?

Last Updated: 7 November 2007
Article by Simon Tolson

  1. Following the decision in Murphy v Brentwood District Council [1991] 1 A.C. 398 HL, it was generally considered that the scope for the imposition of a duty of care not to cause economic loss was severely fettered. For some 13 years prior to that it was considered that if there was sufficient proximity between wrongdoer and claimant and no considerations to negate the imposition of a duty of care, a cause of action would arise when a building presented an immediate or imminent danger to health or safety. The decision in Murphy exposed the reality that until physical injury is caused to something other than the building itself or to a person, the loss is economic only and in such circumstances the test formulated in Anns v London Borough of Merton [1978] A.C. 728, was not a sufficient basis for the imposition of a duty of care to avoid causing economic loss. Since it is rare for buildings to be so poorly constructed or, more precisely, for such defects to remain latent until the building begins to collapse, it looked as if the days of multi-party litigation were over. I well remember going to a conference with Richard Ferneyhough QC in 1989 as the law of tort slipped through our fingers!
  2. Of course the classic authority for the recovery of economic loss in tort is Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465. HL Briefly, liability can arise in negligence where advice is given and relied upon to the detriment of the claimant. In Henderson v Merrett [1995] 2 A.C.145 HL, Lord Goff held that the principle underlying Hedley Byrne was an assumption of responsibility by the person providing information or services to the claimant, coupled with reliance by the claimant, and that once this was established it was unnecessary to consider whether it was "fair, just and reasonable" to impose liability.
  3. Just a few months after Henderson v Merrett it became apparent that this principle could have wide-ranging applications. After all, professionals in the construction industry provide information or advice and contractors and subcontractors provide services, all of which can be said to be relied upon by the employer. Thus in Barclays Bank plc v Fairclough Building Ltd (1995) 44 Con. L.R. 35, specialists were engaged to clean an asbestos cement roof. They did so using pressure washers but without taking the recommended precautions. As a result the impact of the water created a slurry containing asbestos which entered the building. It was held that the specialist owed a duty of care to the contractor in respect of the economic loss suffered by it (i.e. the cost of remedial works). The point of principle was dealt with by the Court of Appeal tritly:
  4. "A skilled contractor undertaking maintenance work to a building assumes a responsibility which invites reliance no less than the financial or other professional adviser does in undertaking his work."

  5. It began to look as if the road to the recovery of economic loss apparently firmly shut by Murphy was beginning to open once again. Thus, in Storey v Charles Church Developments Ltd (1995) 73 Con. L.R. 1, Charles Church designed and built a house for Mr and Mrs Storey. Structural damage was discovered but it was accepted that the loss was economic. It was held that Charles Church did owe a duty of care to the Storeys in respect of such loss. The judge asked himself whether there had been sufficient "assumption of responsibility coupled with the concomitant reliance". It is important to note that the parties had a contractual relationship which imposed a duty of care (which presumably was not relied upon because of limitation problems) but this was no inhibition to the imposition of a concurrent duty in tort.
  6. Similarly in Tesco Stores v Costain Construction Ltd and Others [2003] EWHC 1487 (TCC), the shop owner sought to recover for losses arising out of a fire. The court concluded that
  7. "anyone who undertakes by contract to perform a service for another upon terms, express or implied, that the service will be performed with reasonable skill and care, owes a duty of care to like effect to the other contracting party or parties which extends to not causing economic loss".

    He thus held that the contractor owed the shop owner a duty of care in respect of the work which it carried out (as opposed to work carried out by its subcontractor) which duty included not causing economic loss.

  8. This progression of cases has not, however, been without upsets. In Samuel Payne v John Setchell Ltd (1995) 73 Con. L.R. 1, civil engineers were instructed to carry out a ground investigation of a site and existing foundations in connection with the extension of a cottage. Acting on their advice the claimant demolished the cottage and constructed two new cottages on structural raft foundations. The engineer prepared structural drawings, inspected the foundations and reinforcement, and certified that the works had been carried out to their satisfaction. Subsequently the same engineer was engaged in connection with the construction of further cottages and in this case the engineers inspected the ground and foundations and provided certification. The judge concluded, relying on Murphy and DOE v Bates, that "as a matter of policy, although a builder must be taken to have foreseen the possibility of loss or damage arising from inherently defective work for which it was responsible, it did not owe a duty for care to anybody (including the person who engaged the builder) to avoid causing such loss or damage unless it was physical injury to persons or damage to property other than the building itself". He further concluded that a "builder" for these purposes encompasses "whoever was primarily responsible for the defect" and therefore covered the engineers in this case. Whilst the judge accepted that liability could arise as a result of reliance on advice or statements where there is in law an assumption of responsibility for loss, such an assumption of responsibility "is generally not found when the parties’ relationship is governed by contract, especially if there is anything other than the simplest arrangement". The judge therefore disagreed with both the reasoning and conclusion in Storey.
  9. The decision in Samuel Payne was not, however, followed in Tesco Stores or in Mirant Asia-Pacific Construction v Ove Arup, but it is the question of the relevance of a contractual relationship to the existence of a duty of care that has been considered most recently. Contractual relationships may be relevant in two circumstances:
    1. Where there is a direct contract between the claimant and the alleged tortfeasor; and
    2. Where there is a chain of contracts as between the claimant and the alleged tortfeasor.
  1. Both these situations were considered by the Court of Appeal in Riyad Bank v Ahli United Bank (UK) plc [2006] EWCA Civ 780, CA. The case involved the negligent overvaluation of operating leases of equipment in circumstances where there was a contract between the bank and an intermediary and a further contract between the intermediary and the negligent advisers. What was the relevance of these contractual relationships to the existence of a Hedley Byrne duty of care?
  2. As to situation (i) Lord Goff in Henderson, having analysed the historical context in detail, concluded that
  3. "the common law is not antipathetic to concurrent liability, and that there is no sound basis for a rule which automatically restricts the claimant to either a contractual or tortious remedy".

    Of course it is always open to the parties to exclude such a liability either expressly or by inference. This analysis was endorsed in Riyad Bank in order to rebut the suggestion that in a purely commercial relationship there is no room for tortious duty of care.

  4. Situation (ii) was, however, more problematic because Lord Goff in Henderson had suggested that a subcontractor would not ordinarily owe a duty of care to an employer since there is "generally no assumption of responsibility by the subcontractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility".
  5. In Riyad Bank the Court of Appeal treated the chain of contracts as merely one circumstance relevant to the question as to whether the adviser in that case assumed responsibility. This, on the facts of that case, depended upon:
    • The terms of the relevant contracts;
    • Why the parties had chosen to structure their relationship in that way and, in particular, whether it was done to avoid any legal liability as between the parties;
    • The advice given directly by the tortfeasor to the claimant notwithstanding the chain of contracts.

  1. Whilst it may be an exaggeration to say that economic loss is now recoverable in situations where it was thought to be irrecoverable under the Anns principle (because inter alia the House of Lords L in Murphy overruled it), decisions since Murphy have seen a gradual swing of the pendulum towards the imposition of a duty of care.
  2. Therefore in practice duties of care to avoid causing economic loss may well arise:
    • notwithstanding the existence of a contract or chain of contracts between the tortfeasor and the claimant;
    • where the tortfeasor provides services, e.g. mere construction work or specialist work;
    • where the reliance is "assumed" in the sense that the tortfeasor is a specialist such as in Barclays Bank;
    • or where the reliance is implicit from the terms of the contract, e.g. Tesco Stores.

  1. Given the nature of most construction work, in particular its specialisation and the use of technically demanding and complex procedures, it is likely that designers, project managers, contractors and subcontractors are all at serious risk of a claim in tort for economic loss. You are on notice!

This is an extract from a paper entitled Design Risk, Defective Buildings and the Damages Seesaw written by Simon Tolson, (senior partner of Fenwick Elliott) and given to the IBC Construction Law Summer School, held at Queen’s College, Cambridge. A full copy of the article can be found at www.fenwickelliott.co.uk/articles/contract/design_risk_2.htm.

To see further articles on matters relating to construction, engineering and energy projects, please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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