UK: Recent Important Decisions And Their Practical Application

1. Following the decision in Murphy v. Brentwood District Council [1991] 1 A.C. 398, HL it was generally thought that the scope for the imposition of a duty of care not to cause economic loss was severely restricted. For some 13 years prior to that it was thought that if there was sufficient proximity between wrongdoer and claimant and no considerations to negative the imposition of a duty of care, a cause of action would arise when a building presented a present 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 or to a person, the loss is economic only and in such circumstances the test formulated in Anns 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 badly built or, more accurately, for such defects to remain undiscovered until the building begins to collapse, it looked as if the days of multi-party litigation were over.
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. In short 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 sub-contractors 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, CA specialists were engaged to clean an asbestos cement roof. They did so using power hosing 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 shortly: "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."
4. It began to look as if the doors to the recovery of economic loss apparently firmly shut by Murphy were beginning to open once again. Thus:

1. 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;
2. Similarly in Tesco Stores v. Costain Construction Ltd and Others [2003] EWHC 1487 the store owner sought to recover for losses arising out of a fire. The judge concluded that "…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 builder owed the store owner a duty of care in respect of the work which it carried out (as opposed to work carried out by its sub-contractor) which duty included not causing economic loss.

5. This progression of cases has not however been without hiccups. In Samuel Payne v. John Setchell Ltd [2002] B.L.R. 489 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.
6. The decision in Samuel Payne was not followed in Tesco Stores or in Mirant Asia-Pacific Construction v. Ove Arup (2005) 97 Con. L.R. 1 but it is the question of the relevance of a contractual relationship to the existence of a duty of care which has been considered most recently.
7. Contractual relationships may be relevant in two circumstances:

1. Where there is a direct contract between the claimant and the alleged tortfeasor;
2. Where there is chain of contracts as between the claimant and the alleged tortfeasor.

8. Both these situations were considered 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?
9. As to situation a. Lord Goff in Henderson, having analysed the historical context in detail, concluded that "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.
10. Situation b. was however more problematic because Lord Goff in Henderson had suggested that a sub-contractor would not ordinarily owe a duty of care to an employer since there is "generally no assumption of responsibility by the sub-contractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility."
11. 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:

1. The terms of the relevant contracts;
2. 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;
3. The advice given directly by the tortfeasor to the claimant notwithstanding the chain of contracts.

12. Whilst it may be an exaggeration to say that economic loss is now recoverable in situations where it was thought to be recoverable under the Anns principle, decisions since Murphy have seen a gradual swing of the pendulum towards the imposition of a duty of care.
13. Therefore in practice duties of care to avoid causing economic loss may well arise:

1. Notwithstanding the existence of a contract or chain of contracts between the tortfeasor and the claimant;
2. Where the tortfeasor provides services e.g. mere construction work or specialist work;
3. Where the reliance is "assumed" in the sense that the tortfeasor is a specialist such as in Barclays Bank;
4. Or where the reliance is implicit from the terms of the contract e.g. Tesco Stores.

14. 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, contactors and sub-contractors are all at serious risk of a claim in tort for economic loss.

15. There have been a number of recent cases which have sought to define or redefine the tests laid down by Lord Dunedin in Dunlop Ltd v. New Garage Co Ltd [1915] A.C. 79, HL to distinguish between a genuine pre-estimate of loss and a penalty.
16. However none of these cases gives any encouragement to a party seeking to challenge a liquidated damages clause.
17. Rather than recite each of the cases, I set out below the important points of principle emphasised by the judgments. The cases in question are Cine Bes Filmcilik Ve Yapim Click v. United International Pictures [2003] EWCA Civ 1669, CA, Alfred McAlpine Capital Projects Ltd v. Tilebox Ltd [2005] B.L.R. 271 and Murray v Leisureplay plc [2005] EWCA Civ 963, CA.
18. In Dunlop Lord Dunedin articulated one of the tests as being a consideration as to whether the sum complained of was stipulated as in terrorem of the offending party. This language is inappropriate in a modern setting and instead the relevant question is whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. (Lordsvale Finance plc v. Bank of Zambia [1996] Q.B. 752 cited in Cine and Murray.)
19. Although a comparison between the sum that would be payable by way of damages at common law and the sum payable as liquidated damages is obviously relevant, the mere fact that such a comparison throws up a discrepancy does not of itself lead to the conclusion that the sum stipulated is a penalty. The question is a broader one and will include consideration of the commercial justification for the clause, the importance to the parties of certainty as to the consequences of breach and the nature and complexity of disputes that could arise in the absence of a liquidated damages clause. (Cine and Murray.)
20. Although the test in Dunlop referred to a genuine pre-estimate of loss, that does not turn on the genuineness or honesty of the person or person making the estimate. The question is looked at objectively as at the date of the contract. (Murray and McAlpine).
21. The burden is on the party asserting that the sum is a penalty to prove that and if he fails then the tribunal will conclude that the sum in question is genuine pre-estimate of loss. In other words there is no mid-way position between a penalty and a genuine pre-estimate of loss. (Murray)
22. What does this mean in terms of construction contracts?
23. These cases follow on from and reinforce the view expressed in Philips Hong Kong v. Attorney-General of Hong Kong (1993) 61 B.L.R. 41, PC that the courts are very disinclined to interfere with a the parties’ bargain for the payment of liquidated damages. However, in anything but the simplest of case, the party stipulating the sum should:

1. Consider the losses which might flow from the relevant breach;
2. Consider the wider commercial context and the interests which may be affected by delay;
3. Keep a note of how the figure was arrived and any discussion with the other party concerning the liquidated damages.

24. Whilst evidence of these matters will not be conclusive, they will assist if any subsequent attack is made on the liquidated damages provision.

25. Having said that it is very difficult to strike down a liquidated damages clause there is one circumstance in which such a clause will not be a limiting factor in assessing an employer’s loss.
26. In Bath and North East Somerset District Council v. Mowlem plc [2004] B.L.R. 153, CA the Council contended that certain work was defective. Architect’s instructions were given to remedy the defect, which Mowlem refused to comply with as a result of which the Council instructed another contractor to remedy the defect. Mowlem, who were still performing other work under the contract, refused to give access to the contractor. The Council therefore sought an injunction restraining Mowlem from barring entry to the site to the remedial works contractor. The effect of refusing the injunction would have been to delay the completion of the project until liability for the defective work and Mowlem’s obligation to remedy it had been determined.
27. The grant or refusal of an interim injunction is always a matter of convenience. In that connection the guidelines set out in American Cyanamid Co v. Ethicon Ltd [1975] A.C. 396, HL are applicable. One of the guidelines requires the court to consider whether, if the injunction were refused, damages would be an adequate remedy.
28. Mowlem argued that if it turned out that it was obliged to remedy the defect, the Council would be adequately compensated by the liquidated damages provision, and that there was no doubt that Mowlem would be in a position to pay such damages.
29. Thus Mowlem were relying on the liquidated damages clause as limiting and defining the loss that would be caused to the Council flowing from the delay.
30. The Council put forward evidence that its actual losses would be significantly greater than the liquidated sum and would include many heads of loss which were intangible and unquantifiable.
31. The court granted the injunction sought and rejected Mowlem’s argument that the sum stipulated for liquidated damages was to be taken as the measure of loss for the purposes of the guideline.
32. First it was pointed out that liquidated damages my have underestimated the Council’s true loss and therefore it could not be assumed that that sum represented the actual loss to the Council by reason of delay.
33. Secondly the very fact that the liquidated damages may limit the sum recoverable for delay is in fact a very good reason to grant the injunction since the Council might well be not be full compensated for delay by the liquidated sum.
34. Thus whilst liquidated damages, whilst defining the sum recoverable on breach, are not a limiting factor when considering the actual loss likely to be suffered by reason of delay in the context of an application for an interim injunction.

35. The case of Midland Expressway Ltd v. Carillion Construction Ltd [2006] EWCA Civ 936, CA would not normally merit a mention save for the manner of treatment of provisional sums.
36. The contract in question contained three provisional sums which were to be expended under instruction. Instructions were given for the expenditure of those sums but the contractor argued that it was entitled to be paid the provisional sums without adjustment and in addition appropriate amounts for the work actually performed in relation to those sums.
37. Not surprisingly the Court of Appeal rejected this submission and held that the provisional sums in the contract had to be omitted and the actual expenditure paid.
38. The reasoning leading to this conclusion concentrated on the particular wording of the contract, which is not of general interest. However in arriving at its conclusion the Court treated the words "provisional sum" as virtually a term of art:

"The term "provisional sum" is generally well understood in the construction industry. It is used in pricing construction contracts to refer either to work which is truly provisional, in the sense that it may or may not be carried out at all, or to work whose content is undefined, so that the parties decide not to try to price it accurately when they enter into their contract. A provisional sum is usually included as a round figure guess. It is included mathematically in the original contract price but the parties do not expect the initial round figure to be paid without adjustment. The contract usually provides expressly how it is to be dealt with. A common clause in substance provides for the provisional sum to be omitted and an appropriate valuation of the work actually carried out to be substituted for it. In this general sense, the term "provisional sum" is close to a term of art but its precise meaning and effect depends on the terms of the individual contract…..

As I have said, the term "provisional sum", by the very use of the word "provisional", indicates that the parties do not expect that sum to be paid without adjustment. The appellant's construction in my view offends this expectation. A provisional sum is there essentially for the employer to spend or not as the relevant contingency arises. This accords with its definition in this contract, which provides for all three provisional sums that they "may be used in whole or in part in accordance with the instructions of the employer". The subsequent reference to clause 36.3 is a signpost not a limitation. The essential point is that the sums are there to be used or not in accordance with the employer's instruction. To the extent that they are not so used they are not payable.

Thus although it would have been more elegant and saved a lot of lawyer's fees if the contract had provided in terms for the provisional sums to be omitted and the actual expenditure paid instead, provisional sums are by definition in this contract only payable at all if and to the extent that the employer so instructs."

39. Making use of this definition, the Court was able to construe wording in the contract (which was at least arguably in favour of the contractor’s construction) in accordance with the generally understood meaning of "provisional sums".
40. The case therefore provides a useful definition of provisional sums as well as illustrating a purposive construction of a contract.

What loss is recoverable on an assignment?

41. In recent years the courts have been concerned to find remedies in meritorious cases where otherwise the loss would disappear into some black hole.
42. The issue was summarised in a Note in the Law Quarterly Review (Vol 110 LQR 42 at p 44 I N Duncan Wallace QC):

" …whether .. a contract-breaker can avoid an otherwise inescapable liability in damages as a result of the accident of the transfer of the property and assignment of the benefit of the relevant …contract to a third party, either by arguing that the original contracting party or assignor, having parted with the property at full value, has suffered no loss and that the assignee cannot be in a better position, or conversely that an assignee, in a case where he alone can sue, has paid a reduced price, equally suffering no loss. In other words, does the accident of transfer and assignment create a "legal black hole" into which the right to damages disappears, leaving the contract-breaker with an uncovenanted immunity?"

43. In response to this the law was developed in St Martin’s Property [1994] 1 A.C. 85, HL where an assignor was able to recover substantial damages on behalf of a third party who would suffer from defective performance of the construction contract but would be unable to acquire rights under it. This principle was followed and extended in Darlington Borough Council v. Wiltshier Northern Ltd [1995] 1 W.L.R. 68, CA to embrace a situation where there had been no transfer of property. However the limitation of the principle became apparent in Alfred McAlpine Construction Ltd v. Panatown Ltd [200] 3 W.L.R. 946, HL where the remedy was denied because the third party had a right of action against the builder, albeit more limited than the claim under the construction contract.
44. It was against this background that the recent case of Technotrade Ltd. Larkstore Ltd. [2006] EWCA Civ 1079, CA was decided.
45. Technotrade produced a site investigation report on the instructions of Starglade Ltd. The site was then sold by Starglade to Larkstore Ltd. Larkstore provided the Technotrade report to the building contractor. Whilst the building works were being carried out a landslip occurred causing damage to properties uphill from the site. The property owners sued Larkstore. They then obtained an assignment of Technotrade’s report from Starglade together with the right to sue in respect of breaches by Technotrade of its duties and obligations and brought Part 20 proceedings against Technotrade. It has to be assumed that but for Larkstore’s and/or the building contractor’s reliance on the report, either the development would not have proceeded in the manner it did and/or the building contractor would have taken precautions to prevent the landslip.
46. A preliminary issue arose as to whether Larkstore was entitled to recover any loss from Technotrade. The argument advanced was that Starglade had ceased to own the site at the date of the landslip and subsequent assignment and therefore it had not and could not suffer any loss. Since, so it was submitted, Larkstore could recover no greater losses than Starglade could have claimed as at the date of the assignment, Larkstore was not entitled to recover its loss attributable to the landslip.
47. This argument was rejected. In summary the court held that the losses suffered by Larkstore were no greater or different in kind from those that could have been recovered from but for the assignment and the sale of the property. Founding themselves on the decisions in GUS Property Management v. Littlewoods Mail Order Stores Ltd [1982] SLT 583 and Linden Gardens 57 B.L.R. 57 and distinguishing Dawson v Great Northern & City Railway Co [1905] 1 K.B. 260 the Court of Appeal held that an assignment of the cause of action (i.e. the breach of contract by Technotrade) carried with it the right to claim damages caused by that breach since the effect of the assignment was not to increase Technotrade’s exposure from what it would have been but for the assignment and sale of the building.
48. It was accepted that in one respect at least this case went further than previous authority. In this case the loss arising from the breach had not been caused until the development work was undertaken, by which date the development had been sold to Larkstore and Starglade had suffered no loss. Whereas in the earlier cases the damage caused by the breach had already occurred by the time of the assignments, albeit it had not been experienced as financial loss until quantified by remedial works carried out by the assignees. However, it was held, this difference was not crucial to the application of the principle.
49. The decision in Dawson was distinguished as follows:

"In that case compensation under the Lands Clauses Consolidation Act 1845 was not payable to the assignee for "damage to her trade stock" (as distinct from structural damage to premises requiring re-instatement works which did not increase the burden on the defendants), because that was compensation for an item that could not have been recovered by the assignor from the defendants. The assignor did not trade in the stock in question and could not have made a claim for compensation for that item." (My emphasis.)

50. It would therefore appear that a distinction has to be drawn between losses or heads of loss which could never have been recovered by the assignor and losses which could have been recovered by the assignor, subject to certain eventualities. Thus Starglade would have been able to sue for these losses but for the sale of the property to Larkstore and the assignment. Of course a claim by Starglade also presupposes that had the property not been transferred and the cause of action assigned, Starglade would have relied on the Technotrade report and/or provided it to the building contractor who in turn would have relied upon it. Whilst these further assumptions were not expressly discussed by the Court it is evident that such assumptions were made since it appears that it was always in the contemplation of Starglade that the property would be developed in a certain manner, relying on the Technotrade report.
51. Thus Technotrade illustrates two points of importance:

1. It is not necessary for the damage which causes the loss to have occurred prior to the assignment. In that sense a cause of action for breach of contract can be assigned without any loss whatsoever;
2. In applying the Dawson principle (i.e. that the assignee cannot recover damages greater or different in kind from those that could have been recovered by the assignor) the court may have to make assumptions as to what is likely to have occurred but for the assignment. The more likely it is that the assignor would have suffered the same kind of loss as is claimed by the assignee, the more probable that the court will award the assignee those damages.

52. Lastly I refer to two cases where the scope of recoverable damages was under consideration.
53. In the first, Earl Terrace Properties Ltd v. Nilsson Design Ltd and Charter Construction plc [2004] B.L.R. 273 the completion of a housing development was delayed by approximately 15 months by defects. The developer claimed what were described as "holding losses"; loss of interest on funds held in the project for 15 months longer than they ought to have been had the defective works not occurred. One of the defendants argued that credit had to be given against any damages by reason of the fact that as a result of the delay the houses were sold when demand was high whereas had they been marketed at the time intended the demand would have been less and the price obtainable correspondingly less.
54. The funding for the project was in fact provided by Earl Terrace’s ultimate holding company and it appeared that no interest was payable by Earl Terrace on the funds although the sum borrowed was repayable on demand. Notwithstanding this it was held that Earl Terrace could in principle recover the loss suffered by the holding company. The basis of this appears to have been that since this type of loss fell within the contemplation of the parties and within the scope of the duty of the contract breaker, proof of actual loss by Earl Terrace was not essential to an award of damages. Alternatively it was held that the loss was recoverable as an award of damages for breach of Earl Terrace’s performance or expectation interest under the contract. However in order to recover such a loss Earl Terrace would have to be able to demonstrate that but for the delay Earl Terrace or the holding company would have put the funds to commercial use but, once this is established, the loss may be quantified by reference to a reasonable rate of return.
55. In relation to the argument concerning the rise in the property market it was held that this did not have to be taken into account. Principally it would seem on the basis that had there been a fall in the market, that loss would have been too remote and therefore, by parity of reasoning, any rise in the market should also be considered as too remote.
56. By contrast with this case a claim for loss of use failed in Bella Casa Ltd v. Vinestone Ltd. [2006] B.L.R. 72. In that case the completion of a flat was delayed by reason of defective work. The flat had been purchased for the use of a director of the claimant. Claims were made for the service charge and expenses payable during the period when the flat could not be occupied as a result of the delayed completion but the largest claim was a claim for interest on the balance of the purchase price and other expense from the date when the property should have been completed until it was in a fit state for occupation. Whilst it was held that the service charge and expenses claim might be valid, the claim for loss of use, being a claim for general damages was not recoverable. The distinguishing feature, by comparison with the Earl Terrace case, is that the claimant did not seek to show that any particular loss had been caused by having a capital sum tied up in the flat whilst it was uninhabitable. Thus, whilst a natural claimant may be able claim a modest sum by way of general damages for loss of use of a house or flat, general damages are not recoverable measured by reference to the value of the asset or interest payable on sums borrowed to finance the purchase of that asset in the absence of evidence that the claimant has in fact suffered a loss by having monies tied up in a property which cannot be used.

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