evonshires
solicitors
CONSTRUCTION LAW UPDATE:
Negligence and Pure Economic Loss
You should read this Construction Law Update if:
•
You own the freehold or leasehold to a recently constructed but defective property;
•
You have worked on any projects on which a contractor has become insolvent; or
•
You do not regularly enter warranties with all of your sub-contractors or consultants.
In this update we look at a recent decision of the TCC in
Sainsbury’s Supermarkets Ltd v Condeck Holdings Ltd and
Others [2014] EWHC 2016 (TCC), in which the judge gave
summary judgement against a claimant arguing that the
two defendants owed it a duty in tort to prevent the pure
economic losses it has suffered. In his judgement StuartSmith J gave a helpful overview of the law on the exception
to the rule that ‘pure economic losses’ are not recoverable
for the tort of negligence. His judgement demonstrates the
huge difficulties faced by parties trying to recover their losses
for defective construction projects where they have not
got adequate contractual protection from sub-contractors,
consultants and others.
What is Pure Economic Loss?
The term ‘pure economic loss’ refers to a loss that is purely financial i.e.
not one that is consequent upon any personal injury or direct property
damage.
The concept was made clear in the case of Spartan Steel and Alloys
Ltd v Martin, in this case a production company which manufactured
steel sheets shut down for a time due to a power cut caused by the
negligence of the defendant. The processing of one of the steel sheets
was interrupted causing it to be damaged beyond repair. It was held
that the value of the damaged sheet could in principle be recovered
as property damage, however the claimant’s lost profits for the period
for which it was out of operation were pure economic losses and not
recoverable.
Why is this relevant to the Construction Sector?
The rule that pure economic losses are not recoverable in tort took
on a particular importance for the construction sector in Murphy v
Brentwood District Council where it was held that the diminution in value
of a property due to construction defects was a pure economic loss,
therefore, in the absence of a contract, it was not possible to recover
such losses.
It follows that, if one is going to claim damages for a defective property,
then it will be necessary either to do so on the basis of a contract or
under the exception to the rule against recovery of pure economic
losses, namely that they are recoverable if the defendant has specifically
assumed responsibility to prevent such losses, on which assumption
of responsibility the claimant has reasonably relied. The judgment in
the present case illustrated just how difficult it is to prove either an
assumption of responsibility or reasonable reliance.
The Facts of the Case
The claimant supermarket entered into a contract for the design
and construction of a car-park for one of its stores with Condeck; a
company now in administration. The car park in question had a unique
design involving a large element of pre-fabrication to assist with the
speed of construction. The car park was defective both in design and
construction and will have to be demolished. As Condeck was insolvent
the claimant joined both Mr Pashouros (the designer of the car park,
owner of the patent to the design, and director of Condeck) (“D1”) and
CSL (a company which through a series of complex agreements, had
purchased the business and assets of another company, NRM, which
had reviewed the proposed car park design and advised the claimant
thereon before it entered the contract with Condeck) (“D2”).
The claimant accepted that its case against D1 and D2 was one of
pure economic loss, and that it had no contract between either of them.
Both D1 and D2 applied to have the claim struck out on the basis that
neither had assumed responsibility to the claimant and the claimant’s
case against them was not even arguable. The judge agreed, and gave
summary judgement in favour of both.
Judgement for Mr Pashouros
The claimant’s case against D1 was that he had assumed responsibility
for the claimant’s economic losses and was personally liable for such
losses. This contention was based on the fact that D1 was the designer
of the car park, that as director of Condeck and owner of the patent
for the design he was the sole person who stood to benefit from the
contract, and that he had promoted the use of the system to the
claimant directly.
The judge reviewed the case law on ‘assumption of responsibility’ in
relation to directors of companies which had entered into contracts
with claimants claiming pure economic losses. He held that “it will not
be sufficient to establish… an assumption of responsibility [by the
director personally] if the director does no more than act in a way that is
consistent with his position as director,” he was thoroughly unpersuaded
that D1 had done anything that was other than entirely routine for a
director of a company, as such he gave judgement in D1’s favour.
He further held that, to find D1 personally liable on the basis that D1 had
promoted the system and stood to benefit from it as owner of the patent
and director of the company, would fundamentally undermine one of
the main purposes of a limited company – namely to allow individuals to
benefit financially from their businesses without incurring direct personal
liability.
Judgement for CSL
For the claimant to make out its case against D2 it would first have to
show that NRM had assumed responsibility for the claimant’s economic
losses, that the claimant had reasonably relied on this and then that the
resulting liability had been transferred to D2.
The judge indicated that it would be difficult for the claimant to show
that NRM had assumed responsibility because it will only be in rare
circumstances that a sub-contractor or consultant can be said to
have assumed responsibility for a building owner with whom it did not
contract. He noted that “there is generally no assumption of responsibility
by a sub-contractor or supplier direct to a building owner, [as] the parties
have so structured their relationship that it is inconsistent with any such
assumption of responsibility.”
conclusion – namely that NRM’s report was knowingly appended to
Condeck’s tender and that NRM attended meetings with the claimant
and specifically advised it on technical issues. This however was not
enough to make out the point, and the judge held that it merely rendered
it possible that further information might be forthcoming that would
demonstrate such reasonable reliance. This shows the kinds of factors
the court will consider in determining such issues, but also demonstrates
how hard it is to prove the point.
On the final question the judge held that it was “axiomatic that, in
general, a personal liability in tort cannot be transferred so as to relieve
the original tortfeasor of liability and impose [that liability] on another
party.” He held that there were important policy reasons for this in that,
if an insolvent tortfeasor could transfer their liability to a solvent one and
thereby render the solvent party liable to the victim, it would equally be
the case that a solvent tortfeasor would be able to transfer their liability
to an insolvent party and thereby deny the victim a remedy – for obvious
reasons this has to be avoided.
Commentary
This case makes clear just how difficult it is to rely on a claim in tort when
attempting to recover pure economic losses. A summary judgement
is not easy to obtain. D1 and D2 had to show that the claimant had
no arguable case in order to get the judgement that they did. The fact
that they were able to succeed clearly demonstrates the importance of
ensuring that you enter some form of contractual relationship with those
against whom you may want to claim for economic losses.
Some Practical Advice
Had Condeck not been bankrupt the claimant’s case would have been
straightforward. This clearly demonstrates the importance of doing
proper due diligence. The judge had little sympathy with the claimant
holding that the risk that Condeck would become insolvent was a
risk the claimant took (and could have mitigated) when it entered the
contract with a limited company. When entering such contracts it is vital
to be aware of such risks and to mitigate them by looking at the financial
position of your main contractor.
Another valuable lesson to learn from this case is the importance of
ensuring that any party involved in a construction project, and against
whom you could conceivably have a claim for pure economic loss,
should either be made a party to the main contract or should be required
to enter into a warranty. So long as this is done there will be no need to
rely on the notoriously difficult principles surrounding recovery for pure
economic loss.
The tiny print
On the question of reasonable reliance on NRM’s advice, the judge
held that two features of the relationship ‘tended to support’ such a
No action should be taken on the matters covered by this leaflet without taking
specific legal advice.
Find out more
This is one of a series of regular updates from the Construction & Engineering Department. For advice on any of the above issues, or if
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