Following on from Patrick Holmes’ disturbing article last week, we examine the damaging effects of intimacy, negligence and confusion in commercial relationships
It must be a requirement of any legal system that it offers the parties to a transaction some certainty as to the fundamental principles that govern their relationship. Commercial organisations (and their insurers) are entitled to expect predictability, even if the application of the law to the facts of the particular case is sometimes unpredictable. The ebb and flow of English case law in relation to the liability of construction professionals in the absence of a contract have flouted this basic requirement.
Patrick Holmes (21 November, page 60) has flagged up the muddle in Mirant Asia Pacific Construction vs Ove Arup & Partners International Ltd, a case that concerned novation and designers’ duties to third parties. I think it warrants a further look.
I confess to a degree of personal confusion: as a student I learned that the circumstances in which the courts were prepared to impose a duty of care in tort were endlessly expanding. As a junior solicitor, I studies the case of D&F Estates, in which the House of Lords slammed the door shut in building cases:
“To hold that the builder owed such a duty of care to any person acquiring an interest in the product of the builder’s work would be to impose on him the obligations of an indefinitely transmissible warranty of quality.”
But the Lords left chinks open, and these were exploited in Hedley Byrne vs Heller, where if was found that a “special relationship of proximity” and reliance might result in recovery of financial losses.
This exception took a battering after I had become a partner in Cameron McKenna: the House of Lords in Henderson vs Merritt Syndicates suggested that subcontractors did not have a sufficient “relationship of proximity” to make them liable in tort to the building owner if their work did not conform to the required standard. After I had moved to Linklaters, Judge Lloyd in Samuel Payne vs John Setchell Ltd suggested that as a matter of policy any person involved in the construction process – contractor or consultant – was ordinarily liable in tort only for physical injury or property damage but not for other financial losses.
Consultants will be concerned by the unequivocal finding that they can be sued in tort for economic loss
But now we have a first instance decision in Mirant. Here Judge Toulmin disagreed with Judge Lloyd. He said: “It seems to me that where the designer performs services of a professional or quasi-professional nature it is in the same position as bankers, solicitors, surveyors, valuers and accountants.”
Accordingly, in a classic old-style piece of litigation with preliminary issues and appeals, Arup was found to owe a duty of care to its client both in contract and in tort. Arup was in breach of that duty and could be liable in tort for the financial losses that resulted from its design of the foundations of a boiler house in the Philippines. Normally, of course, the client would have pursued Arup in contract only, but it appears that in this case there were concerns that the limitation period for breach of contract may have expired. The cause of action in tort accrues at the date when the financial loss arises. As in this case, that is often much later than the date of the breach of contract.
Interestingly, in addition to Arup’s client, a related company in the group also pursued it. For tax reasons this company did not have a contractual relationship with Arup. Here Toulmin found that there was not sufficient “proximity” between this company and Arup to enable it to recover economic loss. There was no contractual relationship and there was no line of communication even though this company did rely on Arup’s advice. If there was no “sufficient relationship of proximity”, there was no liability for economic loss.
Plainly this particular litigation has a long way to go, but the courts have undoubtedly changed direction. Consultants and their insurers will be concerned by this unequivocal finding that building industry professionals can be sued in tort for economic loss if there is a sufficiently close relationship between the parties.
Ann Minogue is a partner in solicitor Linklaters