Deciding whether a party causing a delay was responsible for the fall in the market value of a property boiled down to whether that loss was ‘not unlikely’
The Court of Appeal considered recently – in John Grimes Partnership Ltd vs Gubbins – whether consulting engineers were liable for a fall in the market value of a development. The engineer had been engaged to design the road and drainage for a residential development and to arrange for the road to be adopted by the local authority. The judge found that it was an express oral term of the contract that the agreed work would be completed by a particular date and he also held that that was a reasonable time for the work to be done. The work was not completed by the agreed date. The judge found the breach of contract had caused the development to be delayed by 15 months.
This delay occurred after the financial crisis of 2008 and the value of the development fell over those 15 months by a substantial amount. The Court of Appeal had to decide whether the engineers were liable for this loss in value or whether this damage was too remote, which is the case if the party in breach ought to have realised that this type of loss was “not unlikely” to result from the breach.
A fall in the property market could be said always to be reasonably foreseeable in the sense of being “not unlikely” to occur. Also, the engineer in this case was found to have known at the time of the contract that delay brought with it the risk that the property market might move to the disadvantage of the developer.
The court dismissed the engineer’s argument that its modest fee argued against responsibility for losses, saying breaches even of a contract of modest size can give rise to a substantial claim
It was argued on behalf of the engineer that the first step should be to establish the scope and nature of the duties owed under the contract and that there was no duty on the engineer to protect the developer against losses due to falls in the market. This approach was based on the principle developed recently by the House of Lords, particularly in the speeches of Lord Hoffmann, that one must first decide whether the loss is of a kind for which the contract breaker should fairly be assumed to have accepted responsibility. Applying this principle in one of these cases (Banque Bruxelles vs Eagle Star Insurance Co Ltd) the House of Lords held that valuers that advise lenders on the value of properties to be taken as security for a loan, and who negligently overvalued the property, should not be liable for losses attributable solely to a fall in the property market, despite such losses being foreseeable in the sense of being “not unlikely”. This was on the ground that it was outside the scope of liability that the parties would reasonably have considered the valuer was undertaking.
The Court of Appeal held that this principle does not alter the “standard approach” based on reasonable foreseeability. It said that such cases merely show that in some situations the standard approach will not apply, but that such situations are unusual: “Normally, there is an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken.”
The court did not consider that this was one of the “unusual” cases and said that the valuers’ case provided little guidance, also that there was no evidence in the property world to indicate that a party in this engineer’s position would not be taken to have assumed responsibility for losses from movement in the property market.
The court also dismissed the engineer’s argument that its modest fee argued against such responsibility, saying breaches even of a contract of modest size can give rise to a substantial claim in damages.
The court considered that a further argument that the engineer had no control over market movement was not in line with cases where delay in delivery of goods gave rise to damages for losses suffered through a change in the market price.
The court also commented that the delay had been significant. A few days or even a few weeks’ delay would be unlikely to give rise to a demonstrable loss on the property market. It was the extent of the delay in this case that gave rise to a quantifiable loss.
Overall, this is a disappointing decision for professional people and professional indemnity insurers. The court showed no inclination at all to extend further what may be called the “Hoffmann” approach, but rather seemed concerned to confine it within narrow bounds, as only arising in exceptional cases. For engineers in particular, it emphasises the importance of agreeing in their contracts express terms to limit liability in a way that is fair and reasonable.
Rachel Barnes is a partner in solicitor Beale & Company