A recent case has tried to clarify when a duty of care arises. But it remains an area blighted by arbitrariness and uncertainty
Whenever building defects arise, the owner or tenant’s recourse is usually clear. One looks at the construction contract and lease, as well as any warranties and the Contracts (Rights of Third Parties) Act 1999. Problems arise if the contractor or other contractual party against whom there is direct recourse is insolvent and there are no warranties or rights under the 1999 act. Then the owner or tenant may claim that others involved with the defective work owed it a duty of care. They may also assert duties of care if any contractual claim is statutorily time-barred whereas a claim based on duties of care is not.
Someone who installs a boiler that explodes causing injury or property damage will usually owe their victim a duty of care (although the victim must also show that the duty was breached and caused its claimed loss). If the boiler is just defective and causes no injury or property damage, the law is far more reluctant to say the installer owed a duty of care to avoid the “pure economic loss”. This distinction often depends on a defect’s detectability: if it is (or should have been) found before any injury or damage is done, there is less likely to be a duty of care.
The courts try to avoid finding duties of care that are inconsistent with the intentions of the parties to a contractual chain or that could have been created contractually but were not. The courts also try to impose limits on finding duties of care, by concepts such as proximity, to avoid creating wide liabilities. Unfortunately, this approach has made it hard to predict when a duty of care arises. Coupled with the array of conflicting judgments, cases often litigate.
The latest judgment to try valiantly to clarify this area concerned an office refurbishment. A sub-subcontractor allegedly failed to insulate properly the newly installed air-conditioning pipework. It was claimed that it owed the tenant a duty of care to avoid causing damage, namely corrosion and rust. In declining to strike out the claimant’s case without a full trial, the court acknowledged that the relevant law “is still being developed”.
The judgment exposes the crudeness of the distinction between damage to tangible property and damage to intangible property (or pure economic loss). The court accepted that it could not say without detailed, probably expert, evidence whether any rust or corrosion had reached the stage that the pipework could be classified as damaged. One might only have damage once the pipework progressed beyond ordinary deterioration.
Defects in construction work are usually treated as pure economic loss. If there are defects in, say, a building’s foundations that mean it cannot be occupied until it is repaired (but do not injure or damage anyone or anything), the law tends to say that the contractor responsible for constructing the building has only caused economic loss. This is because there is merely “damage to the thing itself”.
The analysis differs if one asks whether the foundation subcontractor owes a duty of care. Then it is easier to say its work has caused damage - that is, to the superstructure built by others. As this shows, the further you go down the contractual chain, the more likely you are to find someone who has caused damage. The irony of such an approach is that the guy with the smaller role is more likely to be liable than the guy with the larger role. In this latest case, it was material that the sub-subcontractor did not provide the pipework - only the insulation. It was therefore possible to say he had damaged other work.
There is further arbitrariness in this area. The courts seem more willing to find that consultants owe duties of care to avoid causing economic loss to claimants whom they have no contract with and where the 1999 act does not apply. This seems to be influenced by the availability of insurance for consultants’ work. It is also partly a result of previous judgments imposing duties of care on parties who made misstatements that were reasonably relied on, thereby causing economic loss. It did not take long for similar duties of care to be found for other acts and omissions, usually by professionals. As with the rest of this area, though, uncertainty abounds as to how far, on a similar basis, specialist contractors would also owe duties of care to avoid acts and omissions in their work that cause economic loss.
It is easy from all this to see the need for warranties and third-party rights. It also suggests one of the benefits of unifying limitation periods (although reform was recently shelved). Otherwise one can only continue to expect the unexpected - and the arbitrary.
Rupert Choat is a partner and solicitor advocate specialising in construction at CMS Cameron McKenna