The Malayan Law Journal Articles

© 2003 LexisNexis Asia (a division of Reed Elsevier (S) Pte Ltd)

The Malayan Law Journal Articles

2001
Volume 2

[2001] 2 MLJ lxv; [2001] 2 MLJA 65

LENGTH: 9755 words

TITLE: Article: Donoghue v Stevenson - A New Facade for the Construction Industry?

AUTHOR: Grace Xavier LLB (Hons) (Lond), CLP, LLM (Mal), Dip Int Comm Arb (Lond),
FCIArb Lecturer, Faculty of Law University of Malaya

TEXT:

Introduction

The law of tort, or rather, its development since the landmark decision in the celebrated case of
Donoghue v Stevenson, 1 has been discussed so often that another attempt to address the issue
might just be glossed over by prolific academic writers and informed readers alike. However, it
is to be emphasized that the development of the law of tort has not even reached the crossroads
of life of general tort actions, let alone the specific tort claims that are founded on negligence. At
least, this appears to be so insofar as defective building claims are concerned.

As a brief introduction to the law of tort, the law provides that any person who causes injury to
another person or another's property is liable for the act or omission that caused the damage.
Why should someone opt for an action in tort and not one in contract, which is a popular form of
action, one may ask? A tort action would help someone who would otherwise find it difficult to
sustain a claim because there was no contractual privity between him and the person who had
caused the injury. Therefore, the law of tort fills the gap where contract law is unable to. As such,
such a person has a remedy available, where otherwise he would have none. Such a fact has been
aptly addressed by Lord Atkin who remarked as follows: 2
I do not think so ill of our jurisprudence as to suppose that its
principles are so remote from the ordinary needs of civilized society
and the ordinary claims it makes upon its members as to deny a legal
remedy where there is so obviously a social wrong.

Tort thus remains an avenue whereby a legal remedy may be administered to a person who has
suffered a social wrong. One cannot but admit that the remark by Lord Atkin has not, and will
not ever, become obsolete. The statement was an honest truth in 1932 and so it remains true to
this day. Where an obvious social wrong has been committed, it is up to the courts, and
subsequently to Parliament, to ensure that the status quo is not prolonged for a day longer than
necessary. Law was made for man, and not man for the law, and as such, the law of tort shall
continue its development. The only restriction shall be where it was evident that the law was
being manipulated to achieve an undesired objective of a particular undesirable individual or
group of persons. At such a time, social justice demands that the law shall not be used as a
manipulating tool to subvert the natural principles of justice.

The facts and the judgment

The appellant in Donoghue sought to recover damages from the manufacturer of the drink that
contained the remains of a decomposed snail. The drink was contained in an opaque bottle that
did not provide any means of ascertaining or viewing its contents. The appellant suffered from
shock and gastro-enteritis because she had already consumed part of the drink before the
unwanted occupant floated out during a refill. The case posed a problem in that there was no
previous case that had held that a manufacturer was under a liability to the consumer. However,
this was overcome in the court below which had distinguished that the general principle, as
stated in the previous sentence, was subject to two exceptions:
(1) where the article itself was dangerous, per se or
(2) the fact that the article was dangerous was known to the manufacturer. 3

Although the case concerned a manufacturer who had supplied products for consumption by the
public, the principle of the duty of care was formulated not only to cover circumstances similar
to the facts of Donoghue but to cover all instances, be it an employer providing safe equipment
or materials for the use of workers that he had employed to carry out work on his premises 4 or
a railway company which had contracted to carry a person from one place to another. It is
arguable that in the two examples mentioned the fact that there is a contract may be raised to
negate the possibility of an action in tort. The existence of a contract, it must be emphasized,
does not prevent the existence of a duty of care between two parties independently of the
contractual regime between them. The synthesis of the tort of negligence is this: as long as there
has been neglect in the exercise of the ordinary skill and care by one person towards another, and
the other, without contributory negligence on his part, has suffered injury either to his person or
his property, he has an actionable claim in negligence. Based on this, the principle in Donoghue
was formulated. The House of Lords referred to a number of cases but the following statement
summarizes the duty of care situation adequately:
That a manufacturer, or indeed the repairer of any article, apart
entirely from contract, owes a duty to any person by whom any person by
whom the article is lawfully used to see that ... the article ... is
carefully constructed. All rights in contract must be excluded from
consideration of this principle; such contractual rights as may exist
in successive steps from the original manufacturer down to the ultimate
purchaser are ex-hypothesi immaterial. Nor can the doctrine be confined
to cases where inspection is difficult or impossible to introduce. This
conception is simply to misapply to tort doctrine applicable to sale
and purchase.
The principle of tort lies completely outside the region where such
considerations apply, and the duty, if it exists, must extend to every
person who, in lawful circumstances uses the article made. There can be
no special duty attaching to the manufacture of food apart from that
implied by contract or imposed by statute. If such a duty exists, it
seems to me it must cover the construction of every article, and I
 cannot see any reason why it should not apply to the construction of a
house. 5

Based on the above, an architect/engineer who acts as a contract administrator, apart from the
contractual obligations that he owes to his employer by virtue of the conditions of his contract of
employment, may concurrently be held liable in negligence towards third parties for issuing
instructions negligently, 6 or for causing defects in the work which resulted in injury to third
parties, 7 or for negligently assuring a subcontractor that he would be paid for the additional
work that he had carried out, 8 or for giving assurances negligently and subsequently failing to
act according to the assurances given, 9 and for issuing certificates negligently. 10

Coming back to the discussion of the House in Donoghue, Lord Atkin was extremely cautious
when formulating the principle of duty of care and its subsequent extension. The extension of the
principle or the obvious wider net of tort claims that were introduced were done with a
preparedness that cannot be denied: Lord Atkin's tactfully phrased observation is worth
reproducing: 11
But acts or omissions, which any moral code would censure, cannot in a
practical world be treated so as to give a right to every person
injured by them to demand relief. ...
The rule that you are to love your neighbour becomes in law, you must
not injure your neighbour;...
Who is my neighbour ... persons who are so closely and directly
affected by my act that I ought reasonably to have them in
contemplation as being so affected when I am directing my mind to the
acts or omissions which are called in question.

His Lordship then referred to the cases of Heaven v Pender 12 and Le Livre v Gould 13 and
observed that:
proximity ... not confined to mere physical proximity but be used, ...
to extend to such close and direct relations that the act complained of
directly affects a person whom the person alleged to be bound to take
care would know would be directly affected by his careless act.

Relationship between the parties in tort claims?

Tort claims are allowed although the parties are not related by contract. However, there has to be
some relationship between the parties. The relationship issue was discussed in Heaven v Pender.
14 Brett MR, delivering his judgment in the Court of Appeal, used an interesting analogy of two
drivers or two ships approaching each other. Assuming that they were approaching each other in
such a manner as to give rise to a dangerous collision between them, then the parties were
obliged to use such ordinary skill and care to avoid such a collision. It was this knowledge
coupled with the subsequent action to avoid danger or injury that gave rise to a relationship
between them. 15 The Master of the Rolls then applied his observation to formulate the general
principle that was formulated in the case of Heaven: 16
Whenever one person is by circumstances placed in such a position with
regard to another that every one of ordinary sense who did think would
at once recognize that if he did not use ordinary care and skill in his
own conduct with regard to those circumstances he would cause danger of
 injury to the person or property of the other, a duty arises to use
ordinary care and skill to avoid such danger.

Applying the above, it becomes clear that a manufacturer, supplier, employer, contract
administrator, contractor, sub-contractor and specialist contractors will all owe a duty of care to
anyone they came into contact with, irrespective of whether there was a contractual relationship
or not.

Therefore, the principle to be applied would be as follows. A manufacturer or a repairer, for that
matter, or even a builder or contractor, owes a duty to whoever uses the article or finished
product or building, lawfully, to ensure that the article or finished product or building has been
carefully constructed. Lord Buckmaster, in his dissenting judgment 17 in Donoghue agreed that
it would involve formulating such a principle to allow the appellant's claim. He contended that
this principle did not provide for the inclusion of any contractual rights or obligations, it existed
independently of a contractual regime. He felt that such a course of action was not practical. 18
He therefore felt that such a principle would result in a misapplication of the tort doctrine to an
otherwise ordinary sale and purchase transaction.

However, if Lord Buckmaster had the authorities available today, he might have reached a
different conclusion. This is due to the fact that he himself agreed that 'if a house be, as it
sometimes is, negligently built, and in consequence of that negligence the ceiling falls and
injures the occupier or anyone else, no action against the builder exists according to the English
law, although I believe such a right did exist according to the laws of Babylon'. 19

The majority of the Lords, however, fortunately, agreed that the manufacturer was liable to the
ultimate consumer. In a sense, Lord Atkin did voice the fear that such a course of action, finding
a manufacturer liable to every ultimate consumer was not a practical move and might open the
floodgates of litigation but on the other hand, he was guided by the fact that the limitations of
law were impractical as well, especially where such limitations hindered a remedy sought by an
injured party. It appears that Lord Atkin chose to base his argument on the biblical doctrine of
'Thou shalt love thy neighbour as thyself'. 20 The following statement by His Lordship prompts
the writer to the conclusion as above:
The rule that you are to love your neighbour becomes in law, you must
not injure your neighbour; and the lawyer's question, Who is my
neighbour? receives a restricted reply. You must take reasonable care
to avoid acts or omissions which you can reasonably foresee would be
likely to injure your neighbour. Who, then, in law, is my neighbour?
The answer seems to be - persons who are so closely and directly
affected by my act that I ought reasonably to have them in
contemplation as being so affected when I am directing my mind to the
acts or omissions which are called in question. 21

Yes, as long as there is proximity! What then is proximity?

Lord Atkin agreed with the principle in Heaven that a duty to take care would arise when the
person or property was in such proximity to the person or property of another that if such due
care was not taken, then there might be damage or injury as a result. His Lordship then took the
definition of proximity a step further by stating that 'proximity be not confined to mere physical
proximity, but be used, ... to extend to such close and direct relations that the act complained of
directly affects a person whom the person alleged to be bound to take care would know would be
directly affected by his careless act'. 22

This volatile statement has somehow not received the applause that it should have. Standing on
its own, it makes every person involved in a building project liable for his acts or omissions,
right from the planning authorities to the architect who finally certifies that the building is
practically completed. There is no policy consideration or grounds to deny the effect of this
statement as has been stated in the preceding sentence. Anyone who is in a proximate position to
another person, irrespective of how much further down the line the ultimate person who used the
product or who bought the house is, is responsible to carry out his obligation in a manner that
reasonably would avoid injury to the person or damage to the property. As long as there is
sufficient evidence to show that negligence had caused the injury or damage to the property, then
the person or persons in such a proximate relationship would be responsible and liability would
automatically attach. There is no doubt that sometimes certain cases may be such that it would be
difficult to determine whether the degree of proximity was sufficient to found such liability. This
is where the judges have to summon all their creativity in deciding when it is reasonable to
decide that it was too remote, and when it was not too remote. This discretion in creativity,
exercised judicially, will go a long way in ensuring that the development of the law keeps in line
with upholding the confidence expressed by Lord Atkin in the law:
I do not think so ill of our jurisprudence as to suppose that its
principles are so remote from the ordinary needs of civilized society
and the ordinary claims it makes upon its members so as to deny a legal
remedy where there is so obviously a social wrong. 23

The discretion, however, has to be exercised cautiously, and not in such a way as to interpret the
law in any wider terms than is necessary. As long as the principle of justice is upheld and remedy
for a wrongdoer is not denied merely because the law does not seem to provide for it, then the
discretion would have been judicially exercised. To allow a party to escape liability merely on
the basis of a rule of law of 'caveat emptor' would no longer be good law considering the impact
of the discussion and development of the law in this regard. Which now brings us to the
discussion of the issue of recovery for pure economic loss claimed by a party on the basis that an
act had been negligently performed.

Economic loss 24

Pure economic loss has always posed an area of difficulty. It has not been possible for a party to
recover for pure economic loss in tort in the absence of a special relationship of proximity 25
between the tortfeasor and the claimant whereby a duty of care would be imposed 26 on the
tortfeasor to safeguard the claimant from economic loss. 27

The principle of liability for negligent acts and omissions in Donoghue was extended to cover
responsibility for negligently-given misstatements in Hedley Byrne v Heller and Partners. 28 In
that case, the defendant bankers were held liable for a negligent misstatement that caused the
plaintiffs considerable loss of money. The plaintiffs had placed advertising orders with a
company based on the defendant's representations as to the creditworthiness of the said company.
They then encountered losses. The said representations were given negligently. However, the
plaintiffs lost their claim merely because the defendant bankers had disclaimed responsibility for
the accuracy of the reference by way of an exclusion of liability clause. Such a disclaimer clause
would not, now, be available for any defendant in a similar situation. Parliament subsequently
enacted the Unfair Contracts Terms Act 1977 ('UCTA 1977') to provide that a person could not
exclude or restrict liability in negligence where the cause of such negligence had resulted in
injury to another or in the death of that other person. 29 The recovery that the plaintiffs were
seeking was economic loss, ie not injury to person or property but loss of money. The case,
therefore, created a further category of loss claimable in the tort of negligence.

However, this was not a category to be easily contended with, ie the plaintiffs could not approach
the courts, allege that they had suffered economic loss and expect the compensation to fall into
their laps! Plaintiffs in this category faced a tough fight, as seen in Caparo Industries v Dickman,
30 where the plaintiffs were yet again unsuccessful for a claim in economic loss. This time the
court held that although the information had been given and could be used by the plaintiffs, there
had been no representation by the defendants that the information could be relied upon by the
plaintiffs for the specific purpose that the plaintiffs had in mind. The plaintiffs had used the
defendants' audited reports as a backing for the taking over of a company, and the court held that
the defendants had not made a representation that their accounts were fair and true for the
purpose for which the plaintiffs had subsequently used them, ie as a basis for the taking over of a
company whose accounts had been audited by the defendants! It was no easy climb, it was more
a painful trudge up a hill that seemed to have no end. But parties who suffer losses are extremely
persevering, and refusing to be discouraged by the above two decisions, they continued to bring
such claims to the courts until they finally achieved success in the case of Smith v Bush. 31

In Smith's case, the plaintiffs relied on the services of a valuation company when they wanted to
purchase some property. The valuations were conducted negligently. As a result, the plaintiffs
suffered considerable losses by paying far too much for houses that were worth much less than
the amounts that had been actually paid. The defendants tried to defend themselves by relying on
disclaimer clauses but unfortunately, by virtue of the UCTA 1977, their disclaimer clause was
held to be invalid and the case was decided as if there were no disclaimer clause. Furthermore,
the principle of reliance was clearly established here, as the parties knew that the plaintiffs were
relying on the valuation reports prepared by the defendants. The House of Lords allowed the
claim for recovery of pure economic loss suffered by the plaintiffs who had relied on the
representations of the defendants.

Therefore, there seems to be a slant in the right direction, ie the first case that came before the
courts fell face down due to the presence of a disclaimer clause. Such a situation would not arise
nowadays. Considering the second decision, the courts were reluctant to expand the theory of
recovery for economic loss where the persons who supplied the information or relevant
documents had made no clear representation. What cannot be denied is that the courts' approach
have been cautious, and yet at the same time, it has paved the way for further development in this
area of the law. It therefore comes as no surprise that one day such a plaintiff was bound to
succeed and so it did in Smith v Bush. 32

The principle of recovery for economic loss was not seriously considered in respect of defective
houses until the case of Dutton v Bognor Regis UDC 33 where the plaintiff, who was the second
purchaser of a house, discovered soon after she moved in that there were serious defects in the
internal structure of the building. Subsequent investigations revealed that the defects were caused
by an inadequate foundation. The plaintiff sued the local council whose building inspector had
been negligent in failing to detect the defect at the early stage of the building works. The only
issue before the Court of Appeal was whether the council was liable to the plaintiff for economic
loss; such loss being the claim to the money she had to spend on the defective house. The Court
of Appeal dismissed the appeal of the council and found in favour of the plaintiff/respondent,
thereby creating a situation where it approved recovery of economic loss that was not consequent
on any injury to person or damage to property. The third category of claims allowable under
negligence was thus firmly established in this case: injury to self, damage to property of self or
another and monetary loss that was not consequent on any injury to person or damage to
property.

Moving on?

The House of Lords in Anns v Merton London BC 34 approved Dutton. In Anns, the House of
Lords held that the council owed a common law duty of care to the plaintiffs for failing to carry
out necessary inspection in approving the foundation. The House of Lords was faced with the
dilemma of whether and how to impose a duty of care on the local authority, which was a public
body, and had immunity for its acts or omissions. Lord Wilberforce neatly laid out the
propositions of law in such a manner that one marvels at the excellence of the finished product.
Starting with the concept of reasonableness 35 when considering to whom the duty should be
owed, he went on to define the scope of the duty. The scope or nature of such a duty by the
building inspectors was to secure compliance with the bylaws. This does not sound unreasonable,
to say the very least, and it is something for local authorities to chew upon. The duty was not
confined exclusively to the realm of local authorities and if a builder were shown to have
performed his construction negligently, then he would be liable as well. Thus the duty was, or
could be, apportioned accordingly between all those who were involved in the construction
project. Lord Wilberforce 36 then finally concluded his argument by identifying the nature of
damages recoverable, ie that the damages would include all that is foreseeable as a result of the
breach of the said duty, and provided that causation was proved, these damages would include
damages for personal injury and damage to property.

Although the two cases above involve the liability of the local council, the House of Lords in
Junior Books Ltd v Veitchi Co Ltd 37 dealt with the liability of specialist subcontractors to a
subsequent owner of the building, with whom they had no contractual relationship. The plaintiffs
were the owners of a factory. The defendants were specialist subcontractors in flooring. The
floors were defective due to the defendants' negligence and the plaintiffs brought an action,
claiming for the losses they had incurred in re-laying the floor. The House of Lords held that
where there was proximity of relationship between the parties, the scope of the duty of care in
delict or tort was not restricted to circumstances of avoiding foreseeable harm to persons or
property. The duty extended to avoid causing pure economic loss consequential on defects in the
work that had been carried out. However, the liberal view adopted by the House of Lords was not
followed subsequently. It might be a worthwhile exercise to explore the judgment in Junior
Books and then come to a conclusion as to whether the subsequent courts had done right in not
following the said decision.

The House of Lords discussed the 'liability in an indeterminate amount for an indeterminate time
to an indeterminate class' statement that Cardozo CJ had introduced in Ultramares Corporation v
Touche 38 as a reason for restricting claims in relation to pure economic loss. According to Lord
Fraser of Tullybelton, he was clearly of the view that to refuse claims on the basis of the above
reasoning was 'unattractive, especially if it leads, as I think it would in this case, to drawing an
arbitrary and illogical line just because a line has to be drawn somewhere'. 39 The floodgates
argument may have been introduced but whether it should form the basis for all subsequent
decisions, without considering other factors, has to be considered. Where there was sufficient
proximity between the parties and where the injury or loss to one of the parties was a direct result
of the negligence of the other party, then it was a case that ought to be allowed. Each case has its
own particular facts, and reading the judgment of Lord Fraser only further signifies the point that
the 'opening of floodgates' reasoning cannot be applied across the board to all cases where the
parties are claiming for pure economic loss. Each case must be decided based on the surrounding
circumstances. The New Zealand courts had in Bowen v Paramount Builders 40 held that a
builder was liable for the negligent creation of a hidden defect which was a source of danger to
third persons whom he ought reasonably to have foreseen as likely to suffer damage either in the
form of personal injury or injury to property. 41 This decision of the New Zealand court was
consistent with the holding of the court in Hedley Byrne & Co Ltd v Heller & Partners Ltd 42
that the scope of duty of care extended to cover situations where pure economic loss was
foreseeable as likely to be suffered by a person who satisfied the test of the required proximity.

From the arguments put forward by Lord Fraser, it therefore appears that restricting recovery for
pure economic loss based on the said 'liability in an indeterminate amount for an indeterminate
time to an indeterminate class' proposed by Cardozo CJ in Ultramares Corporation v Touche 43
should not have any real basis for application in the law of negligence today. In fact, the
proposition by Lord Fraser has found its way into other Commonwealth jurisdictions. 44

Lord Keith of Kinkel concurred with Lord Fraser in dismissing the appeal. However, Lord Keith
propounded the principle that where pure economic loss was being claimed, it could be allowed
even where no injury had actually been caused. A person to whom such a duty was owed was
entitled to recover for expenditure incurred in averting the danger and the measure of damages
was the amount of the said expenditure incurred. 45 Subsequently, Lord Roskill, in tracing the
development of the law in this regard, saw fit to peruse Commonwealth decisions and referred
especially to the dissenting judgment of Laskin J in Rivtow Marine Ltd v Washington Iron Works
46 where the learned judge had posed the question, 'whether the defendant's liability for
negligence should embrace economic loss when there had been no physical harm in fact' and
gave an affirmative answer. 47 Therefore, one can conclude that the synthesis of rejection of
claims for pure economic loss lay not upon established principles of law but rested upon what
earlier judges had called the 'floodgates' argument. Should such an argument, especially one that
has been referred to as 'specious' or 'in terrorem or doctrinaire' 48 be allowed to halt the
development of the law? Law was made for man and not man for the law. From early times, the
law has been modified, or expanded to ensure that a wrong is never without a remedy. Thus was
the emergence of equity when the common law was rigidly curtailed by the writ system. An
actionable wrong shall be capable of being remedied and any law that does not provide for such
a remedy is long overdue for re-consideration.

The extension of liability and approval of the House of Lords of claims relating to pure economic
loss was subsequently curtailed. In Murphy v Brentwood District Council 49 the House of Lords
expressly departed from Anns. Lord Keith at p 921 and 923 of the judgment, said:
To start with, if such a duty (of care) is incumbent on the local
authority, a similar duty must necessarily be incumbent also on the
builder of the house. If the builder of the house is to be so subject,
 there can be no grounds in logic or in principle for not extending
liability on like grounds to the manufacturer of a chattel. That would
open an exceedingly wide field of claims, involving the introduction of
something in the nature of a transmissible warranty of
quality. The purchaser of an article who discovered that it suffered
from a dangerous defect before that defect had caused any damage would
be entitled to recover from the manufacturer the cost of rectifying the
defect, and, presumably, if the article was not capable of economic
repair, the amount of loss sustained through discarding it. Then it
would be open to question whether there should be a right to recovery
where the defect renders the article not dangerous but merely useless.
The economic loss in either case would be the same. There would also be
a problem where the defect causes the destruction of the article
itself, without causing any personal injury or damage to other
property. A similar problem could arise, if the Anns principle is to be
treated as confined to real property, where the building collapse when
unoccupied.

So far as policy considerations are concerned, it is no doubt the case that extending the scope of
the tort of negligence may tend to inhibit carelessness and improve the standards of manufacture
and construction. On the other hand, overkill may present its own disadvantages.

The engineers in Murphy had designed plans for the local council. The council, relying on their
advice, approved the plans without realizing that the engineers had not taken into account
calculation errors in the design. The house was built with a defective foundation and while the
plaintiff was occupying the house, the foundation cracked and there was extensive damage to the
house. Instead of repairing the house, the plaintiff sold the house for less than the market value
and claimed the difference as damages caused due to the negligence of the council. It was held
that the expense incurred by the subsequent purchaser to repair the house was pure economic
loss. The council was not liable to the first purchaser for the losses he had incurred by the sale.
50 This contention did not find favour in Australia. 51

Disclaimer clauses - valid?

Where the parties had voluntarily accepted responsibility, the presence of an exclusion clause
may negate liability. In Pacific Associates v Baxter 52 the claim was that the engineer had been
negligent in two respects; first, in rejecting the contractors" claim on interim certification and
secondly, when giving a decision under the terms of a FIDIC contract. It was held that although
the defendants were employed to supervise the work, they were acting solely for the employer
and did not owe any duty to the plaintiffs to exercise due care to ensure that the plaintiffs did not
suffer economic loss. In arriving at its decision, the court was guided by two considerations.

First, there was an express disclaimer clause, which showed that the defendants had expressly
declined to accept any responsibility to the plaintiffs for any loss under the contract. So the court
was faced with the task of imposing a duty of care which would allow the plaintiffs to claim
against the defendants in negligence. Before such a duty of care could be imposed, the plaintiffs
were bound to show foreseeability of harm, proximity and to satisfy the court that it was just and
reasonable to impose such a duty on the defendants.
Second, the court was guided by the public policy aspect, which expects the court to find it just
and reasonable to impose such a duty. Where the parties had come together against a contractual
structure which provided for compensation in the event of breach by one party, then the court
would be slow to superimpose an added duty of care beyond that which was in the contemplation
of the parties at the time of execution of the contract. That the courts were reluctant to impose
this duty of care was also seen in Edgeworth Construction v Lea & Associates, 53 where the
court was willing to follow the principle of contractual relationships and proximity rather than
imposing the duty of care principle. However, the difficulty of balancing two actions and trying
to prefer one in favour of the other was settled in Henderson and Merrett v Feltrim
Underwriting. 54 In that case, the House of Lords held that a duty of care was not excluded by
virtue of the relevant contractual regime. Parties were free to pursue remedies either in contract
or in tort. The fact that the duty was delegated did not alter the implicit promise that reasonable
care and skill would be exercised in carrying out the obligations under the agreement. The
managing agents, in that case, were under a similar, though non-contractual, duty to the
principals and this did not alter the obligations that the members' agents had agreed to assume by
their bargain.

However, this aspect of concurrent liability in contract and tort must not be carried to extremes.
In Barclays Bank plc v Fairclough Building Ltd(No 2), 55 the bank had two warehouses repaired
and renovated by building contractors. The building contractors employed subcontractors to do
part of the work to the roof, who in turn, employed sub-subcontractors to carry out cleaning
works to the roof. The sub-subcontractors carried out cleaning works to the roofs which resulted
in a serious situation causing danger to health and the cost of rectifying this danger was an
enormous sum of £3.89 million. A number of issues came up before the Court of Appeal, one of
which was whether the sub-subcontractors were entitled to indemnify the subcontractors for the
amounts paid to the building contractors. The Court of Appeal held that the sub-contractor's
claim for a contractual indemnity should be reduced by half to take account of their own
negligence in failing to be aware of potential problems of employing sub-subcontractors. The
question was now whether the sub-subcontractors were liable in pure economic loss.

Beldam LJ held that the sub-subcontractors' contractual agreement to take on the job was
sufficient to found the principle that they had 'assumed responsibility' for it and this was, of
itself, sufficient to found 'reliance' by the client. Thus they were liable in contract (to the
subcontractors) and in tort, although not to the full extent of the indemnity claimed by the
subcontractors. 56

The commonwealth development

It is apparent that now there is a conflict between the UK and other Commonwealth decisions
relating to claims in recovery for pure economic loss. Commonwealth jurisdictions have taken
their own path in dealing with cases concerning economic loss without resorting to English
decisions as the invariable starting point. Only time can tell who is on the right path and as to
when that might be is a million-dollar question.

The High Court of Australia in Bryan v Maloney 57 held that under the law of negligence, a
professional builder who constructed a house for the then owner of the land owed a prima facie
duty to a subsequent owner of the house, the nature of such duty being that of exercising
reasonable care to avoid the kind of foreseeable damage that the respondent in the present case
had sustained. The respondent, in the instant case, had suffered damages that amounted to a
diminution in the value of the house when a latent and previously unknown defect in its footings
or structure had subsequently become manifest. The court held that a clear relationship of
proximity existed between the appellant and the first owner with respect to ordinary physical
injury to self or property. He was, therefore, under a duty to exercise reasonable care in the
building work to avoid a foreseeable risk of such injury. That relationship of proximity and
consequent duty of care extended to mere economic loss sustained by the first owner when the
inadequacy of the footings became manifest. The policy considerations underlying the reluctance
of courts, in general, to recognize a relationship of proximity and a consequential duty of care in
cases of mere economic loss were largely inapplicable to the relationship between a builder and a
subsequent owner as regards this particular kind of economic loss, ie the diminution in value of a
house when the inadequacy of its footings first became manifest as a result of consequent
damage to the fabric of the house.

Brennan J, who dissented with the majority view of the Australian court, however, declined to
classify defects in a building as pure economic loss but rather as physical defects. He therefore
concluded that the cost of rectification of such defects was consequent on their existence.

The defects are not physical damage the foreseeability of which gives rise to a prima facie duty
of care, but it does not follow that the cost of rectifying such physical defects in order to improve
the quality of the building is pure economic loss which may attract an award of damages for
negligence. The damages awarded to the respondent were not for pure economic loss. 58

In Invercargill City Council v Hamlin, 59 the New Zealand Court of Appeal held that councils
were liable to house owners and subsequent owners for defects caused by the building
inspectors" negligence. The court observed that in New Zealand there was a relationship
incorporating a duty of care because of the degree of reliance by house owners on councils to
ensure compliance with building codes and full recognition of that reliance by local authorities.
The court refused to follow Murphy and D & F Estates Ltd, the reasons being:
(a) The New Zealand Court of Appeal is entitled to develop the common
law of New Zealand according to local policy considerations in
areas of common law which are developing; and
(b) The perception in New Zealand is that the community standards and
exception demanded the imposition of a duty of care on local
authorities and builders alike to ensure compliance of by-laws,
and the Court of Appeal of New Zealand has built up a long line
of authority based on link concept of control by the local
authority of building works through the enforcement of its
by-laws, and reliance on that control by the purchaser. 60

Liability for negligence is not a new phenomenon in the law of New Zealand. In a case decided
20 years ago, Bowen and Anor v Paramount Builders (Hamilton) Ltd and Anor, 61 a number of
principles were established, inter alia, that a claim for damages for the loss in value of the
building even after all possible remedial work had been done was sustainable, even though it
could be described as an economic loss, not pure economic loss, but economic loss which caused
or threatened physical harm to the structure itself.
The court drew a distinction between pure economic loss and economic loss that is quantifiable.
If the evidence can show that the defect was in the foundations, and that defect caused actual
physical damage to the building, and the associated effect of that damage was a contributing
factor in the depreciation of the building, then it would not be a claim for pure economic loss but
one based on defects 62 and naturally recoverable.

The existence of the Defective Premises Act 1972 is a vital distinguishing point between UK and
New Zealand. Both Anns and Murphy considered the Defective Premise Act 1972 and used the
Act as a basis for coming to their decisions (policy considerations were based on the provisions
of the said Act). In New Zealand, therefore, the Act that was considered was the Building Act
1991 which provides that local authorities will remain liable to homeowners affected by the
negligent administration of building control.

In Winnipeg Condominium Corp No 36 v Bird Construction Co Ltd, 63 a developer entered into

a contract with a general contractor called Bird Construction Ltd to construct an apartment block.
Works were carried out according to plans drawn by the architects. A subcontractor installed the
external cladding. The plaintiff, a subsequent owner of the apartment, had to repair a section of
the cladding that fell. He claimed from the contractor, the architects and the subcontractor. The
Supreme Court of Canada recognized that the negligence posed 'a real and substantial danger' to
the occupants of the building and that the cost of putting the building back into a non-dangerous
state was recoverable in tort by the occupants, the rationale being that persons participating in the
construction of a large and permanent structure which has the capacity to cause serious damage
to other persons or property should be held to a reasonable standard of care. 64 The court,
adopting the minority view expressed in Rivtow Marine Limited v Washington Iron Works and
Walkern Machinery & Equipment Ltd, 65 held that plaintiffs who discovered a dangerous defect
should not be disadvantaged by its immediate repair before any accident occurs. On the issue of
proximity, it was held that the common law duty of care created by a relationship of sufficient
proximity was not confined to relationships that arose apart from contract. In arriving at this
conclusion, the court was guided by the dictum of Lord Macmillan in Donoghue 66 and Junior
Books Ltd v Veitchi Co Ltd. 67

Conclusion

The duties undertaken by contract would indicate the nature of the relationship that had given
rise to the common law duty of care. The nature and scope of the duty of care that was the
foundation of the tortious liability must not or should not depend on specific obligations or duties
created by the express terms of the contract. A claim cannot be said to be in tort if it were to
depend, for the nature and scope of the asserted duty of care, on the manner in which an
obligation or duty was expressly and specifically defined by a contract. An unfortunate result of
such reasoning would leave a subsequent purchaser with no remedy against the contractor who
constructs the building with substandard materials and by employing substandard skills.
Subsequent purchasers are put at considerable risk.

With the recent developments in the Commonwealth, and with the recent decision of the Court of
Appeal in Henderson, it is timely for the English courts to take a second look at the 'settled law'
in relation to economic claims as stated in Murphy. What must always be a guiding factor for all
judges and lawyers when faced with cases of economic loss or cases that fall squarely within the
fact scenario of Murphy is to reflect upon the words of Lord Atkin:
 I do not think so ill of our jurisprudence as to suppose that its
principles are so remote from the ordinary needs of civilized society
and the ordinary claims it makes upon its members as to deny a legal
remedy where there is so obviously a social wrong.

The questions before a court may be as follows:

(a) Are we living in a civilized society?
(b) The claims that are being made, are they real claims brought by a party
who has truly suffered a loss due to another's inaction or poor action?
Or are such claims merely frivolous and vexatious?
(c) Is it necessary that, in order to reflect a civilized society, such
claims ought to be brought? And entertained by the courts?
(d) Are such claims the result of a social wrong?
(e) Are the claimants, as members of a civilized society, entitled to a
legal remedy?
(f) Are the providers of the legal remedy to be allowed to deny the seekers
of the remedy merely because public policy and political dictates
demand otherwise?

Return to Text

FOOTNOTES:

n1 [1932] AC 562, hereafter referred to as Donoghue. The case was an appeal against an
interlocutor of the Second Division of the Court of Session in Scotland and the appeal was heard
in the House of Lords. The House comprised Lord Atkin, Lord Thankerton and Lord Macmillan,
who delivered concurring judgments allowing the appeal and Lord Buckmaster and Lord Tomlin,
who delivered dissenting judgments.

n2 Ibid, at p 583 of the judgment.

n3 In Langridge v Levy2 M & W 519, a man sold a gun to a person who bought the gun for
his son. The seller knew that the gun was dangerous for the use of the purchaser's son. The gun
subsequently exploded in the boy's hands and it was held that there was a right of action in tort as
against the gun-maker.

n4 Heaven v Pender (1883) 11 QBD 503.

n5 At p 577 of the judgment in Donoghue.

n6 See Clayton v Woodman & Son [1962] 2 QB 533, where an architect was held liable at
first instance for negligently issuing instructions which resulted in personal injury to the plaintiff
bricklayer. Although the decision was reversed on appeal later, it was on different facts. The
liability of the architect was not disputed. For the decision of the Court of Appeal, please refer to
[1962] 1 WLR 585 (CA).

n7 See Clay v AJ Crump and Sons Ltd [1964] 1 QB 533 where a builder"s labourer was
injured as a result of the architect"s negligence and his claim for damages against the architect
was successful. Similarly, an architect was liable to compensate a person who was injured while
using a stage which collapsed due to under-designing of the floor joists in Voli v Inglewood Shire
Council[1962-1963] 110 CLR 74.

n8 See Day v Ost[1973] 2 NZLR 385 where the plaintiff was a blocklaying and plastering
subcontractor who stopped work because he did not receive any payment. The defendant
architect was aware of the financial position under the head contract, whereby there was no
provision for any payment in excess of the total contract price, and requested the plaintiff to
resume work and assured him that the progress payment would be paid and that there were ample
funds to cover the balance of his price. The defendant"s representation that there was plenty of
money available to cover the amount payable to the plaintiff was incorrect and negligent.

n9 See Townsend (Builders) Ltd v Cinema News & Property Management Ltd[1959] 1 All ER
7 where the architect promised the contractor that he [the architect] would serve all the necessary
notices as required by a certain by-law and assured the contractor that he could safely proceed
with the work. The contractor, relying on the architect"s assurance, proceeded with the work.
Subsequently, he was held liable to the proprietor for failing to comply with a by-law. The
architect was held liable in negligence to the contractor.

n10 See Michael Sallis and Company Limited v ECA and Calil and Others(1988) 4 Const LJ
125, where the architects were held liable to the contractors for certifying an extension of time of
only 12 weeks and not doing so with due speed and efficiency that was required. See also
Lubenham Fidelities and Investment Company Limited v South Pembrokeshire District
Council(1986) 33 BLR 39, where the architect had failed to exercise reasonable care when
issuing certificates and in administering the contract as a whole.

n11 At p 580 of the judgment in Donoghue.

n12 (1883) 11 QBD 503.

n13 [1893] 1 QB 491.

n14 (1883) 11 QBD 503.

n15 Ibid, at p 508 of the judgment.

 n16 Ibid, at p 509 of the judgment.

n17 See Donoghue [1932] AC 562 at p 577, where Lord Buckmaster reviewed the authorities
and found that they did not support the appellant's contention. He felt that, considering the
authorities which dealt with dangerous or defective products and articles, and the danger or
defect was known to the manufacturer, they did not apply to the case at present. His Lordship
declined to follow the decision in George v Skivington LR 5 Ex 1 or the dicta in Heaven v
Pender(1883) 11 QBD 503, but instead opted to follow the reasoning of the court in Bates v
Batey & Co Ltd [1913] 3 KB 351, where the defendants who were ginger beer manufacturers
were held not liable to a consumer for injury sustained as a result of the bottle bursting.

n18 'All rights in contract must be excluded from consideration of this principle; such
contractual rights as may exist in successive steps from the original manufacturer down to the
ultimate purchaser are ex hypothesi immaterial. Nor can the doctrine be confined to cases where
inspection is difficult or impossible to introduce. This conception is simply to misapply to tort
doctrine applicable to sale and purchase': at p 577 of the judgment.

n19 The position of apportioning liability and ensuring that negligent builders are brought to
book has been actively propagated, especially in the Commonwealth. Whether England would
subsequently give in to the pressure exerted by the Commonwealth decisions remains yet to be
seen.

n20 Matthew 19:19, King James Version of the Holy Bible, states as follows: '...Thou shalt
love thy neighbour as thyself'.

n21 At p 580 of the judgment in Donoghue.

n22 At p 581 of the judgment in Donoghue.

n23 Somehow, the truth expressed in this statement is so preciously true and yet so easily
overlooked, the writer feels compelled to repeat this note, even at the risk of being accused of
repeating herself. A truth can never be repeated oft enough.

n24 See also Grace Xavier, 'Dr. Abdul Hamid Abdul Rashid & Anor v Jurusan Malaysia
Consultants(sued as a firm) & Ors [1997] 3 MLJ 546: Breakthrough for Recovery in Pure
Economic Loss?' [1998] 3 MLJ, pp xxvi - xlviii, for a further discussion of this topic and the
Commonwealth position in relation to this type of loss.

n25 Although it is arguable that there is sufficient proximity of relationship between the
contractor and the architect by virtue of the supervisor-worker situation, it is not sufficient to
establish the degree of proximity required to impose a duty of care upon the architect. Merely
because the architect accepts the contractual framework of a construction contract does not mean
that he is under such a duty to the contractor. In the absence of a direct contractual relationship
with each other, a duty of care in tort would not extend to cover a situation whereby the parties
are brought together by a contractual framework or chain; Pacific Associates Inc. v Baxter[1990]
1 QB 993 CA.

n26 It is not in every situation that the court will impose a duty of care upon a party. Before
such a duty of care is held to exist, the court must find it just and reasonable to impose such a
duty. In a building contract, the parties to the contract are the employer and the contractor. The
contract itself provides for compensation to be payable in the event of breach of either party. In
such a situation, the court will be slow to superimpose an added duty of care upon the architect
who is brought in by the contractual structure, which already provides for compensation in the
event of a breach.

n27 See Murphy v Brentwood District Council[1990] 3 WLR 414, 435.

n28 [1964] AC 465.

n29 Sections 1 and 2 of the UCTA 1977.

n30 [1990] 2 AC 605.

n31 [1990] 1 AC 831.

n32 [1990] 1 AC 831.

n33 [1972] 1 QB 373.

n34 [1978] AC 728.

n35 A reasonable man in the position of the inspector must realize that if the foundations are
covered in without adequate depth or strength as required by the bylaws, injury to safety or
health may be suffered by owners or occupiers of the house: at p 758 of the judgment in Anns.

n36 The judgment in Anns has very often been quoted by other judges as one that lays down
a two-test formula. Lord Wilberforce in Anns had stated that the question of whether a duty of
care exists had to be approached in two stages. 'First, one has to ask whether as between the
alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of
proximity or neighbourhood such that, in the reasonable contemplation of the former,
carelessness on his part may be likely to cause damage to the latter - in which a prima facie duty
of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider
whether there are any considerations which ought to negative, or reduce, or limit the scope of the
duty or the class of person to whom it is owed or the damages to which a breach of it may give
rise:' cited by Lord Roskill in Junior Books v Veitchi[1983] 1 AC 520, 541-542.

n37 [1983] 1 AC 520.

n38 (1931) 174 NE 441, 444.

n39 Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520, 532.

n40 [1977] 1 NZLR 394.

n41 The court referred to A C Billings & Sons Ltd v Riden[1958] AC 240 where the
negligence of the contractor resulted in personal injury to a visitor. In that case, the general
principle that contractors, architects and engineers were all subject to a duty to use reasonable
care to prevent damage to persons whom they should reasonably expect to be affected by their
work was recognized.

n42 [1964] AC 465.

n43 (1931) 174 NE 441, 444.

n44 For a discussion of the Commonwealth decisions, refer to p lxxx, infra.

n45 At p 535 of the judgment in Junior Books, Lord Keith approved the case of Anns v
Merton London Borough Council[1978] AC 728 and concluded that such was the principle that
was the basis of the decisions in Dutton v Bognor Regis Urban District Council[1972] 1 QB 373
and Batty v Metropolitan Property Realisations Ltd[1978] QB 554.

n46 (1973) 40 DLR (3d) 530.

n47 At p 549 of the judgment.

n48 As per Cooke J in Bowen v Paramount Builders (Hamilton) Ltd [1977] 1 NZLR 394,
422.

n49 [1990] 3 WLR 414.

 n50 Ibid, at p 415. Per curiam: Such extension of principle would necessarily extend also to
the builder of the house and would logically also extend to the manufacturer of a defective
chattel. There is much to be said for the view that in what is essentially a consumer protection
field the precise extent and limits of the liabilities that in the public interest should be imposed
on the builders and local authorities are best dealt with by the legislature.

n51 Bryan v Maloney [1995] 2 CLJ 503.

n52 [1990] 1 QB 993.

n53 (1991) 54 BLR 11.

n54 [1995] 2 AC 145.

n55 [1995] IRLR 605.

n56 Simon Whittaker, 'The Application of the 'Broad Principle of Hedley Byrne' as between
parties to a contract', (1997) 17 LS 169.

n57 [1995] 2 CLJ 503.

n58 Ibid, at pp 504-505.

n59 [1994] 3 NZLR 513.

n60 Dr Abdul Hamid Abdul Rashid v Jurusan Malaysia Consultants [1997] 3 MLJ 546 at p
561.

n61 [1977] 1 NZLR 394.

n62 Ibid, p 417.

n63 Unreported decision delivered by the Supreme Court of Canada on 26 January 1995.

n64 Ian Duncan Wallace, QC in 'Murphy Rejected: Three Commonwealth Landmarks',

(1995) 11 Const LJ 249-253, 250.
 n65 [1974] SCR 1189, 1217. The majority of the Supreme Court endorsed the view that
liability for the cost of repairing damage to the defective article itself and for the economic loss
flowing directly from the negligence, is akin to liability under the terms of an express or implied
warranty of fitness and as it is contractual in origin, it cannot be enforced against the
manufacturer by a stranger to the contract. However, Laskin J at p 1222 of the judgment
dissented and his argument was as follows: 'The case is not one where a manufactured product
proves to be merely defective (in short, where it has not met promised expectations), but rather
one where by reason of the defect there is a foreseeable risk of physical harm from its use and
where the alert avoidance of such harm gives rise to economic loss. Prevention of threatened
harm resulting directly in economic loss should not be treated differently from post-injury cure'.

n66 [1932] AC 562. The dictum of Lord Macmillan is found at p 610 of the judgment and
reads as follows: 'The fact that there is a contractual relationship between the parties which may
give rise to an action for breach of contract does not exclude the co-existence of a right of action
founded on negligence as between the same parties, independently of the contract, though arising
out of the relationship in fact brought about by the contract. Of this, the best illustration is the
right of the injured railway passenger to sue the railway company either for breach of the
contract of safe carriage or for negligence in carrying him... And there is no reason why the same
set of facts should not give one person a right of action in contract and another person a right of
action in tort.'

n67 [1983] 1 AC 520. This case held that a common law duty of care may be created by a
relationship of proximity that would not have arisen but for a contract.
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