LLM International Commercial Law - Construction Law

Claims by a party in tort (in the absence of contractual relationship) in respect of defects in building relate
to economic loss. In torts the builder’s liability is limited to defects which cause either injury to persons or
physical damage to property other than the building itself. Damage to the building itself is regarded as
pure economic loss and therefore irrecoverable1.

It was emphasised by the House of Lords (“HL”) in Murphy v Brentwood District Council2 (“Murphy”) that
pure economic loss is not normally recoverable in torts.

In Murphy, Lord Keith emphasised that the correct manner of determining the existence and scope of the
duty of care in novel situations was the incremental approach.

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Lord Keith in Murphy said that in addition to foreseeability of damage there should also exist "proximity"
and "neighbourhood" and that the situation should be one in which the court considers it fair, just and
reasonable that the law should impose a duty of a given scope on the one party for the benefit of the
other.

What is pure economic loss and why is not allowed?

Pure economic loss is a financial loss suffered by a claimant that is unconnected with and does not flow
from physical damage to his property or person. The spectre, which the courts always had in their minds,
was the avoidance of the opening of the "floodgates" to admit any kind of tortious liability 4.

Absence of proximity and foreseeability; and the remoteness of damage are the usual problems arising in
economic loss as expressed in Cattle v Stockton Waterworks Co 5 and S.C.M Ltd v W.J. Whittall6 and
Spartan Steel & Alloys Ltd v Martin & Co (Contractors) Ltd 7.

Damage to as opposed to Defects in Property

The duty of care in the tort of negligence gives rise to a remedy in cases of injuries to persons and
damage to property. Damage means damage to any third party's property and shall not include the
defective component itself.

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The classification of damage v defect in property was finally disposed of in D & F Estates and Murphy.

Lord Bridge in Murphy said … “where a defect in a building becomes apparent before any injury or
damage has been caused, the loss sustained by the building owner is purely economic. These economic
losses are recoverable if they flow from breach of a relevant contractual duty, but, here again, in the
absence of a special relationship of proximity they are not recoverable in tort”.

Lord Bridge in Murphy9 suggested that it may be possible to bring a claim in negligence against the
manufacturer of a defective central heating boiler if it were to explode and damage the house but not in
the situation where, due to the inadequacy of foundations in a building differential settlement and
consequential cracking were caused. Another example was a fire caused by the negligent installation of a
wiring circuit by an electrical contractor or sub-contractor

The purpose of this essay is to trace the development of English law liability in tortious negligence in
relation to construction industry and examine the outstanding problems.

“The liability under tort of negligence is possible only when a duty of care exists and the law has
always looked at the duty of care in the tort of negligence as giving rise to remedies in case of injuries
to person and damages to property. Further in so far as any financial or purely economic loss
arises as a consequence of that injury or damage this sum is recoverable.”10

Tortious liability operates irrespective of contractual relationships (although these may be present) and is
largely the creation of judicial precedent.

“To establish a claim in negligence, a plaintiff must show that the defendant owes him a duty of care
and the defendant has acted or spoken in such a way that there has been a breach of that duty
causing actionable damage to the plaintiff.”11

Until the end of the nineteenth century, one was entitled to compensation for injury or loss through the
negligent acts or omission of another only if the injury constituted a breach of contract with him regarding
the activity from which the injury or loss arose. 12 The justification for this rule of law, dubbed “privity of
contract fallacy” was based on the argument that the possible victims of negligent act are so
indeterminate that recognition of liability outside contract would open the floodgates to endless litigation.

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By the end of the nineteenth century the law had evolved to meet the need and liability for tortious
negligence was established.13

The established limitation is that a plaintiff cannot recover in tort the cost of replacing a defective
item or pure economic loss, when only the item itself is damaged as a result of the defect . This
view of the law of tort has often been challenged but remains intact from the 1932 decision in the
case of Donoghue v Stevenson14 (“Donoghue”). In 1991 the House of Lords reaffirmed this view in
the case of Murphy v Brentwood District Council15 (“Murphy”). “If a manufacturer produces and sells
a chattel which is merely defective in quality, even to the extent that it is valueless for the purpose for
which it is intended, the manufacturer’s liability at common law arises only under and by reference to the
terms of any contract to which he is a party in relation to the chattel.” 16

In Murphy where the plaintiff had suffered a reduction in the value of his house owing to
defective foundations and sued local authority for negligently approving the design, the
House of Lords rejected the claim for economic loss on the ground that to allow recovery
will introduce product liability and transmissible warranties of quality into the law of
negligence and only where a special relationship of proximity existed between the parties
could liability in pure economic loss arise. The historic decision of House of Lords in Murphy,
Anns was formally overruled, thus bringing Anns liability of both public and private defendants to
an end in England.

Murphy v Brentwood District Council17 (“Murphy”):

“This still more radical and indeed historic decision of a seven-judge House of Lords presided over
by the Lord Chancellor in Murphy concerning a house-owner’s action against a local authority for
having negligently approved what turned out to be inadequate foundations, where the liability of the
by-law authority under the Public Health Acts for economic loss (in the form of cost of repair of
defects) was overturned and Anns formally overruled, thus bringing Anns liability of both public and
private defendants to an end in England.”18

In Murphy the defendants were the council that had approved the design of foundations of a house. The
plaintiff purchased the house and then found the foundations to be defective. He sold the house for less
than the market value and brought a claim against the defendants for negligently approving the design.
The House of Lords in Murphy then took the opportunity to restate the position. Great reliance was
placed on the highly researched 19 judgments of the High Court of Australia in Sutherland Shire Council v

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Heyman, (“Sutherland Shire”) where the judges had disagreed with the classification of Anns as
“material, physical damage.”20

The House of Lords unanimously held that the defendants did not owe to the plaintiffs a duty of care for
the kind of damage they had sustained. They also said that such damage was not material or physical
damage but pure economic loss. Further and more importantly, the judges who formulated the “complex
structure” theory expressly retracted their position on the basis that it is unrealistic to regard the structural
elements in a building as anything other than a single indivisible unit. 21

“Allowing the appeal by the council, the House of Lords held - When carrying out its statutory
functions of exercising control over building operations a local authority was not liable in negligence
to a building owner or occupier for the cost of remedying a dangerous defect in the building which
resulted from the negligent failure of the authority to ensure that the building was designed or erected
in conformity with the applicable standards prescribed by the building regulations or byelaws but
which became apparent before the defect caused physical injury, because the damage suffered by
the building owner or occupier in such circumstances was not material or physical damage but the
purely economic loss of the expenditure incurred either in remedying the structural defect to avert the
danger of abandoning the property as unfit for habitation, and, since a dangerous defect once known
became merely a defect in quality, to permit the building owner or occupier to recover his economic
loss would logically lead to an unacceptably wide category of claims in respect of buildings or
chattels which were defective in quality, and would in effect introduce product liability and
transmissible warranties of quality into the law of tort by means of judicial legislation. The council
accordingly had owed no duty of care to the plaintiff when it approved the plans for a defective raft
foundation for the plaintiff's house. The appeal would therefore be allowed. Sutherland Shire
followed. Dutton, Anns and all cases, excepting Junior Books and Pirelli, which were decided upon
them are to be considered over-ruled.”22

In Murphy,23 Lord Keith emphasised that the correct manner of determining the existence and scope of
the duty of care in novel situations was the incremental approach rather than by a massive extension of a
prima facie duty of care restrained only by indefinable considerations which ought to negative, or to
reduce or limit the scope of the duty.

Lord Keith in Murphy said that in addition to foreseeability of damage there should also exist “proximity”
and “neighbourhood” and that the situation should be one in which the court considers it fair, just and
reasonable that the law should impose a duty of a given scope on the one party for the benefit of the
other.

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Lord Bridge in Murphy24 said … “where a defect in a building becomes apparent before any injury or
damage has been caused, the loss sustained by the building owner is purely economic. These
economic losses are recoverable if they flow from breach of a relevant contractual duty, but, here
again, in the absence of a special relationship of proximity they are not recoverable in tort.”

Lord Bridge suggested a possible exception 25 so as to allow for the recovery of what would otherwise be
pure economic loss was that,

“if a building stands so close to the boundary of the building owner’s land that after discovery of the
dangerous defect it remains a potential source of injury to persons or property on neighbouring land
or on the highway, the building owner ought, in principle, to be entitled to recover in tort from the
negligent builder the cost of obviating the danger, whether by repair or by demolition, so far as that
cost is necessarily incurred in order to protect himself from potential liability to third parties.”

As decided in Morse v Barrett (Leeds) Ltd26 a claimant can sue in negligence for damage to the building
itself, if where the defect in the building creates a danger to adjoining property and the subsequent owner
incurs expense to avert this danger.27

Difficulties in the decision of Murphy:28

1. While this decision made clear that a builder may be liable in accordance with Donoghue
principles in case a latent defect causes personal injury or damage to other property, the
question of liability on a local authority was expressly left open.

2. Lord Oliver was unconvinced with Lord Bridge’s suggestion 29 of a possible exception on the
recoverability in tort from the negligent builder the cost necessarily incurred (e.g., by repair or
demolition) in order to protect himself from potential liability to third parties and reserved his
views on this.

3. The majority of the Lordships regarded the “complex structure” theory advanced in D. & F.
Estates as unrealistic, because “the reality in the structural elements in any building form a single
indivisible unit of which the different parts are essentially interdependent”. 30 Lord Bridge drew a
distinction between a structural element which was dangerous only because it did not perform its

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proper function of sustaining the other elements, and a distinct element incorporated in the
structure which positively malfunctioned, thereby causing damage to the structure. Giving
examples of a defective central heating boiler, which exploded and damaged a house, 31 and of a
defective electrical installation causing damage by fire, he said that if the damage was due to the
negligence of the boiler manufacturer or of the electrical contractor the house owner could
recover under Donoghue. This only explains the position as it was before D & F Estates and no
further. On the other hand Lord Jauncey considered that the complex structure argument might
apply where a separate contractor had built an integral component of the structure, e.g., a steel
frame failing to give adequate support to floor or walls.

4. Their Lordships attached great weight to the plaintiff’s knowledge of the defect, which makes
the defect one of quality only and therefore the loss purely economic. But such knowledge in the
past has not necessarily barred the right of recovery. “In Rimmer v Liverpool City Council 32 the
local authority, who designed and built a council flat, was liable to a tenant injured by a pane of
dangerously thin glass. The tenant knew of the danger and had complained about it but it was
considered neither practicable or reasonable to expect him to leave, or to change the pane of
glass himself (damages were reduced for contributory negligence). This was followed in Targett
v Torfaen Borough Council 33 where the facts were substantially similar. The defendants’
argument that Rimmer had been overruled in Murphy was rejected by the Court of Appeal, who
distinguished the latter case on the ground that the views expressed therein about the effect of
the plaintiff’s knowledge applied only to the type of claim in that case (i.e., pure economic loss)
and not to a claim for personal injuries. According to their Lordships, knowledge of the defect
would only negative the duty of care or break the chain of causation where it was reasonable to
expect the plaintiff to remove or avoid the damage, or where it was unreasonable for him to run
the risk of injury.”34

It now seems clear that any claim for pure economic loss not consequential to a plaintiff’s person or
property or falling within the Hedley Byrne principle will be regarded as novel and that in deciding the
question of liability in such a novel situation the English courts will proceed incrementally on a case by
case basis governed by considerations of policy and will not attempt to formulate or apply any general in
such situations.

The outstanding issues and possible solutions are:

In Murphy35 rejecting economic loss an argument was emphasised by the House of Lords that Parliament
has itself provided a remedy in the Defective Premises Act 1972. To refuse to allow the general principles

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of the common law to impose liabilities wider than those by Act of 1972, appears to assume that the Act
impliedly granted immunity in those situations which it did not expressly cover. This is not the case
because the duties imposed by the Act were in addition to any other duties. 36 There is nothing to prevent
parties extending the statutory protection by contract e.g., the development of collateral warranties. Given
that the development of the Hedley Byrne principle in Spring v Guardian37 and Henderson is based on an
assumption of responsibility by the defendant in favour of the plaintiff which bears considerable similarity
to a contract (but without the requisite consideration) 38 one can argue that such a duty can be created
which effectively extends the duties contained in the Defective Premises Act as long as, on the facts, the
assumption of responsibility can be established. 39

The Latent Damage Act of 1986 amends the period of time laid down in the Limitation Act 1980. Capper 40
explains the difficulties of determining these dates for the various parties who may be responsible for
latent defects: main contractors, sub-contractors, professional advisers and local authorities leading to
cases involving questions of limitation likely to entail long drawn litigation with armies of expert witnesses
on each side. Regrettably, the Act fails to define any criteria for fixing the date when actual “damage,” as
opposed to defects and other similar manifestations, occurs. The only redeeming factor is that the effect
of Murphy and D and F Estates may be to reduce drastically the number of latent damage disputes.

The Contracts (Rights of Third Parties) Act 1999 applicable to contracts entered into on or after 11th May
2000 provides a cover to a third party when the contract must either expressly provide that the third party
may enforce it, or the relevant term must purport ‘to confer a benefit’ on the person seeking to enforce it.
The third party must be expressly identified by name, class or description. However the construction
industry decided to have nothing to do with it; all the standard forms appear now to exclude the Act. 41 So
it seems unlikely that the Act will prove of application in construction, other than at that end of the market
where standard forms are not used. 42

It would appear that decision in Murphy cannot be taken to resolve the subject of duty of care on the
issue of economic loss because of two diametrically opposite judgements at first instance. While Tesco v
Costain Construction Ltd43 held that there was a duty of care not to cause economic loss, Samuel Payne
v John Setchell Ltd44 held that an engineering firm’s drawings for foundations that later proved to be
defective was not liable in negligence for the resulting loss, as that loss was to be classified as pure
economic loss and was therefore irrecoverable.

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While it is difficult to see how the main thrust of Murphy could be reversed in the absence of intervention
by the legislature, there are two stages to any attempt to re-open the areas of liability, which were
thought to be closed by decisions such as Murphy.

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