The College of Estate Management 2011 Paper 3722V4-0

Defects liability

Contents
Aims and learning outcomes 1. Definition 2. Types of defect 2.1 Construction or design 2.2 Patent or latent 2.3 Claims in contract or tort 3. Latent defects 3.1 Effect of the final certificate 3.2 Limitation 3.3 Latent Damage Act 1986 3.4 Fraud, concealment or mistake 4. Subsequent owners 5. Economic loss 5.1 The law pre-Murphy 5.2 The effect of Murphy 5.3 Murphy in the Commonwealth 5.4 Exceptions to Murphy 5.5 Hedley Byrne v. Heller and reliance 5.6 The Defective Premises Act 1972 5.7 Summary 6. Measure of damages 6.1 Contract 6.2 Employers claims for damages for contractors beach 6.3 Contractors claims for damages for employers breach 6.4 Tort Reference Self-assessment questions

Defects liability

Paper 3722 Page 2

Aims and learning outcomes

After studying this paper you should be able to:

explain the difference between design defects and construction defects and where liability will lie in respect of each; explain how patent defects are usually dealt with in building contracts; identify where a claim in respect of defects will lie, in contract, in tort, or in both; discuss the limitation issues that arise in connection with such claims and how the Latent Damage Act 1986 may assist a claimant; explain the effect of concealment by a defendant; discuss the background to the decision in the case of Murphy v. Brentwood, the effect of that decision and the exceptions to it; explain the scope and limitations of the Defective Premises Act 1972; identify the difference between the measure of damages in contract and in tort; advise when a claimant will be able to recover general damages for distress and inconvenience, and the limitations of such claims.

Defects liability

Paper 3722 Page 3

1 Definition
The Oxford English Dictionary defines a defect as: Lack of something essential to completeness; shortcoming; failing; blemish; amount by which a thing falls short. The definition of defective is: Having defects; incomplete; faulty; wanting or deficient. The term defect has been defined in the courts as: anything which renders the plant and construction unfit for the use for which it is intended when used in a reasonable way and with reasonable care. (Yarmouth v. France (1887)) Remember that in talking of defects we mean not just those things which have been done badly or incorrectly, but also those things which have not been done at all.

2 Types of defect
2.1 Construction or design
Defects in buildings are broadly of two kinds:

Construction defects, which are the fault of the contractor. Design defects, which may be the fault of the architect, engineer, contractor or even the employer himself, depending on who was responsible for the design of the works. This is why it is important that the parties should clearly understand who is to be responsible both for the design of the works as a whole, and for the individual elements in it, and that this information is recorded in the contractual documents.

2.2 Patent or latent

Defects may be patent, that is, plain and obvious, or latent, that is, not apparent. Note, however, that the difference between the two may be rather more complex. Shiels (2011) points out that ... whilst a defect may be latent to a casual observer, it may be patent to a construction professional. In Sanderson v. National Coal Board (1961), the court held that: A patent defect is not latent when there is none to observe it. The natural meaning of the word patent is objective, not subjective. Whereas in Baxall Securities v. Sheard Walshaw Partnership (2002), the court summed up latent defects in these terms: The concept of a latent defect is not a difficult one. It means a concealed flaw. What is a flaw? It is the actual defect in the workmanship or the design, not the danger presented by the defect. To what extent must it be hidden? ... [It] must be a defect that would not be discovered following the nature of inspection that the defendant might reasonably anticipate the article would be subject to.

Defects liability

Paper 3722 Page 4

Most building contracts provide that defects must be rectified by the contractor at no cost to the employer. The JCT contracts provide that this work is to be carried out in the Defects Liability Period, which starts at the issue of the certificate of Practical Completion. When the defects have been rectified, the fact is recorded by the issue of the certificate of Making Good Defects. If the contractor fails to rectify the defects within a reasonable or specified time, the employer may employ others to do so and deduct the cost from the contract price due to the original contractor. It is almost always cheaper for the original contractor to correct his own mistakes than for a new contractor to do so, and therefore it is in the original contractors interests to do the work himself. It follows that the contract provisions amount to a right for the original contractor to return to rectify defects, and should be thought of as a privilege as much as a duty (cf Nevill H W (Sunblest) v. William Press & Son (1981)). Moreover, if the employer refuses to let the contractor return, he has failed to mitigate his loss caused by the contractors breaches and cannot recover the cost of rectifying the defects from the contractor (cf. City Axis Limited v. Daniel P Jackson (1998)).

2.3 Claims in contract or tort

As between the employer and the contractor, defects constitute breaches of contract for which, if not rectified, the employer may seek to recover damages. However, defective work may also (or alternatively) form the basis for a claim in tort. Such a claim may be more or less attractive than a claim in contract, because of:

the differing applicable limitation periods in tort; the fact that liability in tort is normally wider than liability in contract; the difference in the measure of damages; the types of damages which may be recoverable;

all of which topics are covered in more detail below. Where the limitation period in contract has not expired, very often an employer has the choice of suing in contract or tort, or both. The question whether the defendant (contractor, architect or other professional) has concurrent liability in both contract and tort has frequently exercised the minds of the courts. In some cases the court has decided that, since the parties to the contract had the opportunity, when making the contract which is usually a commercial bargain to define exactly what the rights and liabilities of each party should be, they should not subsequently be allowed to impose a wider liability than that provided for. In other cases the court has found no difficulty in deciding that the defendant owed the claimant a duty in tort concurrent with his duty under the contract. For example, in Holt v. Payne Skillington and De Groot Collis (1995) Hirst LJ said: In our opinion there is no reason in principle why a Hedley Byrne type of duty of care cannot arise in an overall set of circumstances where, by reference to certain limited aspects of those circumstances, the same parties enter into a contractual relationship involving more limited obligations than those imposed by the duty of care in tort. In such circumstances, the duty of care in tort and the duties imposed by the contract will be concurrent but not co-extensive. The difference between the two will reflect the more limited factual basis which gave rise to the contract and the absence of any term in the contract which precludes or restricts the wider duty of care in tort. This has been a very fluid area of the law sometimes the first theory will prevail and sometimes the second. It follows that there are cases to support each proposition and a variety of intermediate propositions.

Defects liability

Paper 3722 Page 5

3 Latent defects
3.1 Effect of the final certificate
Where defects appear after the expiry of the Defects Liability Period, the employers position will depend on whether a binding and conclusive final certificate has been issued and whether that certificate is conclusive as to the particular work and/or materials that are defective. If such a certificate has been issued, the employer has lost any right of action against the contractor. He may, however, have a right of action against the certifier, either in contract or in tort. In either case the relevant limitation periods apply. The final certificate provisions included in common standard forms of contract vary greatly in terms of both their complexity and their effect. Some forms (e.g. the Government GC/Works/1 form) are unequivocal, stating that no certificate shall be conclusive proof that works have been completed in accordance with the contract. However, others (e.g. the final certificate clause included in the 1963 edition of the JCT Standard Building Contract, which stated that the architect certified that all works had been completed in accordance with the contract) were held to constitute conclusive proof that the works were defect free (P&M Kaye Ltd v. Hosier and Dickenson (1972)). In Crown Estates Commissioners v. John Mowlem (1994), let under the 1980 edition of the JCT Standard Building Contract, it was stated that standards of materials and workmanship were to be to the reasonable satisfaction of the architect, and that the this was one of the criteria for issue of the final certificate. The court, however, recognised that there were three different criteria which could be applied:

standards specified in the contract documents (e.g. British Standards); standards and quality not stated in the contract but which may be implied (e.g. by statutes such as sale of goods legislation); standards expressed as to the satisfaction of the architect.

It was held that the wording of the clause meant that issue of the final certificate was conclusive evidence for all three categories of work. Clause 1.9 of the 2005 edition of the JCT Standard Building Contract is now extremely long and cumbersome, but the overall effect of the clause is that the final certificate is conclusive evidence that where work or materials are expressly specified by the architect, then they are to his satisfaction, but is not conclusive evidence that any works have been completed in accordance with the contract. Note also that the court has recognised the practical difficulties faced by architects and engineers, particularly in checking the quality of workmanship. In National Coal Board v. William Neill & Son (St Helens) (1984), the court held that in addition to the engineers obligation to check the work, the contractor was also under an obligation to carry out the work in accordance with the contract, and that if he failed to do so he would be in breach of contract. That breach would not be excused, even if the engineer expressed his satisfaction with the work.

3.2 Limitation
An action for breach of contract must be brought within six years of the breach where the contract is a simple contract, and within 12 years if it is a specialty. This is why employers prefer the building contract, the engagements of professionals and any other related contracts all to be specialty contracts.

Defects liability

Paper 3722 Page 6

Different limitation considerations apply to claims in tort, due both to the case law which has developed in this area and the intervention of statute law. Limitation in tort (six years except for personal injury claims) starts to run from the accrual of a cause of action, that is, when damage is suffered. Damage need not necessarily arise until some time after a breach of contract, and hence the limitation period in tort may be much longer than that in contract. Where the employer is unaware that he has suffered damage within six or 12 years of the breach of contract, his only claim will lie in tort. The difficulty in this area is where the claimant is unaware that damage has occurred. In Pirelli General Cable Works Limited v. Oscar Faber & Partners (1983), a House of Lords decision, the court decided that limitation ran from the date of damage even though the plaintiff did not discover the damage until some time afterwards. Clearly, this can operate harshly to exclude claims where, through no fault of his own, the employer is unaware that the building is defective during the limitation period. In Western Challenge Housing Association Limited v. Percy Thomas Partnership and Others (1995), the plaintiff purchased a development of terraced houses which proved to be defective. It was held that their cause of action accrued at the date they purchased the properties (since the damage to the plaintiff occurred at the point of purchase). The fact that they were unaware of the defects until some considerable time afterwards did not prevent time running against them, and hence their claim was statute barred.

3.3 Latent Damage Act 1986

The Latent Damage Act 1986 (which amended the Limitation Act 1980) modified the operation of the rule. Initially there was some doubt as to whether s.14A of the Act applied only to claims in tort or to claims in both contract and tort. The point was settled in the case of Iron Trades Mutual Insurance Company Limited v. K Buckenham Limited (1990), a Queens Bench decision subsequently approved by the Court of Appeal in Socit Commercial de Rassurance v. ERAS (International) Limited (1992) s.14A of the Act only applies to claims in tort. Section 14A of the Limitation Act provides that the claimant has three years in which to bring his action for damages in respect of the relevant defect, from the date when he had the knowledge required for bringing an action. The knowledge required means knowledge of material facts about the defect (i.e. such facts about the defect as would lead a reasonable person to consider it sufficiently serious to justify instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment). The Act extends the limitation period to 15 years from the date of the negligent act which caused the damage. In Hamlin v. Edward Evans (1996), the defendants prepared a pre-purchase survey for the plaintiffs. They were negligent in failing to identify defects. The plaintiffs issued proceedings on discovering a fairly minor defect within the limitation period. Those proceedings were compromised. After the expiry of the limitation period the plaintiffs discovered much more serious defects and issued further proceedings, relying on s.14A of the Limitation Act. The court dismissed their claim on the basis that they did not have separate causes of action for the minor defect and the more serious defects, and that s.14A did not apply separate starting dates for the three-year period for different types of damage.

Defects liability

Paper 3722 Page 7

3.4 Fraud, concealment or mistake

In rare cases it may be possible to extend the limitation period even further. Section 32 of the Limitation Act 1980 provides that where there has been fraud, deliberate concealment or mistake, the limitation period does not begin to run against the claimant until he has discovered the fraud, deliberate concealment or mistake, or should with reasonable diligence have discovered it. This is a general provision in tort. However, it takes on a greater significance in a construction context, since, as will readily be imagined, it is all too easy for a contractor to cover up works which he knows to be defective. This was the position in Applegate v. Moss (1971). In that case Edmund Davies LJ said: It is a truism that not every breach of contract arising from a defect in the quality of goods or workmanship would justify a finding of fraud. But some breaches can be so fundamental that, if deliberately and knowingly committed, they properly give rise to an inference of fraud by the party in breach. In British Steel Plc v. Wyvern Structures Limited (1996), the court considered what constituted deliberate concealment and reviewed the authorities on the subject. It found that it was not sufficient for the plaintiff to show that there had been shoddy or incompetent work which happened to be covered up in the course of manufacture. The plaintiff must go further and prove that the defendants conscience should have been affected. The court referred to the test established in the case of William Hill Organisation v. Bernard Sunley & Sons (1982) and expressed by Cumming-Bruce LJ as follows: The question always resolves itself into the issue: in all the circumstances, were the facts such that the conscience of the defendant or the subcontractor, for whose acts and omissions the defendant is vicariously liable, should have been so affected that it was unconscionable to proceed with the work so as to cover up the defect without putting it right? In the British Steel case the court found against the plaintiffs, and the reasons given are of value in understanding how a court is likely to apply the test: Having heard the evidence in this case, it seems to me that where there are errors, they are much more likely to have been committed through boredom or other neglect rather than as a result of some deliberate conspiracy to cover bad work. In any event, even assuming that there had been a breach of contract or a tort by welding over excessively large fit-up gaps without the agreement of the other contracting party, it would be a matter of degree whether that should have affected the welders conscience. The claimant must prove that:

a fact or facts exist relevant to the claimants right of action; that fact or those facts have been deliberately concealed; those facts could not with reasonable diligence have been discovered within the limitation period that would originally have applied.

In Cave v. Robinson Jarvis & Rolf (2002), the House of Lords again looked at deliberate concealment. They emphasised that a breach of duty cannot be regarded as deliberate unless the person concerned is aware that what he is doing is a breach of duty. So where a breach is negligent but inadvertent, s.32 does not operate to postpone the limitation period.

Defects liability

Paper 3722 Page 8

The cases we have considered here concern concealment by the defendant during the limitation period which prevented the plaintiff or claimant bringing his action within it. In Sheldon and Others v. RHM Outhwaite (Underwriting Agencies) Limited and Others (1995), the House of Lords took the matter further. They found that the limitation period does not start to run against the plaintiff until he has discovered the concealment (or could with reasonable diligence have discovered it), even when the concealment took place after the expiry of the limitation period. The discovery of the concealment restarts the limitation clock.

FIGURE 1 Limitation periods

Years Contract Date of breach: Simple contract Speciality contract Tort Date of damage: Patent damage Latent damage: from date of discoverability of damage: from actual date of negligent act: Latent damage because of fraud, concealment or mistake: from date of discoverability of fraud, etc.: 3 years up to a maximum of 15 years 6 years 6 years 12 years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

no long-stop

Defects liability

Paper 3722 Page 9

4 Subsequent owners
A person who purchases a building which turns out to be defective is unlikely to have a cause of action against the seller or landlord. This is for two reasons.

Firstly, the maxim caveat emptor (let the buyer beware) applies, meaning that a contract for the sale of land and buildings, unlike one for the sale of goods, contains no implied terms relating to the quality of what is being sold. Secondly, that position is reinforced by conveyancing procedure in which it is standard practice for the seller to refuse to answer questions relating to the property and instead to invite the buyer to make and rely on his own inspection of it.

In the absence of a collateral warranty or the benefit of rights conferred by the Contracts (Rights of Third Parties) Act 1999, the subsequent buyer has no contract with either the contractor who built the property or the designer who designed it, and therefore is unable to sue in contract for any defects. His only remedy is an action in tort against the contractor (if the defect is a result of defective construction) or the designer (if it is a result of defective design). However, as we shall see, this area of the law is complex and in order to understand it one must look at its development. This is dealt with in the next section.

5 Economic loss
This section deals with two cases where the employer or buyer is unable to sue in contract:

An employer commissions work that turns out to be defective. Here, inability to sue in contract will usually be because the limitation period has expired. A person purchases a defective building. Here, inability to sue in contract will usually be because no contract exists (as for a subsequent owner).

5.1 The law pre-Murphy

In Donoghue v. Stephenson (1932) it was held that a manufacturer of goods was liable to a consumer of those goods for negligently causing personal injury or damage to property, even though there was no contract between them. However, in subsequent cases, while the law treated a contractor as being in a similar position to a manufacturer, it did not accept that Donoghue v. Stephenson had displaced the caveat emptor maxim, and therefore the contractor would not be liable for defects which injured or killed people (cf. Davis v. Foots (1940)). This unsatisfactory situation was eventually rectified by the Court of Appeal in Dutton v. Bognor Regis UDC (1972) and approved by the House of Lords in Anns v. Merton LBC (1978). Those decisions were authority for the following propositions:

Contractors and designers of buildings owed a duty of care to subsequent owners. So did local authorities when exercising their building control function in approving drawings and inspecting building operations. The liability was for personal injury, damage to other property and dangerous defects in the building itself.

Defects liability

Paper 3722 Page 10

In cases that followed, the definition of dangerous defects became very wide.

5.2 The effect of Murphy

The position was reversed in the cases of D & F Estates Limited v. Church Commissioners for England (1988) and Murphy v. Brentwood DC (1990). In the latter, Anns v. Merton was overruled. These cases decided that:

Local authorities did not owe a duty of care to subsequent owners and could not be sued for negligently approving drawings or building work. A subsequent owner could recover for defects causing personal injury or damage to other property but not for damage to the building itself.

The rationale for this part of the decision was stated to be that damage to the building itself is pure economic loss and therefore not recoverable in tort. The building is simply worth less because of the defects. To understand why the claimant cannot recover for damage to the thing itself, it is helpful to reconsider the case of Donoghue v. Stephenson. In that case the plaintiff could recover damages in tort for the effect of the product on her, but she could not have recovered in tort for the value of the defective product, because the defect was in the thing itself and her loss was therefore economic. The principle was succinctly stated by Lord Oliver in D & F Estates: [No] cause of action in tort arises in English law for the defective manufacture of an article which causes no injury other than the injury to the defective article itself.

5.3 Murphy in the Commonwealth

Murphy v. Brentwood, which has been much criticised, has had a profound and farreaching effect on claims in the construction industry. Inventive lawyers have striven to distinguish it and to find exceptions to its harsh effects. Courts in Canada, Australia and New Zealand have declined to follow it in the following cases:

From Canada Winnipeg Condominion Corp No. 36 v. Bird Construction Company Limited (1995) unreported. From New Zealand Bowen v. Paramount Builders (1977) 1 NZLR 394; Mt Albert Borough Council v. Johnson (1979) 2 NZLR 234; Askin v. Knox (1989) 1 NZLR 248. From Australia National Mutual Life Association of Australasia Limited v. Coffey and Partners Pty Limited (1991) 2 Qd R 401; Opat v. National Mutual Life (1992) 1 VR 283; Lowden v. Lewis (1989) Tas R 254; Brumby v. Pearton (1991) 10 BCL 291 (Supreme Court of Tasmania); Miell v. Hatjopoulos (1987) 4 BCL 226.

Defects liability

Paper 3722 Page 11

Most recently the highest appellate court of Australia (the High Court) declined to follow Murphy in the case of Bryan v. Maloney (HCA, 23 March 1995). Mr Bryan, who was a professional builder, built a house in 1979 which was purchased by Mrs Maloney in 1986, there having been an intermediate owner. Mrs Maloney noticed no defects in the property, but about six months after she bought it cracks began to appear: the result of inadequate foundations. Under Murphy the English courts would not have allowed her claim in tort, since it would have characterised her loss as being purely economic i.e. the defective house was simply worth less than it would have been without the defects. However, after a lengthy review of previous authorities, including D & F Estates and Murphy, the court allowed her claim, describing those cases as resting upon a narrower view of the modern law of negligence, and a more rigid compartmentalisation of contract and tort than was acceptable under the law of Australia.

5.4 Exceptions to Murphy

There are two situations discussed by the court in the case of Murphy and followed in subsequent cases which are described as being exceptional. The first is where the defect in the building creates a danger to adjoining property. In Morse v. Barratt (Leeds) Limited (1992), a retaining wall was defective and in danger of collapsing on to the road. It was held that the owners of the wall were entitled to claim damages from the builder who had negligently built the wall, the amount of those damages being the cost of repairing the wall. The second exception is the complex chattel or structure situation. This is where different elements of a building are constructed by different people and one element is negligently constructed as a result of which another element is damaged. However, this should perhaps not be seen as an exception: it is a case where the defect causes damage to other property, which was never within the scope of Murphy in the first place. An example would be where a plumbing or electrical installation causes flood or fire which damages other parts of the building. In Jacobs v. Morton & Partners (1994), a house had defective foundations. It was held that where the defendants negligently designed a scheme to remedy the defect and damage resulted, they would be liable for the cost of repair. The proposed remedial work would damage the original building. However, in the recent case of Tunnel Refineries Limited v. Bryan Donkin Company Limited, Alsthom SA and others (1998), the court rejected the complex chattel or structure theory. In that case a defective fan wrecked the machinery of which it was a component part. The court refused the plaintiffs claims for the cost of replacing the machinery and for lost production. The loss was purely economic.

Defects liability

Paper 3722 Page 12

5.5 Hedley Byrne v. Heller and reliance

The harsh effect of the rule in Murphy will be avoided where the claimant can demonstrate that he has relied on the negligent designer or contractor, or where the designer or contractor has assumed responsibility to him in some way. In the first case the claimant will rely on the case of Hedley Byrne & Co. Ltd v. Heller & Partners Ltd (1964). Very often, of course, an employer will rely on the skill and expertise of, for example, the architects, engineers and quantity surveyors he employs. It is precisely because they have the requisite skill and expertise that he employed them in the first place. Of course, he would usually have a contract with these individuals and can sue them under that. However, it has been seen that a claim in contract may be less advantageous to him than a claim in tort. Whether the claimant relies on the defendant or the defendant assumes responsibility are of course merely different sides of the same coin. In either case the defendant will be liable for economic loss caused by his negligence where the court finds a sufficient relationship of proximity existing between the claimant and the defendant. In Hedley Byrne it was held that a bank could be liable in tort for the economic consequences of its negligent misstatement concerning a customer. In the case of Henderson v. Merrett Syndicates Limited (1994), a House of Lords decision, Lord Goff made it plain that the doctrine of Hedley Byrne is not confined to the making of statements but: ... extends beyond the provision of information and advice to include the performance of other services and would include negligent omissions as much as negligent acts of commission. He said it was a question of analysing whether there had been a sufficient assumption of responsibility by the defendant upon which the plaintiff had reasonably relied. In that judgment it seems that the test of reliance may not be very onerous: It follows, of course, that although in the case of the provision of information and advice, reliance upon it by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect), nevertheless there may be other circumstances in which there will be the necessary reliance to give rise to the application of the principle. In particular, as cases concerned with solicitor and client demonstrate, where the plaintiff entrusts the conduct of his affairs, in general or in particular, he may be held to have relied on the defendant to exercise due skill and care in such conduct. It is not just the professional team against whom a Hedley Byrne claim may be made. In Barclays Bank v. Fairclough Building Ltd (1994), a specialist subcontractor was found liable to the employer in these circumstances. In the case of White v. Jones the House of Lords similarly relied upon the notion of assumption of responsibility to hold that a solicitor who negligently failed to carry out his clients instructions to make a new will was liable in negligence to the deceased clients daughters who, but for such failure, would have obtained an inheritance. Clearly the plaintiffs in this case had no contract with the solicitor and had to sue in tort for what was undoubtedly pure economic loss. The solicitor was held to have assumed responsibility towards them in accepting his clients instructions.

5.6 The Defective Premises Act 1972

It has been seen that the effect of Murphy will be to exclude many claims in tort in respect of defective buildings. For some claimants help may be at hand in the form of the Defective Premises Act 1972.

Defects liability

Paper 3722 Page 13

Section 1(1) states: A person taking on work for or in connection with the provision of a dwelling (whether the dwelling is provided by the erection or by the conversion or enlargement of a building) owes a duty a. if the dwelling is provided to the order of any person, to that person; and b. without prejudice to paragraph (a) above, to every person who acquires an interest (whether legal or equitable) in the property; to see that the work which he takes on is done in a workmanlike or, as the case may be, professional manner, with proper materials and so that as regards that work the dwelling will be fit for habitation when completed. Section 1(4) states: A person who a. in the course of a business which consists of or includes providing or arranging for the provision of dwellings or the installations in dwellings; or b. in the exercise of a power of making such provision or arrangements conferred by or by virtue of any enactment; arranges for another to take on work for or in connection with the provision of the dwelling shall be treated for the purposes of this section as included among the persons who have taken on the work. The important points to note are:

The Act only applies to dwellings, and this severely restricts the scope of its operation. However, it should be borne in mind that the CDM Regulations largely exclude residential property from their ambit, which makes the availability of the Act of more significance to residential owners and occupiers. The legal duty imposed by the Act is very wide, since it covers any work connected with the provision of the dwelling, and that will include conversion or enlargement of a building (e.g. the conversion of an existing building into flats). The duty is owed to subsequent owners and occupiers as well as to the original owner or occupier (i.e. it will apply where there is no contract between the parties and where a claim in tort is not available for whatever reason). Not only is the work to be done properly with appropriate materials, but the person on whom the duty is imposed must ensure that the dwelling will be fit for habitation. This is very important, for it is very rare that a court will find an implied term in a building contract that the completed building will be fit for its purpose. The duty is owed by every person involved in either the design or construction of the building. This will include architects, engineers, contractors, suppliers, property developers and local authorities.

Defects liability

Paper 3722 Page 14

The Act imposes strict liability (i.e. liability even where there has been no negligence) on all these parties for their acts and also for their omissions (cf. Andrews v. Schooling (1991)). Limitation under the Act is restrictive. An action under it must be commenced within six years of the completion of the dwelling (or six years from the completion of any work to rectify defects, but only in respect of that work). Any attempt to contract out of the Act is void. The Act does not apply where the aggrieved party has some other, alternative and comparable protection under an approved scheme in practice this will be rare.

In Thompson v. Clive Alexander and Partners (1992), the nature of the duty imposed by the Act was discussed. The court held that it was not sufficient to show that the workmanship or materials were defective: the plaintiff must show that their defective nature was such as to render the premises unfit for habitation.

5.7 Summary
1 As between original parties under original contract

Patent defects

Employer sues in contract for damages. Alternatively, if contract so provides, contractor returns to rectify or, in default, employer deducts cost from contract price. Defective Premises Act 1972 may apply if residential.

Latent defects

Employer sues in contract for damages. Alternatively, if contract so provides and a binding and conclusive final certificate has been issued, he will lose his right to sue the contractor. Employer may be able to sue architect or other professionals he has engaged (for negligent certification or other negligence) in contract or in tort, or both if concurrent liability. He may prefer to sue in tort (because of scope of liability, limitation and/or measure of damages), or he may have to if limitation in contract has passed.

2 Position of subsequent owner

Unlikely to be able to sue vendor. No contract with contractor or designer (in absence of collateral warranty). Only action is therefore in tort.

3 In either case

The employer or owner cannot recover if only the building is affected, because loss is economic except if:

danger to other property; complex chattel or structure; can prove reliance on or assumption of responsibility by designer or contractor; Defective Premises Act 1972 applies.

Defects liability

Paper 3722 Page 15

6 Measure of damages
The measure of damages that may be recovered for defective work will be different according to whether the claim is made in contract or in tort.

6.1 Contract
In contract the measure of damages is the amount required to put the claimant in the position he would have been in had the contract been properly performed. It is not the amount required to put the claimant in the position he would have been in had the contract never been made. The distinction is important. For example, where an employer is in repudiatory breach such as to entitle the contractor to terminate the contract, the contractor is entitled to claim the loss of profit he would have made from the contract. In respect of each loss, the claimant has to demonstrate that it is not too remote from the defendants breach of contract. Either the loss must have been likely to arise in the normal course of things as a result of the breach (it was reasonably foreseeable), or the loss must be one which could have been within the contemplation of the parties at the time they made the contract. It should be noted that the claimant does not have to prove that the loss was contemplated by the parties, just that it could have been: i.e. that their state of knowledge was such as to have made that contemplation possible. In Balfour Beatty Construction (Scotland) Limited v. Scottish Power plc (1994), the defendants contracted to supply electricity to the plaintiffs, who were constructing a concrete aqueduct. The plaintiffs needed to pour the concrete in one continuous operation. The electricity supply failed. Although the defendants were in breach of contract as a result, since they had not known the requirement for a continuous pour, they were not liable to the plaintiffs for the cost of demolishing the plaintiffs work. The claimant also has to show that, where possible, it has mitigated its loss: that is, it has taken all reasonable steps to minimise the damage caused to it by the defendants breach. For example, in the case of City Axis Limited v. Daniel P Jackson (1998) it was held that the employers refusal to allow the contractor to return to site to do snagging works was a failure to mitigate the employers loss, and thus the employer was not allowed to claim from the contractor the cost of employing others to do the work. In the cases of St Martins v. McAlpines (1993) and Darlington BC v. Wiltshier Northern Limited (1994), the court held that there were exceptions to the general principle that a plaintiff who has not suffered loss cannot recover substantial damages, and cannot recover damages on behalf of a third party. Those decisions were reaffirmed by the House of Lords in Panotown Limited v. Alfred McAlpine Construction Limited (2000). In that case Panatown employed McAlpines to construct an office building and a car park. The works were defective and Panatown sued McAlpines. As Panatown were not the owners of the land or buildings, they had arguably suffered no loss. The Court of Appeal awarded substantial damages to Panatown on the basis that it was within the parties intention or contemplation that Panatown should be entitled to recover substantial damages for defective work, notwithstanding that it had no proprietary interest in the land. Panatown was therefore allowed to recover damages on behalf of a third party to the contract. This decision was overturned by the House of Lords because McAlpine had executed a duty of care deed in favour of the actual owner of the building (Unex Investment Properties Ltd), and so they were in a position to sue on their own behalf.

Defects liability

Paper 3722 Page 16

These cases seem to demonstrate that the range of foreseeable and therefore recoverable loss can, in certain circumstances, extend to third-party losses. The explanation given in the Darlington case for the exception to the general rule was that it provides a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it. These decisions represent an acknowledgement by the court of the complex financial arrangements which are part and parcel of modern commercial life. A claimant should be able to recover a third partys loss in circumstances where the defendant is well aware of the true commercial interrelationships between the contracting and noncontracting parties and it would be unfair to allow him to escape liability simply by relying on the doctrine of privity of contract. (Cf. also Phillips Petroleum Company (UK) Limited and Norsea Pipeline Limited v. IT Corporation Limited and Flaretec Alloys and Equipment Limited (1998)).

6.2 Employers claims for damages for contractors breach

The most commonly employed measure of damages is, as one would expect, the cost of repair. However, in some circumstances it will be uneconomic and/or unreasonable to repair the building, and in these cases the courts will award damages for the diminution in value of the property. This will usually be less than the cost of repair and may be affected by a rise or fall in the property market. In George Fischer Holding Limited v. Multi Design Consultants Limited and Davis Langdon & Everest and others (1998), it was held that the plaintiff could recover both the cost of repair and the loss of value. This is unusual, since the two have usually been treated as alternatives. However, in this case, even after the completion of remedial work the property would not be worth as much as it would have been had there not been the defects for which the defendants were liable. This is an important principle, as it allows a claimant to claim the residual difference in value after carrying out the best and most economical repair that can be performed. In a controversial House of Lords decision (Ruxley Electronics and Construction Limited v. Forsyth (1995)), the court declined to award damages on either of the above bases. The case concerned a swimming pool which had only one fault it was 450mm shallower than specification. The court decided it would be unreasonable to award damages based on the cost of correcting the defect, since this would involve completely rebuilding the pool. Further, the court found that there was no diminution in value as a result of the defect. However, clearly the defendant was in breach of contract and the plaintiff entitled to an award of damages. They therefore awarded 2,500 for loss of pleasure and amenity. It has been seen that the claimant is under a duty to mitigate its loss. However, it frequently happens that the claimant is not in a financial position to have the remedial work carried out before the defendant is found liable and ordered to pay damages. In the case of Dodd Properties (Kent) Limited v. Canterbury CC (1980), the court held that the plaintiffs decision to defer carrying out the remedial works because of its financial situation and until the defendant was found liable was a reasonable one. The delay in this case was 10 years and as a result the cost of repair was nearly three times the amount it would have been 10 years earlier. Nevertheless, the court held the plaintiff was entitled to the full cost of repair as at the date of trial.

Defects liability

Paper 3722 Page 17

In addition to claiming specific damages for the cost of rectifying the defects or the loss of value caused by the defects, the claimant may claim general damages for inconvenience and distress where the building concerned is the claimants home. At one time fairly considerable damages were awarded under this head. However, in the case of Watts v. Morrow (1991) the court severely curtailed the award of damages under this head. The case concerned a negligent survey. It will be appreciated that claimants whose home proves to be defective will suffer anxiety and disappointment at discovering that what was probably their largest investment is worth less than they had believed, together with the discomfort and unpleasantness of living in a defective property and the disruption and inconvenience in living in the property while the remedial works are carried out. The Court held in the Watts case that the plaintiffs were entitled to damages for:

the discomfort suffered as a result of having to live for a lengthy period in the defective premises; and the physical discomfort caused by carrying out repairs.

However, damages were limited to distress caused by the physical consequences of breach. The court reduced the damages awarded to each plaintiff from 4,000 to 750. Bingham LJ summarised the position as follows: A contract-breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his breach of contract may cause to the innocent party. ... But the rule is not absolute. Where the very object of a contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will be awarded if the fruit of the contract is not provided ... . A contract to survey the condition of a house for a prospective purchaser does not, however, fall within this exceptional category. In cases not falling within this exceptional category, damages are in my view recoverable for physical inconvenience and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort. If those effects are foreseeably suffered during a period when defects are repaired, I am prepared to accept that they sound in damages ... . But I also agree that awards should be restrained. In Partridge v. Morris (1995), the plaintiff claimed damages against her architect for negligence resulting in (inter alia) her not being able to move into her new home for two years. The Court refused her claim for damages for distress (following Watts v. Morrow) and only awarded her 10 per week damages for physical inconvenience and discomfort and directly related mental suffering. Awards of damages under this head will not be available in cases concerning business premises (Hutchinson v. Harris (1978)).

6.3 Contractors claims for damages for employers breach

If the employer is in breach, the contractor may claim any actual losses suffered and for loss of profit.

6.4 Tort
The measure of damages is the amount required to put the claimant in the position he was in before the tort was committed. As we have seen, unless he can bring himself within one of the exceptions to Murphy or can prove reliance on or an assumption of responsibility by the defendant (Hedley Byrne v. Heller), the claimant will be unable to recover economic loss and thus will have no claim if the only damage is to the building itself.

Defects liability

Paper 3722 Page 18

However, in other respects a claim in tort may be more generous to the claimant than a claim in contract, since different tests of remoteness will apply. In tort, the claimant only has to show that the damage suffered was a reasonably foreseeable consequence of the defendants negligence, even if the extent of the damage or the precise manner of its occurrence were not reasonably foreseeable (Overseas Tankship (UK) v. Morts Dock & Engineering Company (The Wagon Mound No. 1) (1961)). The author of the 20th edition of Salmon and Heuston explains as follows: In contract the rule is that the plaintiff can recover for loss which the defendant, when he entered into the contract, ought to have contemplated, as a reasonable man, was of a very substantial degree of probability or was not unlikely to result from a breach. The plaintiff cannot recover, as he can in tort, for loss which is a serious possibility or a real danger. The reason for this distinction between contract and tort is that in contract, if one party wishes to protect himself from a risk which to the other party would appear unusual, he can direct that others attention to it before the contract is made. But in tort there is no such opportunity available to the injured party, and so the tortfeasor cannot complain if he has to pay for some very unusual but still foreseeable damage which results from his wrongdoing. Therefore, liability in tort is normally wider than liability in contract but not necessarily so, for the parties to a contract may expressly agree that there shall be liability for some remote and quite unforeseeable head of damage. Accordingly, loss of profit on a contract with a third party which the claimant is unable to fulfil as a result of the defendants breach may not be recoverable in contract if the defendant was unaware of such contract or the likelihood of its existence should not have been obvious to him. In tort, the claimant is more likely to recover in these circumstances.
REFERENCE

Shiels L (2011) Defects what are your rights?, Construction Law, 22(1): 2931.
SELF-ASSESSMENT QUESTIONS 1. Discuss the reasons why a claim in tort may be more attractive to a claimant than a claim in contract. 2. Explain the different limitation periods applicable in contract and tort and how a claimant may be assisted by: a. the Latent Damage Act 1986 b. s.32 of the Limitation Act 1980. 3. Is the decision in Murphy fair? 4. What must a claimant prove in order to make a claim under Hedley Byrne v. Heller and what are the advantages of doing so? 5. Since the decision in Murphy v. Brentwood, more claims are being made under the Defective Premises Act 1972. Why is this? The Act is both very wide and very limited in its application. Explain. 6. Explain the different ways in which a court may award damages for defects in contract and in tort.