The Court of Appeal decision in Robinson v P.E. Jones (Contractors) Limited has been eagerly awaited because of the topical debate surrounding builders' liability in tort for pure economic loss. There were two views on builders' liability; the first being that builders should only be liable for personal injury or physical damage to property other than the building itself (based on the Donoghue v Stevenson "neighbour" principle). On the other hand, why should builders not form part of the same group as bankers or accountants upon whose advice, knowledge or special skill, clients rely thus constituting a "special relationship" by the defendant and consequent "assumption of responsibility".
The Court of Appeal has upheld the first instance decision that the contractor had excluded any possible tortious duty from its contract. However, importantly, the Court of Appeal has confirmed that such tortious duty does not arise simply by virtue of the fact that the parties are in contract with each other. There has to be more.
Tort and contract - differences to be reconciled
Contractual obligations are negotiated by the parties and then enforced by the law. In contrast, tortious duties are imposed by law without the need for agreement by the parties because society demands certain standards of conduct. There is no reason why contractual and tortious obligations should be identical as they serve different functions. In principle it is possible for there to exist at the same time both types of obligations (concurrent liability). In the building scenario, the leading construction text (Keating on Construction Contracts 8th edition) said:
"It is difficult to disagree with the view that a contract which stipulates that the contracting party will perform certain services involves an assumption of responsibility which will normally be relied upon by the other contracting party. On the other hand it is true that the authorities prior to Henderson v Merrett, and in particular Murphy, did not envisage a builder....owing duties of care in respect of economic loss. This difference of view requires a reconciliation of these two different streams of authority which will have to await a decision from the Court of Appeal or the House of Lords."
In giving the leading judgment in this appeal case, Jackson LJ has duly supplied the answer.
Mr Robinson entered into a sale agreement with P. E. Jones (the builder) pursuant to which the builder agreed to build and sell a new house. The house was transferred to Mr Robinson in 1992. More than 12 years after the builder completed the building, inspections of the house revealed that the builder had not built the house's flues in accordance with the relevant Building Regulations in force at the time the house was built.
In 2006, Mr Robinson issued proceedings against the builder claiming the cost of the remedial works in the sum of £35,000. Given the amount of time that had elapsed, Mr Robinson did not have an actionable claim in contract since it was time-barred. Mr Robinson therefore relied on the latent damage extension under the Limitation Act 1980 which provides that a claimant has three years to bring a claim in tort from the date he knew or ought reasonably to have known about the damage. Since no physical damage to other property or personal injury had been caused, the claim was for pure economic loss only.
At first instance the court held that in principle a builder could be liable in both tort and contract (concurrent liability) but in this case any tortious duty had been excluded under the contract. The building conditions provided (at clause 10) that the parties would enter into an National House Building Council (NHBC) agreement and that the vendor (the contractor) would not be liable "in respect of any defect error or omission in the execution or the completion of the work save to the extent and for the period that it is liable under the provisions of the N.H.B.C Agreement on which alone his rights and remedies are founded." The first instance judge found that clause 10 satisfied the reasonableness requirement under the Unfair Contract Terms Act and excluded concurrent liability in tort. Mr Robinson's claim was dismissed.
The Court of Appeal upheld the first instance decision to strike out the action and dismissed the appeal. The court helpfully reviewed the conflicting authorities. On the one hand, there was a line of cases which established that builders do not owe a duty of care to protect a builder owner from pure economic loss. On the other hand, there was a second series of cases where builders were held to have owed a tortious duty not to cause pure economic loss. These were either because of the nature of the specialist services provided by the builder or supplier, or alternatively an "assumption of responsibility" by the builder by reason of the contractual relationship between the parties. In short, there was an argument that builders (depending on the nature of the skill, advice or services provided) should be treated no differently to lawyers, accountants or surveyors and should be held liable for negligent acts which gave rise to pure economic loss, including defects to the building itself.
The principle of this type of liability originates from the case of Hedley Byrne v Heller where it was held that bankers would have been liable for economic loss but for an express disclaimer of responsibility. Such hypothetical liability was based on a special relationship between the parties flowing from an assumption of responsibility. Other examples of assumption of responsibility have included solicitors' liability to disappointed beneficiaries and a company director's liability for negligent advice in a company brochure.
Jackson LJ analysed the position as follows:
"Absent any assumption of responsibility, there do not spring up between the parties duties of care co-extensive with their contractual obligations. The law of tort imposes a different and more limited duty upon the manufacturer or builder. That more limited duty is to take reasonable care to protect the client against suffering personal injury or damage to other property. The law of tort imposes this duty, not only towards the first person to acquire the chattel or the building, but also towards others who foreseeably own or use it."
The appeal judge further commented that:
"It is perhaps understandable that professional persons are taken to assume responsibility for economic loss to their clients...They expect their clients and possibly others to act in reliance upon their work product, often with financial or economic consequences."
However he stressed that:
"When one moves beyond the realm of professional retainers, it by no means follows that every contracting party assumes responsibilities [in the Hedley Byrne sense] to the other parties co-extensive with the contractual obligations. Such an analysis would be nonsensical.... Sometimes a particular set of facts may give rise to identical contractual and tortious duties, but self-evidently that is not always the case."
Building contracts - assumption of responsibility
Jackson LJ clarified that the law does not automatically impose upon every contractor or sub-contractor tortious duties of care co-extensive with the contractual terms. It is necessary to consider the relationship and dealings between the parties in order to ascertain whether the contractor or sub-contractor has "assumed responsibility" so as to give rise to Hedley Byrne duties.
On the facts in the present case, the appeal court saw nothing to suggest that the contractor had "assumed responsibility" to Mr Robinson. Interestingly, the Court of Appeal noted that the parties "were not in a professional relationship whereby, for example, the claimant was paying the defendant to give advice or to prepare reports or plans upon which the claimant would act." Put simply, the parties had entered into a written contract whose terms were clear and simple. The contract represented a sensible allocation of risk between the parties who were both legally represented at the time. The parties had expressly agreed the contractor's liability would be that arising solely from the NHBC agreement thereby excluding any liability in negligence which might otherwise arise.
In conclusion, Jackson LJ commented that "In my judgment it is not possible for the claimant to invoke the law of tort in order to impose liabilities upon the defendant which are inconsistent with the contract."
Stanley Burton LJ's supporting judgment was expressed more robustly than Jackson LJ's. He commented that:
"In my judgment, it must now be regarded as settled law that the builder/vendor of a building does not by reason of his contract to construct or complete the building assume any liability in the tort of negligence in relation to defects in the building giving rise to purely economic loss."
In brief, co-extensive liability on the part of the builder in tort will be difficult to prove but each individual case will be fact-specific. It appears that only in exceptional cases will employers be able to demonstrate an assumption of responsibility on the part of builders which will bring them within the "special relationship" as per Hedley Byrne and thus potentially liable for damages for pure economic loss.
Note that the judgment does not deal specifically with design and build contractors and we await further clarification from the courts in this regard. Presumably design and build contractors will be in the same position as an architect in respect of its design obligations and would therefore be held to assume a responsibility in tort.
The case is also a reminder that the parties can effectively exclude a concurrent duty in tort in their contract. Finally, Jackson LJ was very critical of the fact that the litigation ran in the County Court for two and a half years before it was properly transferred to the Technology and Construction Court.