Last week the Court of Appeal revisited the question of tortious liability for pure economic loss in building contracts.

The judgment handed down by Lord Justice Jackson in the case of James Andrew Robinson v P.E. Jones (Contractors) Limited [2011] EWCA Civ 9 is well worth a read for anyone involved in the drafting or negotiation of construction contracts and professional appointments and in advising clients on tortious liability in general. It handily summarises the case law and sets out what will now be regarded as settled law in this difficult area.

You can access the full judgment here.

The judgment discusses the circumstances in which a building contractor and a professional will owe concurrent duties in tort and contract and how far those tortious duties extend.

Lord Justice Jackson analysed the current authorities and came to the following conclusions:

  1. There is no reason why a party cannot owe concurrent duties in both contract and tort to another party. However, these duties are not necessarily the same.
  2. The relationship between a contractor and an employer is primarily governed by the contract between them and determines each party’s obligations and remedies.
  3. The law of tort imposes a different and more limited duty upon the contractor to take reasonable care to protect the employer (and subsequent purchasers) against suffering personal injury or damage to any other property. There is no liability for pure economic loss arising from damage or potential damage to the property itself. For example, the loss sustained by a building owner for an ordinary building defect is the cost of rectifying the defect which is not recoverable against the contractor in tort.
  4. However, a contractor or professional may have a separate and broader tortious liability through the doctrine of ‘assumption of responsibility’. This arises when the contractor or professional has a special relationship with the employer which the courts have decided does render it liable in tort to the employer (and/or subsequent purchasers) for economic loss, damage to the property itself, as well as other heads of recoverable damage. The doctrine has its origins in the famous Hedley Byrne case and the present judgment considers examples of where the doctrine arises. Unsurprisingly, the majority of examples concern professionals (architects, engineers, financial advisors etc).
  5. There is an assumption that professionals owe this broader tortious duty of care to their clients and thus assume responsibility for economic loss to their clients. “They give advice, prepare reports, draw up accounts, produce plans and so forth. They expect their clients and possibly others to act in reliance upon their work product, often with financial or economic consequences” (paragraph 75).
  6. However, there is no assumption that a builder or contractor takes on this broader tortious liability. It will be necessary to look at the relationship and dealings between the parties to see if the contractor assumed responsibility to the employer so as to give rise to the Hedley Byrne duties.

Lord Justice Stanley Burnton affirmed that the law in this area is simply stated by Lord Bridge in D & F Estates Ltd v Church Commissioners [1989] AC 177 at 206 as:

“If the hidden defect in the chattel is the cause of personal injury or of damage to property other than the chattel itself, the manufacturer is liable. But if the hidden defect is discovered before any such damage is caused, there is no longer any room for the application of the Donoghue v Stevenson principle. The chattel is now defective in quality, but is no longer dangerous. It may be valueless or it may be capable of economic repair…. If the same principle applies in the field of real property to the liability of the builder of a permanent structure which is dangerously defective, that liability can only arise if the defect remains hidden until the defective structure causes personal injury or damage to property other than the structure itself. If the defect is discovered before any damage is done, the loss sustained by the owner of the structure, who has to repair or demolish it to avoid a potential source of danger to third parties, would seem to be purely economic”

So what does this mean for you?

If you are a contractor, this case highlights the importance of ensuring that your contract deals adequately with liability for defects and represents a sensible allocation of risk between the parties. Without this, the court may found an ‘assumption of responsibility’ and thus impose the broader tortious duty if the relationship was such that the employer was relying on the ‘advice’ of the builder. The majority of the standard forms will automatically incorporate such terms.

The facts of this case provide a good example of the types of clauses which will be found to comply with the requirements of sensible risk allocation and with the requirement of reasonableness, particularly where consumers are concerned. In this case, the Court of Appeal found that the contract dealt adequately with the warranties as to quality and the remedies available to the employer if those warranties were breached and therefore, no assumption of responsibility was found.

If you are a professional or a contractor with design responsibilities, be aware of the broader tortious liability and responsibility which you could assume through the doctrine of ‘assumption of responsibility’ when contracting with an employer and your consequent potential liability to them for economic loss. You may also wish to consider this issue when renewing your PI insurance.