When the contractual party has no money – will, or can tort fill the hole?

Sainsbury’s Supermarkets Ltd. v Condek Holdings Ltd. & Ors [2014] EWHC 2016 (TCC)

Where an employer discovers defects in a building, but the contractor lacks sufficient funds to make it worth suing, the employer may consider bringing an action against someone else involved in the project instead. Often, liability will be asserted on the basis that there was a duty of care in tort to prevent the employer suffering pure economic loss. In this case the Claimant (Sainsbury’s) unsuccessfully attempted to bring such a claim. Alex Hickey of 4 Pump Court appeared on behalf of Sainsbury’s and Claire Packman of 4 Pump Court appeared on behalf of the Fourth Party, Capita Symonds Ltd.

In 2006, Sainsbury’s procured the construction of a car park at one of its stores. The car park involved a “novel” design which had been invented by the Third Defendant, Mr Andreas Pashouros. Although no formal contract to design and build the car park was ever agreed, the First Defendant (the company through which Mr Pashouros carried on business and of which he was managing director) had successfully tendered for the work and subsequently entered into a letter of intent with Sainsbury’s to carry out certain preparatory tasks. The project reached practical completion in late 2006. However, the car park later began to manifest defects which allegedly necessitated re-building it. It was common ground that those defects constituted pure economic loss.

When it was carrying out work for the project, the First Defendant engaged another company (“NRM”) to assist it with certain aspects of the design. NRM’s design work subsequently formed part of the tender submitted to Sainsbury’s. NRM was also alleged to have undertaken inspections of the car park after completion and attended meetings with the First Defendant and Sainsbury’s, providing design advice. Subsequently, in 2008, NRM transferred its business and assets to Capita Symonds. NRM continued to exist as a separate company but, because of the transfer, it was effectively an ‘empty shell’, having little in the way of assets.

Due to the financial state of his companies, Sainsbury’s decided to join Mr Pashouros to the action, arguing that he had, as director, assumed a personal duty of care to (amongst other things) ensure that the materials supplied for the project were of satisfactory quality and to use reasonable care to ensure that work carried out by others was done in a good and workmanlike manner. Mr Pashouros applied to strike out the claim on the basis that he owed no such duty of care. Before Stuart-Smith J, his application was successful.

Stuart-Smith J said that, to establish that there was a duty of care to guard against pure economic loss on Mr Pashouros’ part, “it will not be sufficient [that]…the director does no more than act in a way that is consistent with his position as a director”. In essence, in order to be liable, Mr Pashouros had to have done something over and above what could be expected of him as a director. However, the “mere fact” he had created “a novel design does not impose an obligation upon the designer if he attends site in any capacity to check that the construction is in accordance with the design”. That he had promoted the use of his design through the First Defendant was not sufficient to establish liability either. If liability was imposed simply because Mr Pashouros had used the First Defendant to commercially exploit his invention for his own financial gain, then “the main benefits of incorporation would be lost”. Further, Sainsbury’s could have also taken steps to safeguard its position by, for example, entering into a duty of care deed. It had made a “commercial choice” not to do so and now had to bear the consequences. The claim against Mr Pashouros therefore failed.

To succeed against Capita Symonds, Sainsbury’s had to establish that, first, NRM owed it a duty of care which had been breached and, secondly, NRM’s consequent liabilities had been transferred to Capita Symonds when it purchased NRM’s business. On Capita Symonds’ application, Stuart-Smith J again struck the claim out.

First, he held that Sainsbury’s could not establish that NRM had owed it a duty of care. That could only be done if Sainsbury’s had reasonably relied on NRM’s advice, and NRM knew of this. However, as pleaded, Sainsbury’s case was “silent” on the issue of whether NRM knew it would be relied on by Sainsbury’s. Also, there was no evidence about, for example, what questions Sainsbury’s had asked NRM at the meetings they had both attended and what advice had been given in response by NRM.

Secondly, Stuart-Smith J considered in the alternative whether, if NRM had incurred a liability to Sainsbury’s, it could have transferred it to Capita Symonds. He held that it could not. Sainsbury’s argued that the principle of vicarious liability, the shared responsibility of partners for the acts of other partners and the doctrine of subrogation demonstrated that it was possible in law to transfer a liability. Stuart-Smith J rejected these analogies. Properly analysed, they were not examples of the liabilities of one person being transferred to another. In addition, policy considerations also supported the conclusion that it was not open to a tortfeasor to transfer its liability to someone else. If such a transfer were possible, it might lead to the undesirable situation that “an unscrupulous but solvent tortfeasor [could]…transfer his tortious liabilities to an insolvent third party” to a claimant’s detriment. Therefore, NRM could not have transferred any of its tortious liabilities to Capita. In any event, the terms of the business transfer agreement between Capita Symonds and NRM did not have this effect as a matter of construction.

This case is a useful reminder that a court is unlikely to look favourably on an employer who, faced with a contractual counterparty of limited funds, attempts to establish liability against someone else instead. Stuart-Smith J rejected the suggestion that there was a legal “black hole which the law of tort should fill” simply because of the financial position of those whom Sainsbury’s had (contractual) claims against. Employers who wish to take steps to guard against such risks need to make suitable arrangements to protect themselves (such as through collateral warranties, duty of care deeds or insurance). The alternative option of trying to frame a claim for pure economic loss in tort will be difficult.