The College of Estate Management 2002

Paper 3722V3-1

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 Limitation
3.2 Latent Damage Act 1986
3.3 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

Defects liability

Paper 3722 Page 2

Aims and learning outcomes

After studying this paper you should be able to:
z

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.
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:
z

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.
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 (1991)). 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)).

Defects liability

Paper 3722 Page 4

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:
z
z
z
z

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.

3 Latent defects
3.1 Limitation
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 (cf Crown Estates Commissioners v John Mowlem &
Company Limited (1994)). 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.
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 5

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.

3.2 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 (ie 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 judgement). 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 6

3.3 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:
1. a fact or facts exist relevant to the claimants right of action;
2. that fact or those facts have been deliberately concealed;
3. 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 7

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

10

11

12

13

14

Contract
Date of breach:
6 years

Simple contract

12 years

Speciality contract
Tort
Date of damage:
6 years

Patent damage
Latent damage:
from date of discoverability of damage:
from actual date of negligent act:

3 years
up to a maximum of 15 years

Latent damage because of fraud,

concealment or mistake:
from date of discoverability of
fraud etc:

no longstop

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.
z

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.

15

Defects liability

Paper 3722 Page 8

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:
z

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:
z

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.

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:
z

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.

Defects liability

Paper 3722 Page 9

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:
z

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.

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 ie 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.

Defects liability

Paper 3722 Page 10

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.

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 judgement 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.

Defects liability

Paper 3722 Page 11

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.
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.

Defects liability

Paper 3722 Page 12

The important points to note are:

z

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 (eg 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 (ie 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.

The Act imposes strict liability (ie 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.
z

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 may apply if residential.

Defects liability

Paper 3722 Page 13

Latent Defects.
z

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

z
z
z

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:
z
z
z

danger to other property;

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

Defects liability

Paper 3722 Page 14

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: ie
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 15

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
2500 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 16

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:
z

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 4000 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 17

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.
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 awards damages for defects in
contract and in tort.