The Malayan Law Journal Articles Donoghue

The Malayan Law Journal Articles © 2003 LexisNexis Asia (a division of Reed Elsevier (S) Pte Ltd) The Malayan Law Journal Articles 2001 Volume 2 [2001] 2 MLJ lxv; [2001] 2 MLJA 65 LENGTH: 9755 words TITLE: Article: Donoghue v Stevenson - A New Facade for the Construction Industry? AUTHOR: Grace Xavier LLB (Hons) (Lond), CLP, LLM (Mal), Dip Int Comm Arb (Lond), FCIArb Lecturer, Faculty of Law University of Malaya TEXT: Introduction The law of tort, or rather, its development since the landmark decision in the celebrated case of Donoghue v Stevenson, 1 has been discussed so often that another attempt to address the issue might just be glossed over by prolific academic writers and informed readers alike. However, it is to be emphasized that the development of the law of tort has not even reached the crossroads of life of general tort actions, let alone the specific tort claims that are founded on negligence. At least, this appears to be so insofar as defective building claims are concerned. As a brief introduction to the law of tort, the law provides that any person who causes injury to another person or another's property is liable for the act or omission that caused the damage. Why should someone opt for an action in tort and not one in contract, which is a popular form of action, one may ask? A tort action would help someone who would otherwise find it difficult to sustain a claim because there was no contractual privity between him and the person who had caused the injury. Therefore, the law of tort fills the gap where contract law is unable to. As such, such a person has a remedy available, where otherwise he would have none. Such a fact has been aptly addressed by Lord Atkin who remarked as follows: 2 I do not think so ill of our jurisprudence as to suppose that its principles are so remote from the ordinary needs of civilized society and the ordinary claims it makes upon its members as to deny a legal remedy where there is so obviously a social wrong. Tort thus remains an avenue whereby a legal remedy may be administered to a person who has suffered a social wrong. One cannot but admit that the remark by Lord Atkin has not, and will not ever, become obsolete. The statement was an honest truth in 1932 and so it remains true to this day. Where an obvious social wrong has been committed, it is up to the courts, and subsequently to Parliament, to ensure that the status quo is not prolonged for a day longer than necessary. Law was made for man, and not man for the law, and as such, the law of tort shall

continue its development. The only restriction shall be where it was evident that the law was being manipulated to achieve an undesired objective of a particular undesirable individual or group of persons. At such a time, social justice demands that the law shall not be used as a manipulating tool to subvert the natural principles of justice. The facts and the judgment The appellant in Donoghue sought to recover damages from the manufacturer of the drink that contained the remains of a decomposed snail. The drink was contained in an opaque bottle that did not provide any means of ascertaining or viewing its contents. The appellant suffered from shock and gastro-enteritis because she had already consumed part of the drink before the unwanted occupant floated out during a refill. The case posed a problem in that there was no previous case that had held that a manufacturer was under a liability to the consumer. However, this was overcome in the court below which had distinguished that the general principle, as stated in the previous sentence, was subject to two exceptions: (1) where the article itself was dangerous, per se or (2) the fact that the article was dangerous was known to the manufacturer. 3 Although the case concerned a manufacturer who had supplied products for consumption by the public, the principle of the duty of care was formulated not only to cover circumstances similar to the facts of Donoghue but to cover all instances, be it an employer providing safe equipment or materials for the use of workers that he had employed to carry out work on his premises 4 or a railway company which had contracted to carry a person from one place to another. It is arguable that in the two examples mentioned the fact that there is a contract may be raised to negate the possibility of an action in tort. The existence of a contract, it must be emphasized, does not prevent the existence of a duty of care between two parties independently of the contractual regime between them. The synthesis of the tort of negligence is this: as long as there has been neglect in the exercise of the ordinary skill and care by one person towards another, and the other, without contributory negligence on his part, has suffered injury either to his person or his property, he has an actionable claim in negligence. Based on this, the principle in Donoghue was formulated. The House of Lords referred to a number of cases but the following statement summarizes the duty of care situation adequately: That a manufacturer, or indeed the repairer of any article, apart entirely from contract, owes a duty to any person by whom any person by whom the article is lawfully used to see that ... the article ... is carefully constructed. All rights in contract must be excluded from consideration of this principle; such contractual rights as may exist in successive steps from the original manufacturer down to the ultimate purchaser are ex-hypothesi immaterial. Nor can the doctrine be confined to cases where inspection is difficult or impossible to introduce. This conception is simply to misapply to tort doctrine applicable to sale and purchase. The principle of tort lies completely outside the region where such considerations apply, and the duty, if it exists, must extend to every person who, in lawful circumstances uses the article made. There can be no special duty attaching to the manufacture of food apart from that implied by contract or imposed by statute. If such a duty exists, it seems to me it must cover the construction of every article, and I

cannot see any reason why it should not apply to the construction of a house. 5 Based on the above, an architect/engineer who acts as a contract administrator, apart from the contractual obligations that he owes to his employer by virtue of the conditions of his contract of employment, may concurrently be held liable in negligence towards third parties for issuing instructions negligently, 6 or for causing defects in the work which resulted in injury to third parties, 7 or for negligently assuring a subcontractor that he would be paid for the additional work that he had carried out, 8 or for giving assurances negligently and subsequently failing to act according to the assurances given, 9 and for issuing certificates negligently. 10 Coming back to the discussion of the House in Donoghue, Lord Atkin was extremely cautious when formulating the principle of duty of care and its subsequent extension. The extension of the principle or the obvious wider net of tort claims that were introduced were done with a preparedness that cannot be denied: Lord Atkin's tactfully phrased observation is worth reproducing: 11 But acts or omissions, which any moral code would censure, cannot in a practical world be treated so as to give a right to every person injured by them to demand relief. ... The rule that you are to love your neighbour becomes in law, you must not injure your neighbour;... Who is my neighbour ... persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. His Lordship then referred to the cases of Heaven v Pender 12 and Le Livre v Gould 13 and observed that: proximity ... not confined to mere physical proximity but be used, ... to extend to such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act. Relationship between the parties in tort claims? Tort claims are allowed although the parties are not related by contract. However, there has to be some relationship between the parties. The relationship issue was discussed in Heaven v Pender. 14 Brett MR, delivering his judgment in the Court of Appeal, used an interesting analogy of two drivers or two ships approaching each other. Assuming that they were approaching each other in such a manner as to give rise to a dangerous collision between them, then the parties were obliged to use such ordinary skill and care to avoid such a collision. It was this knowledge coupled with the subsequent action to avoid danger or injury that gave rise to a relationship between them. 15 The Master of the Rolls then applied his observation to formulate the general principle that was formulated in the case of Heaven: 16 Whenever one person is by circumstances placed in such a position with regard to another that every one of ordinary sense who did think would at once recognize that if he did not use ordinary care and skill in his own conduct with regard to those circumstances he would cause danger of

injury to the person or property of the other, a duty arises to use ordinary care and skill to avoid such danger. Applying the above, it becomes clear that a manufacturer, supplier, employer, contract administrator, contractor, sub-contractor and specialist contractors will all owe a duty of care to anyone they came into contact with, irrespective of whether there was a contractual relationship or not. Therefore, the principle to be applied would be as follows. A manufacturer or a repairer, for that matter, or even a builder or contractor, owes a duty to whoever uses the article or finished product or building, lawfully, to ensure that the article or finished product or building has been carefully constructed. Lord Buckmaster, in his dissenting judgment 17 in Donoghue agreed that it would involve formulating such a principle to allow the appellant's claim. He contended that this principle did not provide for the inclusion of any contractual rights or obligations, it existed independently of a contractual regime. He felt that such a course of action was not practical. 18 He therefore felt that such a principle would result in a misapplication of the tort doctrine to an otherwise ordinary sale and purchase transaction. However, if Lord Buckmaster had the authorities available today, he might have reached a different conclusion. This is due to the fact that he himself agreed that 'if a house be, as it sometimes is, negligently built, and in consequence of that negligence the ceiling falls and injures the occupier or anyone else, no action against the builder exists according to the English law, although I believe such a right did exist according to the laws of Babylon'. 19 The majority of the Lords, however, fortunately, agreed that the manufacturer was liable to the ultimate consumer. In a sense, Lord Atkin did voice the fear that such a course of action, finding a manufacturer liable to every ultimate consumer was not a practical move and might open the floodgates of litigation but on the other hand, he was guided by the fact that the limitations of law were impractical as well, especially where such limitations hindered a remedy sought by an injured party. It appears that Lord Atkin chose to base his argument on the biblical doctrine of 'Thou shalt love thy neighbour as thyself'. 20 The following statement by His Lordship prompts the writer to the conclusion as above: The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer's question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law, is my neighbour? The answer seems to be - persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. 21 Yes, as long as there is proximity! What then is proximity? Lord Atkin agreed with the principle in Heaven that a duty to take care would arise when the person or property was in such proximity to the person or property of another that if such due care was not taken, then there might be damage or injury as a result. His Lordship then took the definition of proximity a step further by stating that 'proximity be not confined to mere physical

proximity, but be used, ... to extend to such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act'. 22 This volatile statement has somehow not received the applause that it should have. Standing on its own, it makes every person involved in a building project liable for his acts or omissions, right from the planning authorities to the architect who finally certifies that the building is practically completed. There is no policy consideration or grounds to deny the effect of this statement as has been stated in the preceding sentence. Anyone who is in a proximate position to another person, irrespective of how much further down the line the ultimate person who used the product or who bought the house is, is responsible to carry out his obligation in a manner that reasonably would avoid injury to the person or damage to the property. As long as there is sufficient evidence to show that negligence had caused the injury or damage to the property, then the person or persons in such a proximate relationship would be responsible and liability would automatically attach. There is no doubt that sometimes certain cases may be such that it would be difficult to determine whether the degree of proximity was sufficient to found such liability. This is where the judges have to summon all their creativity in deciding when it is reasonable to decide that it was too remote, and when it was not too remote. This discretion in creativity, exercised judicially, will go a long way in ensuring that the development of the law keeps in line with upholding the confidence expressed by Lord Atkin in the law: I do not think so ill of our jurisprudence as to suppose that its principles are so remote from the ordinary needs of civilized society and the ordinary claims it makes upon its members so as to deny a legal remedy where there is so obviously a social wrong. 23 The discretion, however, has to be exercised cautiously, and not in such a way as to interpret the law in any wider terms than is necessary. As long as the principle of justice is upheld and remedy for a wrongdoer is not denied merely because the law does not seem to provide for it, then the discretion would have been judicially exercised. To allow a party to escape liability merely on the basis of a rule of law of 'caveat emptor' would no longer be good law considering the impact of the discussion and development of the law in this regard. Which now brings us to the discussion of the issue of recovery for pure economic loss claimed by a party on the basis that an act had been negligently performed. Economic loss 24 Pure economic loss has always posed an area of difficulty. It has not been possible for a party to recover for pure economic loss in tort in the absence of a special relationship of proximity 25 between the tortfeasor and the claimant whereby a duty of care would be imposed 26 on the tortfeasor to safeguard the claimant from economic loss. 27 The principle of liability for negligent acts and omissions in Donoghue was extended to cover responsibility for negligently-given misstatements in Hedley Byrne v Heller and Partners. 28 In that case, the defendant bankers were held liable for a negligent misstatement that caused the plaintiffs considerable loss of money. The plaintiffs had placed advertising orders with a company based on the defendant's representations as to the creditworthiness of the said company. They then encountered losses. The said representations were given negligently. However, the plaintiffs lost their claim merely because the defendant bankers had disclaimed responsibility for

the accuracy of the reference by way of an exclusion of liability clause. Such a disclaimer clause would not, now, be available for any defendant in a similar situation. Parliament subsequently enacted the Unfair Contracts Terms Act 1977 ('UCTA 1977') to provide that a person could not exclude or restrict liability in negligence where the cause of such negligence had resulted in injury to another or in the death of that other person. 29 The recovery that the plaintiffs were seeking was economic loss, ie not injury to person or property but loss of money. The case, therefore, created a further category of loss claimable in the tort of negligence. However, this was not a category to be easily contended with, ie the plaintiffs could not approach the courts, allege that they had suffered economic loss and expect the compensation to fall into their laps! Plaintiffs in this category faced a tough fight, as seen in Caparo Industries v Dickman, 30 where the plaintiffs were yet again unsuccessful for a claim in economic loss. This time the court held that although the information had been given and could be used by the plaintiffs, there had been no representation by the defendants that the information could be relied upon by the plaintiffs for the specific purpose that the plaintiffs had in mind. The plaintiffs had used the defendants' audited reports as a backing for the taking over of a company, and the court held that the defendants had not made a representation that their accounts were fair and true for the purpose for which the plaintiffs had subsequently used them, ie as a basis for the taking over of a company whose accounts had been audited by the defendants! It was no easy climb, it was more a painful trudge up a hill that seemed to have no end. But parties who suffer losses are extremely persevering, and refusing to be discouraged by the above two decisions, they continued to bring such claims to the courts until they finally achieved success in the case of Smith v Bush. 31 In Smith's case, the plaintiffs relied on the services of a valuation company when they wanted to purchase some property. The valuations were conducted negligently. As a result, the plaintiffs suffered considerable losses by paying far too much for houses that were worth much less than the amounts that had been actually paid. The defendants tried to defend themselves by relying on disclaimer clauses but unfortunately, by virtue of the UCTA 1977, their disclaimer clause was held to be invalid and the case was decided as if there were no disclaimer clause. Furthermore, the principle of reliance was clearly established here, as the parties knew that the plaintiffs were relying on the valuation reports prepared by the defendants. The House of Lords allowed the claim for recovery of pure economic loss suffered by the plaintiffs who had relied on the representations of the defendants. Therefore, there seems to be a slant in the right direction, ie the first case that came before the courts fell face down due to the presence of a disclaimer clause. Such a situation would not arise nowadays. Considering the second decision, the courts were reluctant to expand the theory of recovery for economic loss where the persons who supplied the information or relevant documents had made no clear representation. What cannot be denied is that the courts' approach have been cautious, and yet at the same time, it has paved the way for further development in this area of the law. It therefore comes as no surprise that one day such a plaintiff was bound to succeed and so it did in Smith v Bush. 32 The principle of recovery for economic loss was not seriously considered in respect of defective houses until the case of Dutton v Bognor Regis UDC 33 where the plaintiff, who was the second purchaser of a house, discovered soon after she moved in that there were serious defects in the internal structure of the building. Subsequent investigations revealed that the defects were caused by an inadequate foundation. The plaintiff sued the local council whose building inspector had

been negligent in failing to detect the defect at the early stage of the building works. The only issue before the Court of Appeal was whether the council was liable to the plaintiff for economic loss; such loss being the claim to the money she had to spend on the defective house. The Court of Appeal dismissed the appeal of the council and found in favour of the plaintiff/respondent, thereby creating a situation where it approved recovery of economic loss that was not consequent on any injury to person or damage to property. The third category of claims allowable under negligence was thus firmly established in this case: injury to self, damage to property of self or another and monetary loss that was not consequent on any injury to person or damage to property. Moving on? The House of Lords in Anns v Merton London BC 34 approved Dutton. In Anns, the House of Lords held that the council owed a common law duty of care to the plaintiffs for failing to carry out necessary inspection in approving the foundation. The House of Lords was faced with the dilemma of whether and how to impose a duty of care on the local authority, which was a public body, and had immunity for its acts or omissions. Lord Wilberforce neatly laid out the propositions of law in such a manner that one marvels at the excellence of the finished product. Starting with the concept of reasonableness 35 when considering to whom the duty should be owed, he went on to define the scope of the duty. The scope or nature of such a duty by the building inspectors was to secure compliance with the bylaws. This does not sound unreasonable, to say the very least, and it is something for local authorities to chew upon. The duty was not confined exclusively to the realm of local authorities and if a builder were shown to have performed his construction negligently, then he would be liable as well. Thus the duty was, or could be, apportioned accordingly between all those who were involved in the construction project. Lord Wilberforce 36 then finally concluded his argument by identifying the nature of damages recoverable, ie that the damages would include all that is foreseeable as a result of the breach of the said duty, and provided that causation was proved, these damages would include damages for personal injury and damage to property. Although the two cases above involve the liability of the local council, the House of Lords in Junior Books Ltd v Veitchi Co Ltd 37 dealt with the liability of specialist subcontractors to a subsequent owner of the building, with whom they had no contractual relationship. The plaintiffs were the owners of a factory. The defendants were specialist subcontractors in flooring. The floors were defective due to the defendants' negligence and the plaintiffs brought an action, claiming for the losses they had incurred in re-laying the floor. The House of Lords held that where there was proximity of relationship between the parties, the scope of the duty of care in delict or tort was not restricted to circumstances of avoiding foreseeable harm to persons or property. The duty extended to avoid causing pure economic loss consequential on defects in the work that had been carried out. However, the liberal view adopted by the House of Lords was not followed subsequently. It might be a worthwhile exercise to explore the judgment in Junior Books and then come to a conclusion as to whether the subsequent courts had done right in not following the said decision. The House of Lords discussed the 'liability in an indeterminate amount for an indeterminate time to an indeterminate class' statement that Cardozo CJ had introduced in Ultramares Corporation v Touche 38 as a reason for restricting claims in relation to pure economic loss. According to Lord Fraser of Tullybelton, he was clearly of the view that to refuse claims on the basis of the above

reasoning was 'unattractive, especially if it leads, as I think it would in this case, to drawing an arbitrary and illogical line just because a line has to be drawn somewhere'. 39 The floodgates argument may have been introduced but whether it should form the basis for all subsequent decisions, without considering other factors, has to be considered. Where there was sufficient proximity between the parties and where the injury or loss to one of the parties was a direct result of the negligence of the other party, then it was a case that ought to be allowed. Each case has its own particular facts, and reading the judgment of Lord Fraser only further signifies the point that the 'opening of floodgates' reasoning cannot be applied across the board to all cases where the parties are claiming for pure economic loss. Each case must be decided based on the surrounding circumstances. The New Zealand courts had in Bowen v Paramount Builders 40 held that a builder was liable for the negligent creation of a hidden defect which was a source of danger to third persons whom he ought reasonably to have foreseen as likely to suffer damage either in the form of personal injury or injury to property. 41 This decision of the New Zealand court was consistent with the holding of the court in Hedley Byrne & Co Ltd v Heller & Partners Ltd 42 that the scope of duty of care extended to cover situations where pure economic loss was foreseeable as likely to be suffered by a person who satisfied the test of the required proximity. From the arguments put forward by Lord Fraser, it therefore appears that restricting recovery for pure economic loss based on the said 'liability in an indeterminate amount for an indeterminate time to an indeterminate class' proposed by Cardozo CJ in Ultramares Corporation v Touche 43 should not have any real basis for application in the law of negligence today. In fact, the proposition by Lord Fraser has found its way into other Commonwealth jurisdictions. 44 Lord Keith of Kinkel concurred with Lord Fraser in dismissing the appeal. However, Lord Keith propounded the principle that where pure economic loss was being claimed, it could be allowed even where no injury had actually been caused. A person to whom such a duty was owed was entitled to recover for expenditure incurred in averting the danger and the measure of damages was the amount of the said expenditure incurred. 45 Subsequently, Lord Roskill, in tracing the development of the law in this regard, saw fit to peruse Commonwealth decisions and referred especially to the dissenting judgment of Laskin J in Rivtow Marine Ltd v Washington Iron Works 46 where the learned judge had posed the question, 'whether the defendant's liability for negligence should embrace economic loss when there had been no physical harm in fact' and gave an affirmative answer. 47 Therefore, one can conclude that the synthesis of rejection of claims for pure economic loss lay not upon established principles of law but rested upon what earlier judges had called the 'floodgates' argument. Should such an argument, especially one that has been referred to as 'specious' or 'in terrorem or doctrinaire' 48 be allowed to halt the development of the law? Law was made for man and not man for the law. From early times, the law has been modified, or expanded to ensure that a wrong is never without a remedy. Thus was the emergence of equity when the common law was rigidly curtailed by the writ system. An actionable wrong shall be capable of being remedied and any law that does not provide for such a remedy is long overdue for re-consideration. The extension of liability and approval of the House of Lords of claims relating to pure economic loss was subsequently curtailed. In Murphy v Brentwood District Council 49 the House of Lords expressly departed from Anns. Lord Keith at p 921 and 923 of the judgment, said: To start with, if such a duty (of care) is incumbent on the local authority, a similar duty must necessarily be incumbent also on the builder of the house. If the builder of the house is to be so subject,

there can be no grounds in logic or in principle for not extending liability on like grounds to the manufacturer of a chattel. That would open an exceedingly wide field of claims, involving the introduction of something in the nature of a transmissible warranty of quality. The purchaser of an article who discovered that it suffered from a dangerous defect before that defect had caused any damage would be entitled to recover from the manufacturer the cost of rectifying the defect, and, presumably, if the article was not capable of economic repair, the amount of loss sustained through discarding it. Then it would be open to question whether there should be a right to recovery where the defect renders the article not dangerous but merely useless. The economic loss in either case would be the same. There would also be a problem where the defect causes the destruction of the article itself, without causing any personal injury or damage to other property. A similar problem could arise, if the Anns principle is to be treated as confined to real property, where the building collapse when unoccupied. So far as policy considerations are concerned, it is no doubt the case that extending the scope of the tort of negligence may tend to inhibit carelessness and improve the standards of manufacture and construction. On the other hand, overkill may present its own disadvantages. The engineers in Murphy had designed plans for the local council. The council, relying on their advice, approved the plans without realizing that the engineers had not taken into account calculation errors in the design. The house was built with a defective foundation and while the plaintiff was occupying the house, the foundation cracked and there was extensive damage to the house. Instead of repairing the house, the plaintiff sold the house for less than the market value and claimed the difference as damages caused due to the negligence of the council. It was held that the expense incurred by the subsequent purchaser to repair the house was pure economic loss. The council was not liable to the first purchaser for the losses he had incurred by the sale. 50 This contention did not find favour in Australia. 51 Disclaimer clauses - valid? Where the parties had voluntarily accepted responsibility, the presence of an exclusion clause may negate liability. In Pacific Associates v Baxter 52 the claim was that the engineer had been negligent in two respects; first, in rejecting the contractors" claim on interim certification and secondly, when giving a decision under the terms of a FIDIC contract. It was held that although the defendants were employed to supervise the work, they were acting solely for the employer and did not owe any duty to the plaintiffs to exercise due care to ensure that the plaintiffs did not suffer economic loss. In arriving at its decision, the court was guided by two considerations. First, there was an express disclaimer clause, which showed that the defendants had expressly declined to accept any responsibility to the plaintiffs for any loss under the contract. So the court was faced with the task of imposing a duty of care which would allow the plaintiffs to claim against the defendants in negligence. Before such a duty of care could be imposed, the plaintiffs were bound to show foreseeability of harm, proximity and to satisfy the court that it was just and reasonable to impose such a duty on the defendants.

Second, the court was guided by the public policy aspect, which expects the court to find it just and reasonable to impose such a duty. Where the parties had come together against a contractual structure which provided for compensation in the event of breach by one party, then the court would be slow to superimpose an added duty of care beyond that which was in the contemplation of the parties at the time of execution of the contract. That the courts were reluctant to impose this duty of care was also seen in Edgeworth Construction v Lea & Associates, 53 where the court was willing to follow the principle of contractual relationships and proximity rather than imposing the duty of care principle. However, the difficulty of balancing two actions and trying to prefer one in favour of the other was settled in Henderson and Merrett v Feltrim Underwriting. 54 In that case, the House of Lords held that a duty of care was not excluded by virtue of the relevant contractual regime. Parties were free to pursue remedies either in contract or in tort. The fact that the duty was delegated did not alter the implicit promise that reasonable care and skill would be exercised in carrying out the obligations under the agreement. The managing agents, in that case, were under a similar, though non-contractual, duty to the principals and this did not alter the obligations that the members' agents had agreed to assume by their bargain. However, this aspect of concurrent liability in contract and tort must not be carried to extremes. In Barclays Bank plc v Fairclough Building Ltd(No 2), 55 the bank had two warehouses repaired and renovated by building contractors. The building contractors employed subcontractors to do part of the work to the roof, who in turn, employed sub-subcontractors to carry out cleaning works to the roof. The sub-subcontractors carried out cleaning works to the roofs which resulted in a serious situation causing danger to health and the cost of rectifying this danger was an enormous sum of £3.89 million. A number of issues came up before the Court of Appeal, one of which was whether the sub-subcontractors were entitled to indemnify the subcontractors for the amounts paid to the building contractors. The Court of Appeal held that the sub-contractor's claim for a contractual indemnity should be reduced by half to take account of their own negligence in failing to be aware of potential problems of employing sub-subcontractors. The question was now whether the sub-subcontractors were liable in pure economic loss. Beldam LJ held that the sub-subcontractors' contractual agreement to take on the job was sufficient to found the principle that they had 'assumed responsibility' for it and this was, of itself, sufficient to found 'reliance' by the client. Thus they were liable in contract (to the subcontractors) and in tort, although not to the full extent of the indemnity claimed by the subcontractors. 56 The commonwealth development It is apparent that now there is a conflict between the UK and other Commonwealth decisions relating to claims in recovery for pure economic loss. Commonwealth jurisdictions have taken their own path in dealing with cases concerning economic loss without resorting to English decisions as the invariable starting point. Only time can tell who is on the right path and as to when that might be is a million-dollar question. The High Court of Australia in Bryan v Maloney 57 held that under the law of negligence, a professional builder who constructed a house for the then owner of the land owed a prima facie duty to a subsequent owner of the house, the nature of such duty being that of exercising

reasonable care to avoid the kind of foreseeable damage that the respondent in the present case had sustained. The respondent, in the instant case, had suffered damages that amounted to a diminution in the value of the house when a latent and previously unknown defect in its footings or structure had subsequently become manifest. The court held that a clear relationship of proximity existed between the appellant and the first owner with respect to ordinary physical injury to self or property. He was, therefore, under a duty to exercise reasonable care in the building work to avoid a foreseeable risk of such injury. That relationship of proximity and consequent duty of care extended to mere economic loss sustained by the first owner when the inadequacy of the footings became manifest. The policy considerations underlying the reluctance of courts, in general, to recognize a relationship of proximity and a consequential duty of care in cases of mere economic loss were largely inapplicable to the relationship between a builder and a subsequent owner as regards this particular kind of economic loss, ie the diminution in value of a house when the inadequacy of its footings first became manifest as a result of consequent damage to the fabric of the house. Brennan J, who dissented with the majority view of the Australian court, however, declined to classify defects in a building as pure economic loss but rather as physical defects. He therefore concluded that the cost of rectification of such defects was consequent on their existence. The defects are not physical damage the foreseeability of which gives rise to a prima facie duty of care, but it does not follow that the cost of rectifying such physical defects in order to improve the quality of the building is pure economic loss which may attract an award of damages for negligence. The damages awarded to the respondent were not for pure economic loss. 58 In Invercargill City Council v Hamlin, 59 the New Zealand Court of Appeal held that councils were liable to house owners and subsequent owners for defects caused by the building inspectors" negligence. The court observed that in New Zealand there was a relationship incorporating a duty of care because of the degree of reliance by house owners on councils to ensure compliance with building codes and full recognition of that reliance by local authorities. The court refused to follow Murphy and D & F Estates Ltd, the reasons being: (a) The New Zealand Court of Appeal is entitled to develop the common law of New Zealand according to local policy considerations in areas of common law which are developing; and (b) The perception in New Zealand is that the community standards and exception demanded the imposition of a duty of care on local authorities and builders alike to ensure compliance of by-laws, and the Court of Appeal of New Zealand has built up a long line of authority based on link concept of control by the local authority of building works through the enforcement of its by-laws, and reliance on that control by the purchaser. 60 Liability for negligence is not a new phenomenon in the law of New Zealand. In a case decided 20 years ago, Bowen and Anor v Paramount Builders (Hamilton) Ltd and Anor, 61 a number of principles were established, inter alia, that a claim for damages for the loss in value of the building even after all possible remedial work had been done was sustainable, even though it could be described as an economic loss, not pure economic loss, but economic loss which caused or threatened physical harm to the structure itself.

The court drew a distinction between pure economic loss and economic loss that is quantifiable. If the evidence can show that the defect was in the foundations, and that defect caused actual physical damage to the building, and the associated effect of that damage was a contributing factor in the depreciation of the building, then it would not be a claim for pure economic loss but one based on defects 62 and naturally recoverable. The existence of the Defective Premises Act 1972 is a vital distinguishing point between UK and New Zealand. Both Anns and Murphy considered the Defective Premise Act 1972 and used the Act as a basis for coming to their decisions (policy considerations were based on the provisions of the said Act). In New Zealand, therefore, the Act that was considered was the Building Act 1991 which provides that local authorities will remain liable to homeowners affected by the negligent administration of building control. In Winnipeg Condominium Corp No 36 v Bird Construction Co Ltd, 63 a developer entered into a contract with a general contractor called Bird Construction Ltd to construct an apartment block. Works were carried out according to plans drawn by the architects. A subcontractor installed the external cladding. The plaintiff, a subsequent owner of the apartment, had to repair a section of the cladding that fell. He claimed from the contractor, the architects and the subcontractor. The Supreme Court of Canada recognized that the negligence posed 'a real and substantial danger' to the occupants of the building and that the cost of putting the building back into a non-dangerous state was recoverable in tort by the occupants, the rationale being that persons participating in the construction of a large and permanent structure which has the capacity to cause serious damage to other persons or property should be held to a reasonable standard of care. 64 The court, adopting the minority view expressed in Rivtow Marine Limited v Washington Iron Works and Walkern Machinery & Equipment Ltd, 65 held that plaintiffs who discovered a dangerous defect should not be disadvantaged by its immediate repair before any accident occurs. On the issue of proximity, it was held that the common law duty of care created by a relationship of sufficient proximity was not confined to relationships that arose apart from contract. In arriving at this conclusion, the court was guided by the dictum of Lord Macmillan in Donoghue 66 and Junior Books Ltd v Veitchi Co Ltd. 67 Conclusion The duties undertaken by contract would indicate the nature of the relationship that had given rise to the common law duty of care. The nature and scope of the duty of care that was the foundation of the tortious liability must not or should not depend on specific obligations or duties created by the express terms of the contract. A claim cannot be said to be in tort if it were to depend, for the nature and scope of the asserted duty of care, on the manner in which an obligation or duty was expressly and specifically defined by a contract. An unfortunate result of such reasoning would leave a subsequent purchaser with no remedy against the contractor who constructs the building with substandard materials and by employing substandard skills. Subsequent purchasers are put at considerable risk. With the recent developments in the Commonwealth, and with the recent decision of the Court of Appeal in Henderson, it is timely for the English courts to take a second look at the 'settled law' in relation to economic claims as stated in Murphy. What must always be a guiding factor for all judges and lawyers when faced with cases of economic loss or cases that fall squarely within the fact scenario of Murphy is to reflect upon the words of Lord Atkin:

I do not think so ill of our jurisprudence as to suppose that its principles are so remote from the ordinary needs of civilized society and the ordinary claims it makes upon its members as to deny a legal remedy where there is so obviously a social wrong. The questions before a court may be as follows: (a) Are we living in a civilized society? (b) The claims that are being made, are they real claims brought by a party who has truly suffered a loss due to another's inaction or poor action? Or are such claims merely frivolous and vexatious? (c) Is it necessary that, in order to reflect a civilized society, such claims ought to be brought? And entertained by the courts? (d) Are such claims the result of a social wrong? (e) Are the claimants, as members of a civilized society, entitled to a legal remedy? (f) Are the providers of the legal remedy to be allowed to deny the seekers of the remedy merely because public policy and political dictates demand otherwise? Return to Text FOOTNOTES: n1 [1932] AC 562, hereafter referred to as Donoghue. The case was an appeal against an interlocutor of the Second Division of the Court of Session in Scotland and the appeal was heard in the House of Lords. The House comprised Lord Atkin, Lord Thankerton and Lord Macmillan, who delivered concurring judgments allowing the appeal and Lord Buckmaster and Lord Tomlin, who delivered dissenting judgments. n2 Ibid, at p 583 of the judgment. n3 In Langridge v Levy2 M & W 519, a man sold a gun to a person who bought the gun for his son. The seller knew that the gun was dangerous for the use of the purchaser's son. The gun subsequently exploded in the boy's hands and it was held that there was a right of action in tort as against the gun-maker. n4 Heaven v Pender (1883) 11 QBD 503. n5 At p 577 of the judgment in Donoghue. n6 See Clayton v Woodman & Son [1962] 2 QB 533, where an architect was held liable at first instance for negligently issuing instructions which resulted in personal injury to the plaintiff bricklayer. Although the decision was reversed on appeal later, it was on different facts. The

liability of the architect was not disputed. For the decision of the Court of Appeal, please refer to [1962] 1 WLR 585 (CA). n7 See Clay v AJ Crump and Sons Ltd [1964] 1 QB 533 where a builder"s labourer was injured as a result of the architect"s negligence and his claim for damages against the architect was successful. Similarly, an architect was liable to compensate a person who was injured while using a stage which collapsed due to under-designing of the floor joists in Voli v Inglewood Shire Council[1962-1963] 110 CLR 74. n8 See Day v Ost[1973] 2 NZLR 385 where the plaintiff was a blocklaying and plastering subcontractor who stopped work because he did not receive any payment. The defendant architect was aware of the financial position under the head contract, whereby there was no provision for any payment in excess of the total contract price, and requested the plaintiff to resume work and assured him that the progress payment would be paid and that there were ample funds to cover the balance of his price. The defendant"s representation that there was plenty of money available to cover the amount payable to the plaintiff was incorrect and negligent. n9 See Townsend (Builders) Ltd v Cinema News & Property Management Ltd[1959] 1 All ER 7 where the architect promised the contractor that he [the architect] would serve all the necessary notices as required by a certain by-law and assured the contractor that he could safely proceed with the work. The contractor, relying on the architect"s assurance, proceeded with the work. Subsequently, he was held liable to the proprietor for failing to comply with a by-law. The architect was held liable in negligence to the contractor. n10 See Michael Sallis and Company Limited v ECA and Calil and Others(1988) 4 Const LJ 125, where the architects were held liable to the contractors for certifying an extension of time of only 12 weeks and not doing so with due speed and efficiency that was required. See also Lubenham Fidelities and Investment Company Limited v South Pembrokeshire District Council(1986) 33 BLR 39, where the architect had failed to exercise reasonable care when issuing certificates and in administering the contract as a whole. n11 At p 580 of the judgment in Donoghue. n12 (1883) 11 QBD 503. n13 [1893] 1 QB 491. n14 (1883) 11 QBD 503. n15 Ibid, at p 508 of the judgment.

n16 Ibid, at p 509 of the judgment. n17 See Donoghue [1932] AC 562 at p 577, where Lord Buckmaster reviewed the authorities and found that they did not support the appellant's contention. He felt that, considering the authorities which dealt with dangerous or defective products and articles, and the danger or defect was known to the manufacturer, they did not apply to the case at present. His Lordship declined to follow the decision in George v Skivington LR 5 Ex 1 or the dicta in Heaven v Pender(1883) 11 QBD 503, but instead opted to follow the reasoning of the court in Bates v Batey & Co Ltd [1913] 3 KB 351, where the defendants who were ginger beer manufacturers were held not liable to a consumer for injury sustained as a result of the bottle bursting. n18 'All rights in contract must be excluded from consideration of this principle; such contractual rights as may exist in successive steps from the original manufacturer down to the ultimate purchaser are ex hypothesi immaterial. Nor can the doctrine be confined to cases where inspection is difficult or impossible to introduce. This conception is simply to misapply to tort doctrine applicable to sale and purchase': at p 577 of the judgment. n19 The position of apportioning liability and ensuring that negligent builders are brought to book has been actively propagated, especially in the Commonwealth. Whether England would subsequently give in to the pressure exerted by the Commonwealth decisions remains yet to be seen. n20 Matthew 19:19, King James Version of the Holy Bible, states as follows: '...Thou shalt love thy neighbour as thyself'. n21 At p 580 of the judgment in Donoghue. n22 At p 581 of the judgment in Donoghue. n23 Somehow, the truth expressed in this statement is so preciously true and yet so easily overlooked, the writer feels compelled to repeat this note, even at the risk of being accused of repeating herself. A truth can never be repeated oft enough. n24 See also Grace Xavier, 'Dr. Abdul Hamid Abdul Rashid & Anor v Jurusan Malaysia Consultants(sued as a firm) & Ors [1997] 3 MLJ 546: Breakthrough for Recovery in Pure Economic Loss?' [1998] 3 MLJ, pp xxvi - xlviii, for a further discussion of this topic and the Commonwealth position in relation to this type of loss. n25 Although it is arguable that there is sufficient proximity of relationship between the contractor and the architect by virtue of the supervisor-worker situation, it is not sufficient to establish the degree of proximity required to impose a duty of care upon the architect. Merely

because the architect accepts the contractual framework of a construction contract does not mean that he is under such a duty to the contractor. In the absence of a direct contractual relationship with each other, a duty of care in tort would not extend to cover a situation whereby the parties are brought together by a contractual framework or chain; Pacific Associates Inc. v Baxter[1990] 1 QB 993 CA. n26 It is not in every situation that the court will impose a duty of care upon a party. Before such a duty of care is held to exist, the court must find it just and reasonable to impose such a duty. In a building contract, the parties to the contract are the employer and the contractor. The contract itself provides for compensation to be payable in the event of breach of either party. In such a situation, the court will be slow to superimpose an added duty of care upon the architect who is brought in by the contractual structure, which already provides for compensation in the event of a breach. n27 See Murphy v Brentwood District Council[1990] 3 WLR 414, 435. n28 [1964] AC 465. n29 Sections 1 and 2 of the UCTA 1977. n30 [1990] 2 AC 605. n31 [1990] 1 AC 831. n32 [1990] 1 AC 831. n33 [1972] 1 QB 373. n34 [1978] AC 728. n35 A reasonable man in the position of the inspector must realize that if the foundations are covered in without adequate depth or strength as required by the bylaws, injury to safety or health may be suffered by owners or occupiers of the house: at p 758 of the judgment in Anns. n36 The judgment in Anns has very often been quoted by other judges as one that lays down a two-test formula. Lord Wilberforce in Anns had stated that the question of whether a duty of care exists had to be approached in two stages. 'First, one has to ask whether as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter - in which a prima facie duty

of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or reduce, or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise:' cited by Lord Roskill in Junior Books v Veitchi[1983] 1 AC 520, 541-542. n37 [1983] 1 AC 520. n38 (1931) 174 NE 441, 444. n39 Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520, 532. n40 [1977] 1 NZLR 394. n41 The court referred to A C Billings & Sons Ltd v Riden[1958] AC 240 where the negligence of the contractor resulted in personal injury to a visitor. In that case, the general principle that contractors, architects and engineers were all subject to a duty to use reasonable care to prevent damage to persons whom they should reasonably expect to be affected by their work was recognized. n42 [1964] AC 465. n43 (1931) 174 NE 441, 444. n44 For a discussion of the Commonwealth decisions, refer to p lxxx, infra. n45 At p 535 of the judgment in Junior Books, Lord Keith approved the case of Anns v Merton London Borough Council[1978] AC 728 and concluded that such was the principle that was the basis of the decisions in Dutton v Bognor Regis Urban District Council[1972] 1 QB 373 and Batty v Metropolitan Property Realisations Ltd[1978] QB 554. n46 (1973) 40 DLR (3d) 530. n47 At p 549 of the judgment. n48 As per Cooke J in Bowen v Paramount Builders (Hamilton) Ltd [1977] 1 NZLR 394, 422. n49 [1990] 3 WLR 414.

n50 Ibid, at p 415. Per curiam: Such extension of principle would necessarily extend also to the builder of the house and would logically also extend to the manufacturer of a defective chattel. There is much to be said for the view that in what is essentially a consumer protection field the precise extent and limits of the liabilities that in the public interest should be imposed on the builders and local authorities are best dealt with by the legislature. n51 Bryan v Maloney [1995] 2 CLJ 503. n52 [1990] 1 QB 993. n53 (1991) 54 BLR 11. n54 [1995] 2 AC 145. n55 [1995] IRLR 605. n56 Simon Whittaker, 'The Application of the 'Broad Principle of Hedley Byrne' as between parties to a contract', (1997) 17 LS 169. n57 [1995] 2 CLJ 503. n58 Ibid, at pp 504-505. n59 [1994] 3 NZLR 513. n60 Dr Abdul Hamid Abdul Rashid v Jurusan Malaysia Consultants [1997] 3 MLJ 546 at p 561. n61 [1977] 1 NZLR 394. n62 Ibid, p 417. n63 Unreported decision delivered by the Supreme Court of Canada on 26 January 1995. n64 Ian Duncan Wallace, QC in 'Murphy Rejected: Three Commonwealth Landmarks', (1995) 11 Const LJ 249-253, 250.

n65 [1974] SCR 1189, 1217. The majority of the Supreme Court endorsed the view that liability for the cost of repairing damage to the defective article itself and for the economic loss flowing directly from the negligence, is akin to liability under the terms of an express or implied warranty of fitness and as it is contractual in origin, it cannot be enforced against the manufacturer by a stranger to the contract. However, Laskin J at p 1222 of the judgment dissented and his argument was as follows: 'The case is not one where a manufactured product proves to be merely defective (in short, where it has not met promised expectations), but rather one where by reason of the defect there is a foreseeable risk of physical harm from its use and where the alert avoidance of such harm gives rise to economic loss. Prevention of threatened harm resulting directly in economic loss should not be treated differently from post-injury cure'. n66 [1932] AC 562. The dictum of Lord Macmillan is found at p 610 of the judgment and reads as follows: 'The fact that there is a contractual relationship between the parties which may give rise to an action for breach of contract does not exclude the co-existence of a right of action founded on negligence as between the same parties, independently of the contract, though arising out of the relationship in fact brought about by the contract. Of this, the best illustration is the right of the injured railway passenger to sue the railway company either for breach of the contract of safe carriage or for negligence in carrying him... And there is no reason why the same set of facts should not give one person a right of action in contract and another person a right of action in tort.' n67 [1983] 1 AC 520. This case held that a common law duty of care may be created by a relationship of proximity that would not have arisen but for a contract. This is the first te selectedText,doc

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