Economic Loss
Cases
Irish Paper Sacks Ltd v John Sisk & Son (Dublin) Ltd
(18 May 1972) O’Keeffe P:
The plaintiffs in this action claim damages for negligence of the defendants who are building and civil engineering contractors. The plaintiffs have their factory at Ballymount Road, Walkinstown, Dublin. They manufacture paper sacks. Their machines are powered by electric current, which is brought to the factory by underground cable. On 23 November 1970, there was a failure of the electric power, due to a break in the underground cable. The cable was not restored until the morning of25 November, and in the meantime the plaintiffs had to cease production. They claim that their loss amounts to £270 for labour, £650 for overheads, and £263 for loss of profit, giving a total of
£1,183. These figures were not questioned.
The plaintiffs gave evidence that about the end of 1969 or early 1970 a factory for O’Dea & Co Ltd was nearing completion, and it became necessary to rearrange the supply of electricity of the factories at Ballymount Road, where there are a number of factories on an industrial estate. It was agreed that the defendants should excavate a trench in which the cable would be run. The trench was excavated to a depth of about 2 feet, which should afford adequate cover for the cable. The cable was laid about March of 1970. It was a very strong cable, and well protected. At the point where the cable ran under the line of an intended access road to the site, the cable was carried in concrete ducts, as an additional protection.
When the power failure occurred the approximate point of breakage was established. It was about one-third way across the access road, and in a place where the cable ran through the ducts. An attempt was made to pull away the damaged cable, but the duct had been so damaged that the cable could not be withdrawn. A second duct was also blocked. Mr Fanning, the ESB engineer in charge of the area, who was responsible for the laying of the cable, expressed the view that the damage must have been caused by a bulldozer used to excavate the area for the laying of a concrete access road over the site of the cable. He thought it likely that the bulldozer gripped the cable and pulled it and damaged the insulation. This was, in his view, done when the excavation was being carried out, with the result that, the insulation being damaged, the cable ultimately failed as a result of a percolation of water. He agreed that the bulldozer driver would be aware ofit, if his machine caught the cable as suggested.
The defendants called their general foreman on the site, Mr Albert Kavanagh, who said that after the cable was laid, the ESB covered it over for a depth of about six inches, and the defendants then backfilled by machine, which merely pushed the soil into the trench. This machine worked along the trench, travelling astride the trench, and would not have damaged the cable or the ducts. The road was concreted in June, but no machine worked in the area after the month of March, when the trench was filled in.
The defendants argued that the plaintiffs’ claim must be dismissed on two grounds; first, the claim was for economic loss directly caused only, and not for damage to the plaintiffs’ property, and secondly, the plaintiffs had not established any negligence on the part of the defendants.
In support of the first ground reference was made to Weller & Co v Foot and Mouth Disease Research Institute [1965] 3 All ER 560; Electrochrome Ltd v Welsh Plastics Ltd [1968] 2 All ER 205; Elliot v Sir Robert McAlpine & Sons Ltd [1966] 2 L1 LR 482, and SCM Ltd v Whittall & Son Ltd [1970] 2 All ER 417, [1970] 3 All ER 245. Reference was also made to Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. The principle to be derived from these cases is that a plaintiff suing for damages suffered as a result of an act or omission of the defendant cannot recover if the act or omission did not directly injure the plaintiff’s person or property, but merely caused consequential loss.
Aftera full consideration of the matter I think that I must apply the principle of the cases cited above. For this reason I must hold that the plaintiffs in this action are not entitled to succeed.I consider, further, that the plaintiffs have failed to establish that the
injury to the cable was caused by any act of the defendants, and on this ground, also, the defendants are entitled to succeed.
McShane Wholesale Fruit and Vegetables Ltd. v. Johnston Haulage Company Ltd.
[1996] IEHC 57 [1997] 1 ILRM 86
Flood J.
1. This matter comes before this Court by way of notice of appeal from the whole of the judgment of the Circuit Court given on 14 December 1993.
2. The plaintiff’s complaint in the indorsement of claim on the civil bill herein is:-
4. The plaintiff was at all material times the occupier and carrying on business from the premises 106 Castleforbes Industrial Estate, East Wall, Dublin 1 which said premises adjoins the premises situated at No. 2 Castleforbes Industrial Estate which at all material times was under the occupational control of the defendants herein in each one or other of them their servants and agents.
5. On or about 18 February 1991 a serious fire occurred on the defendants’ said premises as a result of which the plaintiff’s premises suffered a loss of electrical power in consequence of which it suffered loss and damage in carrying out its wholesale fruit and vegetable business.
6. The said fire and consequent loss of power to the plaintiff’s said premises was occasioned by reason of the negligence and breach of duty, including statutory duty and/or a nuisance of the defendants, their servants or agents.
Particulars
(a) Causing or permitting a fire to take place on their said premises.
(b) Causing or permitting dangerous and inflammable substances to be stored on their said premises.
(c) Storing the said substances in close proximity to bales of paper and other combustible materials.
(d) Failing to take any or any adequate measures whether by way of periodic or other examination, inspection, test or otherwise to ensure that a fire would not occur on their said premises.
(e) Failing to take any or any adequate precaution to ensure that the said fire would not spread to and cause damage to the plaintiff and its said premises.
And finally,
(f) Failing to comply with the provisions of the Dangerous Substances Act 1972 and regulations made thereunder.
7. Further or in the alternative, the defendants their servants or agents failed to adequately ensure that the said premises would not constitute a fire hazard having regard in particular to the storage of dangerous inflammable substances whereof they thereby maintained a public nuisance by reason whereof the said fire occurred thereby causing damage and expense to the plaintiffs company.
3. The defendants and each of them filed defences which may be generally described as being traverses of the allegations of fact, a plea that the loss or damage was not reasonably foreseeable and was too remote and a plea by way of estoppel on the premises that the said fire was an accidental fire and that in consequence no cause of action arose therefrom and there is an estoppel from maintaining the claim pursuant to s. l (l)(a) of the Accidental Fires Act 1943.
4. On the matter being opened in this Court, I was advised that the plaintiff and defendants had agreed that I should try a preliminary issue as to whether economic loss consequent on a negligent act is recoverable as damages, within this jurisdiction.
5. In Ireland since the Supreme Court decision in Ward v. McMaster [1988] IR 337; [1989] ILRM 400, the test for actionable negligence is:-
(a) A sufficient relationship of proximity between the alleged wrongdoer and the person who has suffered damage.
(b) Such relationship that in the reasonable contemplation of the former carelessness on his part may be likely to cause damage to the latter – in which case a prima facie duty of care arises.
Subject always to any compelling exemption based on public policy.
6. McCarthy J stated the position as follows at pp. 349/409:-
. . . I prefer to express the duty as arising from the proximity of the parties, the foreseeability of the damage and the absence of any compelling exemption based on public policy. I do not in any fashion seek to exclude the latter consideration although I confess that such a consideration must be a very powerful one if it is to be used to deny any injured party his right to redress at the expense of the person or body that injured him.
7. The quality of the damage does not arise. It can be damage to property, to the person, financial or economic – see Sweeney v. Duggan [1991] 2 IR 274. The question as to whether the damage (of whatever type) is recoverable is dependent on proximity and foreseeability subject to the caveat of compelling exemption on public policy.
8. In short, the proximity of the parties giving rise to the duty of care must be such, as a matter of probability to be causal of the damage. If it is not, the damage is too remote and the action will fail. It will fail not because the damage is of a particular type but because the relationship between the wrongdoer and the person who suffers the damage does not have the essential of sufficient relationship of proximity or neighbourhood.
9. It therefore follows that the fact that the damage is economic is not in itself a bar to recovery where the other elements above stated are present.
10. Whether the damage in this instance is or is not too remote is a question of fact to be determined on evidence.
Sweeney v. Duggan
[1997] 2 IR 531
Murphy J.
To explain the nature of the dispute between the parties to these proceedings it is necessary first to identify Kenmare Lime Works Ltd. (the company) and analyse to some extent its structure and business operations.
The company was incorporated in or about the year 1976 and had an issued share capital of £19,000 of which 18,999 shares were held at all relevant times by the above defendant Dennis Duggan and the remaining one issued ordinary share was held by his wife Mrs. Eileen Duggan. It appears that the defendant was the managing director of the company and Mrs. Duggan the secretary thereof.
The company was the owner of a limestone quarry at Kilpadder, County Kerry, which it operated, subject to some disruptions, until it was wound-up in a creditors voluntary winding up pursuant to resolution in that behalf passed in the month of August, 1987, and by which Mr. Eoin Clayton was appointed liquidator thereof.
The liquidator gave evidence to the effect that the accounts of the company showed a loss of approximately £10,000 for the year 1982, and a loss of £30,000 for the year 1983. The liquidator was satisfied that proper books and accounts were kept for the years up to the year 1984, but thereafter the books and records of the company were destroyed by a fire which occurred in that year. The losses incurred by the company were explained in part or in whole by the withdrawal of subsidies on lime with the consequent decrease in user of lime by farmers. As a result of the losses it was established, by the accounts for the year 1983, that the net assets of the company were less than half of the company’s issued share capital.
The Mines and Quarries Act, 1965, imposes numerous and detailed provisions on the owner of a quarry to ensure the safety, health and physical welfare of persons employed in quarrying operations. Any breach of those provisions constitutes a criminal offence and is punishable accordingly. A statutory system is set up for the inspection of quarries by officers appointed for that purpose by the relevant minister. A particular provision, s. 23, requires that an individual be appointed to the statutory position of quarry manager. That manager has the statutory duty of supervising the operations in the quarry and ensuring the compliance with the provisions of the Act of 1965. The post of quarry manager of the company was at all material times held by the defendant.
The above named Daniel Sweeney (the plaintiff) is about 65 years of age. He commenced working with the company as a labourer or unskilled operative in the mid seventies. On the 18th February, 1984, whilst operating a drill in the company’s quarry he met with an accident as a result of which he suffered a significant injury to his leg. On the 24th September, 1984, he instituted proceedings against the company claiming damages for those personal injuries which he alleged were caused by the
negligence and breach of statutory duty of the company. Those proceedings came on for hearing on the 15th October, 1987, when the plaintiff was awarded a sum of £20,866 damages against the company. In the meantime the plaintiff had returned to work with the company in or about March, 1985, and had continued working with the company until it ultimately ceased operations in the year 1986. Whilst an employee of the company had informed the plaintiff immediately after the accident that the company was insured against liability for accidents the plaintiff was advised about the time he returned to work in March, 1985, that no such insurance existed.
It was clear from the evidence given by the liquidator that the company will not be able to pay its creditors, even its preferential creditors, in full. It is anticipated that the plaintiff may receive a dividend amounting to approximately £4,500 on his preferential claim of £20,866. In addition the plaintiff has recovered or will recover a small but unspecified sum on foot of a policy of insurance which he himself had taken out at his own expense in respect of the injuries suffered by him.
The present proceedings were commenced by the plaintiff against the defendant by plenary summons issued on the 1st March, 1989. On behalf of the plaintiff it was contended; first, that the company as the employer of the plaintiff had a duty, in all of the relevant circumstances, to procure employers’ liability insurance to meet any claim which the plaintiff might have for damages for personal injuries or, failing that, to warn the plaintiff that no such policy was in existence, and, secondly, that the defendant had a duty to ensure that the company obtained and maintained such a policy of insurance or the alternative obligation to warn the plaintiff that this course had not been adopted.
It was asserted on behalf of the plaintiff that the obligations aforesaid in so far as they fell upon the company derived primarily (and perhaps exclusively) from the contractual relationship between the employer and the employee. It was contended that the particular obligation to insure the company against liability (or in default to warn the plaintiff) was an implied term of the employment contract.
In the amended written submissions to this Court the plaintiff contended that such a term should be implied having regard to a variety of matters which included the following:
(1) The company’s business, quarrying, was said to be exceptionally dangerous.
(2) At the time of the accident, the company’s finances were precarious.
(3) The plaintiff had insured himself to a “small extent” against loss covered by injuries sustained in the course of his employment.
Whilst there may be room for argument as to the degree of danger involved in the business carried on by the company or the extent of its financial difficulties in or around the time of the accident there is no doubt that evidence was adduced before the learned trial judge to the effect that the accident rate in quarries is approximately eight times the rate on building sites generally and furthermore there was evidence of substantial losses incurred by the company in the years immediately prior to the accident albeit due to no fault of the company or its management. Moreover it was asserted that the plaintiff was a man of modest means and education who was not represented by a trade union in any negotiations he had with the company or the defendant. The question is whether in these circumstances, and accepting that each of the factors aforesaid existed and assuming that they existed to the highest degree for which the plaintiff might contend, a term such as that for which the plaintiff argues would be implied in the contract of employment.
There are at least two situations where the courts will, independently of statutory requirement, imply a term which has not been expressly agreed by the parties to a contract. The first of these situations was identified in the well-known case, The Moorcock (1889) 14 P.D. 64 where a term not expressly agreed upon by the parties was inferred on the basis of the presumed intention of the parties. The basis for such a presumption was explained by MacKinnon L.J. in Shirlaw v. Southern Foundries (1926) Ltd. [1939] 2 K.B. 206 at p. 227 in an expression, equally memorable, in the following terms:
“Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course’.”
In addition there are a variety of cases in which a contractual term has been implied on the basis, not of the intention of the parties to the contract but deriving from the nature of the contract itself. Indeed in analysing the different types of case in which a term will be implied Lord Wilberforce in Liverpool C.C. v. Irwin [1977] A.C. 239 preferred to describe the different categories which he identified as no more than shades on a continuous spectrum.
The relevance of the presumed intention of the parties differs in different cases. This is dramatically illustrated in Liverpool C.C. v. Irwin [1977] A.C. 239. In that case the court was asked to infer a term in a contract between the Liverpool City Council and its tenants to the effect that the Council would maintain and repair the lifts and chutes in an apartment block. Roskill L.J. speculated as to what the reaction of the Liverpool City Council would have been if one of the tenants has said: “I suppose that the council will be under a legal liability to us to keep the chutes and the lifts in working order and the staircases properly lighted”and he concluded that the answer in all probability would have been”Certainly not”. Whilst Roskill L.J.’s assumption aforesaid was accepted in the House of Lords, they concluded that irrespective of the presumed intention of the parties a term must be implied from the very nature of the fact that the tenants had to gain access to their apartments by and through the common areas of a fifteen storey tower block that some party would have to keep them in repair. The question then was whether this obligation would fall on the tenants collectively or individually or else on the Council. As Salmon L.J. said at p. 262:
“Unless the law, in circumstances such as these, imposes an obligation upon the council at least to use reasonable care to keep the lifts working properly and the staircase lit, the whole transaction becomes inefficacious, futile and absurd. I cannot go so far as Lord Denning M.R. and hold that the courts have any power to imply a term into a contract merely because it seems reasonable to do so. Indeed, I think that such a proposition is contrary to all authority. To say, as Lord Reid said in Young & Marten Ltd. v. McManus Childs Ltd. [1969] 1 A.C. 454, 465 that ‘. . . no warranty ought to be implied in a contract unless it is in all of the circumstances reasonable’ is, in my view, quite different from saying that any warranty or term which is, in all of the circumstances, reasonable ought to be implied in a contract. I am confident that Lord Reid meant no more than that unless a warranty or term is in all the circumstances reasonable there can be no question of implying it into a contract, but before it is implied much else besides is necessary, for example that without it the contract would be inefficacious, futile and absurd.”
Whether a term is implied pursuant to the presumed intention of the parties or as a legal incident of a definable category of contract it must be not merely reasonable but also necessary. Clearly it cannot be implied if it is inconsistent with the express wording of the contract and furthermore it may be difficult to infer a term where it cannot be formulated with reasonable precision.
It seems to me clear that the contention that a term as to insurance by the company of its risk for liability to the plaintiff as its employee or an obligation to warn him of the absence of such insurance could not be implied in pursuance of The Moorcock (1889) 14 P.D. 64 doctrine. The contract of employment would and did operate effectively without any such term and if one postulated an inquiry by the ubiquitous and officious bystander as to whether such a term should be included I anticipate that it might well have been rejected and certainly would not have been accepted without considerable negotiation and discussion a result which would negative the existence of an implied term. In Spring v. National Amalgamated Stevedores and Dockers Society [1956] 1 W.L.R. 585, the defendant trade union sought to expel the plaintiff from membership and in doing so relied upon what it alleged was implied in the contract between the plaintiff and it. The term which it was said should be implied arose from an agreement which had been reached at Bridlington in the year 1939, and regulated the transfer of members from one union to another. That agreement was, in trade union circles, referred to as “the Bridlington Agreement”. What, therefore, the defendants sought to incorporate by implication in their agreement with the plaintiff was a provision that the plaintiff should comply with the “the Bridlington Agreement”. In his judgment, Stone V.C. postulated The Moorcock test, at p. 599, in the following terms:
“If that test were to be applied to the facts of the present case and the bystander had asked the plaintiff at the time he paid his five shillings and signed the acceptance form, ‘Won’t you put into it some reference to the Bridlington Agreement?’ I think (indeed, I have no doubt) the plaintiff would have answered ‘What’s that?’ In my judgment, that is sufficient to dispose of this case, . . .”
Clearly the plaintiff in the present case would have little difficulty in appreciating the general concept of employers’ liability insurance but so far from an immediate acquiescence to any proposals in relation to such insurance I think it is reasonable to anticipate that a debate would have arisen as to the value of such insurance to the employee seeing that such insurance is primarily for the benefit of the employer and, if it were explained how it might also benefit the employee, further and useful discussion might well follow as to whether the interests of the plaintiff would not be better secured by some other arrangement which would be of immediate and direct benefit to the plaintiff. The parties to the negotiations might recognise, (as did their counsel) that a contractual obligation by the company to insure would add little protection to the plaintiff as default by the company would merely duplicate the plaintiff’s right to recover a judgment against the company with no greater prospect of recovering thereon. I would reject the contention that the term for which the plaintiff contends could be implied on the basis of The Moorcock (1889) 14 P.D. 64 doctrine.
Both parties referred to the decision of the Court of Appeal in England in two cases, namely, Reid v. Rush & Tompkins Plc [1990] 1 W.L.R. 212 and Van Oppen v. Bedford Trustees [1990] 1 W.L.R. 235, on the issue as to whether the disputed provision with regard to insurance should be implied as a legal incident to the plaintiff’s contract of employment. Each of these cases has a similarity to the other and a relevance to the existing matter in as much as it was alleged (unsuccessfully) that the defendants in each case were under an obligation or duty to take out and maintain some form of insurance for the benefit of the plaintiff or at any rate to advise him in relation to such insurance.
In Reid v. Rush & Tompkins Plc [1990] 1 W.L.R. 212, the plaintiff was employed by the defendants to travel to Ethiopia as a quarry foreman. While in that country the plaintiff was injured in a motor car accident caused by the negligence of a third party whose identity was never discovered. In Ethiopia there was not, at the time, any compulsory third party motor insurance nor any scheme for compensating persons injured in accidents caused by the negligence of uninsured or untraced drivers. In those circumstances the plaintiff brought an action against his employers, the defendants, for damages in respect of the economic loss which he had suffered in being unable to recover such compensation. He alleged that the defendant was in breach of an implied term of his contract of employment to the effect that it would take out appropriate indemnity insurance cover for the plaintiff or, alternatively, that it would, prior to his departure for Ethiopia, advise him of any special risks so that he could obtain such insurance cover for himself. Alternatively, the plaintiff argued, that the defendant was negligent in failing to discharge its duty of care as an employer to protect the plaintiffs economic welfare by providing the appropriate insurance cover. Ralph Gibson L.J. delivering the main judgment of the Court of Appeal declined to imply the term for which the plaintiff contended. He analysed the facts of the case and went on, at p. 227 to state as follows:
“It is, however, impossible in my judgment, to imply in this case a term as a matter of law in the form contended for, namely, a specific duty to advise the plaintiff to obtain specific insurance cover. Such a duty seems to me inappropriate for incorporation by law into all contracts of employment in the circumstances alleged. The length of time during which the servant will work abroad and the nature of his work may vary greatly between one job and another and hence the extent to which the servant would be exposed to the special risk. Further, having regard to the many different ways in which a servant working abroad may run the risk of uncompensated injury caused by the wrong doing of a third party, apart from a traffic accident, it seems to me impossible to formulate the detailed terms in which the law could incorporate into the general relationship of master and servant a contractual obligation to the effect necessary to cover the plaintiffs claim.”
Again having referred to the judgment of Scarman L.J. in Tai Hing Ltd v. Liu Chong Hing Bank [1986] A.C. 80 (to which I will refer again) he expressed his conclusion with regard to the allegation based on tort, at p. 232 in the following terms:
“It therefore seems to me that, on the facts alleged, it is not open to this court to extend the duty of care owed by this defendant to the plaintiff by imposing a duty in tort which, if I am right, is not contained in any express or implied term of the contract.”
The judgment of the Court of Appeal in Van Oppen v. Bedford Trustees [1990] 1 W.L.R. 235 does not significantly advance the matter either way. It was a case in which the defendant trustees, who owned and managed a school, were advised by a competent association of the desirability of taking out accident insurance for all of their pupils who played rugby. The school informed the parents of the advice which they had received in this regard but before any action was taken on the proposals the plaintiff suffered serious injuries to his cervical spine while playing rugby. In those circumstances the pupil claimed damages against the defendants for negligence alleging that they had failed to take reasonable care for his safety on the rugby field and failed to advise his father of the risk of serious injury and the consequent need for personal accident insurance. It may be sufficient to say that Balcombe L.J. in delivering the main judgment of the court endorsed substantially the judgment of Ralph Gibson L.J. in Reid v. Rush & Tompkins Plc [1990] 1 W.L.R. 212. It is, however, notable that the insurance in Van Oppen v. Bedford Trustees and Reid v. Rush & Tompkins Plc. would have had the effect of providing the plaintiff with a positive economic benefit and not merely security for the discharge by the employer of a pre-existing liability.
It seems to me that the decision of the House of Lords in Scally v. Southern Health Board [1992] 1 A.C. 294 and in particular the speech of Bridge L.J. provides even more persuasive authority for the proposition that a term such as that for which the plaintiff contends cannot in circumstances such as the present be found by reference to the law of tort. It is helpful also as to the circumstances in which a term will be implied as a matter of law independently of the intention of the parties. In Scally v. Southern Health Board the plaintiffs were employees of the Northern Ireland Health Board whose contracts of employment had been negotiated by representatives of their professional bodies. The terms of their employment provided for certain pension benefits. By virtue of certain legislative provisions, the plaintiffs were given the right to purchase particular “additional years” on advantageous terms but that right was required to be exercised within a specified time from the date on which the legislative regulations came into operation.
Bridge L.J. dealing with the claim based in contract expressed his views, at p. 302, in the following terms:
“. . . it seems to me that the plaintiffs’ common law claims can only succeed if the duty allegedly owed to them by their employers arose out of the contract of employment. If a duty of the kind in question was not inherent in the contractual relationship, I do not see how it could possibly be derived from the tort of negligence.”
He then went on to cite with approval the same passage from the judgment of Scarman L.J. in Tai Hing Ltd v. Liu Chong Hing Bank [1986] A.C. 80 at p. 107 as Ralph Gibson L.J. had relied upon in Reid v. Rush & Tompkins Plc [1990] 1 W.L.R. 212. That passage is in the following terms:
“Their Lordships do not believe that there is anything to the advantage of the law’s development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship. Though it is possible as a matter of legal semantics to conduct an analysis of the rights and duties inherent in some contractual relationships including that of banker and customer either as a matter of contract law when the question will be what, if any, terms are to be implied or as a matter of tort law when the task will be to identify a duty arising from the proximity and character of the relationship between the parties, their Lordships believe it to be correct in principle and necessary for the avoidance of confusion in the law to adhere to the contractual analysis: on principle because it is a relationship in which the parties have, subject to a few exceptions,
the right to determine their obligations to each other, and for the avoidance of confusion because different consequences do follow according to whether liability arises from contract or tort, e.g. in the limitation of action. Their Lordships respectfully agree with some wise words of Lord Radcliffe in his dissenting speech in Lister v. Romford Ice & Cold Storage Co. Ltd. [1957] A.C. 555. After indicating that there are cases in which a duty arising out of the relationship between employer and employee could be analysed as contractual or tortious Lord Radcliffe said, at p. 587: ‘Since, in any event, the duty in question is one which exists by imputation or implication of law and not by virtue of any express negotiation between the parties, I should be inclined to say that there is no real distinction between the two possible sources of obligation. But it is certainly, I think, as much contractual as tortious. Since in modern times the relationship between master and servant, between employer and employee, is inherently one of contract, it seems to me entirely correct to attribute the duties which arise from that relationship to implied contract’.
Their Lordships do not, therefore, embark on an investigation as to whether in the relationship of banker and customer it is possible to identify tort as well as contract as a source of the obligations owed by the one to the other. Their Lordships do not, however, accept that the parties’ mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their contract.”
In his judgment with which all of their Lordships were in agreement, Bridge L.J. in fact concluded that the term for which the plaintiffs contended should be implied in the contract between them and their employers. His analysis of the circumstances in which the term was implied is to be found, at p. 306, in the following terms:
“. . . there is no doubt whatever that the terms of the superannuation scheme as laid down in the regulations in force from time to time were embodied in the terms of the contract of employment of each plaintiff. Since the relevant board was in each case the employer upon whom, although acting as agent for the Department, all liabilities were imposed by paragraph 2 of Schedule 1 to the Order of 1972, it seems to me beyond question that the legal obligation, if there was one, to notify the plaintiffs of their rights in relation to the purchase of added years rested in each case on the board not on the department.
Will the law then imply a term in the contract of employment imposing such an obligation on the employer? The implication cannot, of course, be justified as necessary to give business efficacy to the
contract of employment as a whole. I think there is force in the submission that, since the employee’s entitlement to enhance his pension rights by the purchase of added years is of no effect unless he is aware of it and since he cannot be expected to become aware of it unless it is drawn to his attention, it is necessary to imply an obligation on the employer to bring it to his attention to render efficacious the very benefit which the contractual right to purchase added years was intended to confer.”
I agree that a term may be implied independently of the intention of the parties where it is necessary as a matter of law and logic to enable the provisions of the agreement to have operative effect. No such necessity exists in the present case. The decision is also relevant in setting out the principles, with which I fully agree, which establish that the obligation as between the employer and employee in a case such as the present are to be found in contract and not in tort.
Accordingly, as to the first and crucial argument submitted on behalf of the plaintiff, I am satisfied that there is no basis for the implication in the contract of employment between the company and the plaintiff of a term that the employer should in any circumstances extract risk insurance cover or otherwise make special provision to ensure the payment of compensation to the plaintiff in the event of injury or to warn the plaintiff of the absence of such policy or such arrangement. Likewise I am satisfied that no such obligation or duty can be identified by reference to the law of tort. If the company has no liability in contract to the plaintiff then neither has the defendant. The piercing of the corporate veil bestowed upon the company by law, or even its complete removal, cannot impose on the defendant or the other shareholder in the company an obligation in contract to which the company itself was not subject.
That the defendant may have had a variety of duties to the plaintiff in tort is hardly open to dispute. In so far as the defendant was a fellow workman of the plaintiff he was of course bound to exercise reasonable care in the exercise of his duties as an employee not to cause injury to the plaintiff. Again in his capacity as quarry manager the defendant had wide ranging statutory obligations the breach of which might well have given rise to a liability on his part to the plaintiff. However the neglect of such duties has not been alleged nor would the breach of any of them provide the remedy which the plaintiff seeks to assert in these proceedings.
I find it difficult to accept that a director or shareholder as such has the necessary relationship with an employee of his company to give rise to any duty on the part of the director/shareholder for the economic welfare
of the employee. I find it inconceivable that any such duty on the part of a corporator, if it did exist, could be more extensive than that of the corporation itself.
I would of course recognise that the case put forward on behalf of the plaintiff was that the company did have the particular obligations in contract so that the argument for liability on the part of the defendant was essentially his failure to ensure that “his” company failed to fulfil its obligations. To find a duty in the defendant to protect the economic welfare of the plaintiff in a manner which is not sustained by the terms of employment of the plaintiff express or implied is in my view unstateable.
In the circumstances I would dismiss the plaintiff’s appeal herein.
Doran v. Delaney
[1998] IESC 66 [1998] 2 IR 61 Supreme Court
KEANE J:
Introduction
In September, 1990, the plaintiffs agreed to buy a site near Greystones in County Wicklow, on which they hoped to build a house, from the second and third defendants (hereafter “the vendors”). They employed the first defendant (hereafter “the plaintiffs’ solicitor”) to act as their solicitor in the purchase: the vendors were represented by the fourth and fifth defendants (hereafter “the vendors’ solicitors”).
The property was sold with the benefit of a planning permission from Wicklow County Council for the erection of a dormer-style bungalow. After the sale had been closed, the builders (Ballymore Homes Limited) began work on the site. They entered he site from a private roadway which served three existing dwellings. One of the householders having objected to the builders using that roadway, the first plaintiff and the builders decided to enter the site from the main road, in the belief that the site sold to the plaintiffs had a frontage on to that road. For the purpose of gaining access the builders knocked down part of the boundary wall.
At that stage, the plaintiffs and their builders were notified by the adjoining landowner, Mrs McKimm, that the area in question was in her ownership and was not part of the site sold to the plaintiffs. It then emerged that there was a discrepancy between the boundaries of the site sold to the plaintiffs as delineated on the map lodged with the application for planning permission and the boundaries as delineated on the Land Registry map of the land comprised in the two folios which constituted the legal title of the vendors to the site. The former erroneously included a triangular area of 54 square metres as being included in the vendors’ site. That triangular area included the road frontage the plaintiffs’ builders were using to get access to the site. Without that frontage, they were unable to get access to the site, save along the private roadway, which was also not available because of the refusal of one of the householders to consent. Apart altogether from the problem of access, the discrepancy between the planning map and the Land Registry map clearly raised a question as to the validity of the planning permission, since it purported to extend to land which was not owned by the vendors.
The plaintiffs then initiated negotiations with Mrs McKimm with a view to acquiring the 54 square metres. Those negotiations eventually proved abortive and the plaintiffs thereupon abandoned their plan to build the dormer bungalow and sold the site to one of the adjoining householders.
Before the plaintiffs signed the contract for the purchase of the site, their builder had advised them that, since there was no physical boundary between their site and the adjoining land, it should be staked out. The plaintiffs’ solicitor was asked by them to include such a condition in the contract, but he advised that it would be sufficient to stipulate that an ordnance survey map with the boundaries marked thereon be provided. The vendors’ solicitors objected to that condition and the plaintiffs’ solicitor agreed to omit it without, it would seem, so informing the plaintiffs.
The plaintiffs instituted these proceedings claiming damages for negligence, breach of duty and breach of contract against the plaintiffs’ solicitor and for negligence, breach of warranty and misrepresentation against the remaining defendants. The action was heard by Hamilton P., as he then was, who in a reserved judgment found both the plaintiffs’ solicitor and the vendors liable in damages, but dismissed the claim against the vendors’ solicitors. The plaintiffs have appealed to this Court from the dismissal of their claim against the vendors’ solicitors, the assessment of damages having been deferred pending the hearing of the appeal.
…………
The correspondence dealing with the dispute between the vendors and Mrs McKimm as to the boundaries of their respective sites came to an end at that point. The fourth defendant, the partner in the vendors’ solicitors who had been dealing with the matter up to that stage, said in evidence that in December, 1989, he had rung Cunningham & Company about the matter but did not succeed in making contact with the member of the firm who was dealing with the dispute and left a message that he had rung. He also gave evidence that he spoke to the first vendor in March, 1990 and was told by him that “the dispute had all been sorted out”.
In January, 1990, the first plaintiff discovered that the site was for sale and was given by the estate agents a copy of the map which had been lodged with the first planning application. (On the 20th August, 1990, the first vendor was granted a further permission in respect of the same site but this time for a dormer bungalow.) Having entered into an agreement with the builders as to the costs of the works involved, the first plaintiff agreed with the estate agents that he would purchase the site for L25,000, subject to the granting of planning permission based on the second application by the first vendor. The latter called to the first plaintiff’s house in August, 1990, and they discussed the projected sale. The first plaintiff said that, at that meeting, he asked the first vendor about the staking out of the site and was told by him that there was already a stake on the adjoining neighbour’s boundary. He also produced the second planning map (which was identical as to boundaries with the first) and pointing to it said “what you see is what you get”.
The plaintiffs’ solicitor was then instructed by them to act on their behalf in connection with the purchase of the site. The contract was signed on the 14th September, 1990 and provided for the sale to the plaintiffs of:-
“ALL THAT AND THOSE the lands presently comprised in folios 10461 and folio 9267F of the register County Wicklow. Held in fee simple.”
The Special Conditions provided at para. (7) that:-
“The contract herein includes the benefit of planning permission reg. ref. No 90/005807 dated the 20th day of August 1990 from Wicklow County Council.”
As already noted the draft contract also included at para. 10, a condition, which the vendors’ solicitors required to be deleted, in the following terms:-
“Vendor shall furnish Ordinance Survey map showing the site being sold and all boundaries clearly marked thereon.”
The boundary dispute between the vendors and Mrs McKimm had been handled by the fourth defendant, who normally dealt with litigation matters in the practice: the conveyancing side was usually the concern of the fifth defendant. She, in any event, had been on maternity leave from the end of November, 1989 and said in evidence that, when she dealt with the sale to the plaintiffs on her return to the office, she was unaware of any difficulty in relation to the boundaries. She also said that there was no map attached to the planning permission and that the only maps she saw were the folio maps.
Requisitions were raised by the plaintiffs’ solicitor in the normal way and included the following standard requisition (No 13.8):-
“Is there any litigation pending or threatened in relation to the property or any part of it or has any adverse claim thereto been made by any person ”
The first vendor at the request of the fifth defendant came into her office and went through the Requisitions with her. The latter was aware at this stage, from reading the file, that there had been a boundary dispute, and said in evidence:-
“I asked (the first vendor) about it and he confirmed it had been settled and sorted out and that there were no queries. I had no reason to doubt him.”
She also said she spoke to the fourth defendant about it. Both she and the fourth defendant agreed in cross examination that they had never ascertained from the vendors on what terms the dispute had allegedly been resolved.
The reply to requisition 13.8 given by the fifth defendant was:-
“Vendor says none.”
The sale was closed on the 15th October, 1990 and the builders then moved on to the site. Following the objections from the householder as to the use of the private roadway, the builders effected an entry from the roadway by knocking down part of the boundary wall. At that stage, for the first time, the plaintiffs became aware of the claim by Mrs McKimm that the triangular area of 54 square metres was owned by her. On the 18th October, 1990, Cunningham & Company wrote to the builders as follows:-
“As indicated to you, your agents or servants have trespassed on to our client’s property at Blacklion causing considerable damage thereto. We call upon you to immediately withdraw from our client’s land and refrain from making further incursions to our client’s lands. If you continue, you do so at your peril.
Please note that our client will be holding you totally liable for all damage to her property including damage to the pillars at her entrance and the boundary wall.”
Negotiations between the plaintiffs and Mrs McKimm having failed to resolve the problem, the plaintiffs decided not to proceed with the building of the house and sold the site to the householder who had raised the objection to the use of the private roadway for L20,000.
…
Submissions on behalf of the parties
On behalf of the plaintiffs, counsel submitted that it was well settled as a result of the decision in Hedley Byrne & Co Ltd. v Heller & Partners Limited [1964] AC 465, that a person suffering economic loss as a result of a negligent misstatement had a cause of action against the maker of the statement. Accordingly, the solicitors acting for the vendors in a case such as the present could be liable to the purchaser where it could be shown that they owed a duty to take reasonable care in relation to the making of particular statements. He cited in support passages from the judgment of Jauncey LJ. in Midland Bank v Cameron, Thom Peterkin and Duncans [1988] S.L.T. 611 referred to in the judgment under appeal, Wall v Hegarty [1980] ILRM 124, Allied Finance and Investments Ltd. v Haddow [1983] N.Z.L.R. 22 and McCullagh v Lane Fox & Partners Ltd. [1994] 8 E.G. 118.
Counsel for the plaintiffs said that, in the circumstances of the present case, the vendors’ solicitors knew, or ought to have known, that their reply to requisition 13.8 would be relied on by the plaintiffs and their solicitor, since they knew that the plaintiffs and their solicitor were wholly unaware of the boundary dispute between the vendors and Mrs McKimm. He submitted that the manner in which the requisition had been answered was in breach of that duty of care in two respects: first, because the vendors’ solicitors had failed to ascertain, as they should have done the terms on which the dispute had been resolved and, secondly, because they went further than any instruction they had been given in saying that the vendors had instructed them that no adverse claim to the property being sold was being made by any person.
Counsel for the plaintiffs further submitted that, while this Court was bound by any findings of fact made by the learned trial judge which were supported by credible evidence, the Court was not bound by any findings which were not supported by such evidence. He said that, contrary to what had been found by the trial judge, the evidence established that the fourth and fifth defendants were aware of the existence of the planning map, although neither of them had actually seen it until the present proceedings were instituted.
Counsel on behalf of the vendors’ solicitors submitted that the findings of the learned trial judge were supported by credible evidence and should not be set aside by this Court. He said that it was clear from the decision in Midland Bank v Cameron, Thom Peterkin and Duncans [1988] S.L.T. 611, that a solicitor could not become liable to a third party simply by reason of transmitting to that third party in good faith information which had been furnished to him by his own client. In the present case, the fifth defendant had been careful to word the reply to the requisition in such a way as to make it clear that she was doing no more than conveying her clients’ instructions. He submitted that it would be extending the duties of solicitors to third parties further than was warranted by principle or authority to impose on them an obligation, in a case such as the present, to question the veracity of the instructions they had received from their own clients.
Counsel for the vendors’ solicitors further submitted that, contrary to what was urged on behalf of the plaintiffs, the reply did accurately reflect the fifth defendant’s instructions. The first part of requisition 13.8 clearly related to litigation which is pending or threatened at the time the requisition is raised: on the fifth defendant’s instructions there was none. As to the second part of that requisition it was submitted that, since claims in the past were clearly embraced by the first part of the requisition, the second part could only relate to a claim being pursued at the time the requisition was raised. Again, on the fifth defendant’s instructions, no such claim was being pursued.
The applicable law
In the course of his speech in Hedley Byrne & Co Ltd. v Heller & Partners Ltd. [1964] AC 465, the case which, as applied in a number of decisions in this jurisdiction, is authority for the proposition that liability for negligent mis-statements can arise in our law, even in the absence of a contractual relationship, Devlin LJ. said, at pp. 528 and 529:-
“I think, therefore, that there is ample authority to justify your Lordships in saying now that the categories of special relationship, which may give rise to a duty to take care in word as well as in deed are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which in the words of Lord Shaw in Nocton v Lord Ashburton [1914] AC 932 at p. 972 are ‘equivalent to contract’ that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract. Where there is an express undertaking, an express warranty as distinct from mere representation, there can be little difficulty. The difficulty arises in discerning those cases in which the undertaking is to be implied. In this respect the absence of consideration is not relevant. Paying for information or advice is very good evidence that it is being relied on and that the informer or adviser knows that it is. Where there is no consideration, it will be necessary to exercise greater care in distinguishing social and professional relationships and between those which are of a contractual character and those which are not. It may often be material to consider whether the adviser is acting purely out of good nature or whether he is getting his reward in some indirect form.”
The latter part of that passage is of assistance in determining the nature of the duty of care, if any, which a vendor’s solicitor owes to the purchaser in circumstances such as arose in the present case. While there was no contractual relationship between the vendors’ solicitors and the plaintiffs, that would not of itself negate the existence of a duty of care. Moreover, in determining whether such a duty of care arose in the particular circumstances, it is a material factor that statements such as replies to requisitions are made by a solicitor acting as such and not in some casual social context. Again, while the primary duty of the solicitor acting for the vendor in circumstances such as arose here, is, under common law and by virtue of contract, to protect his own client, that obligation is perfectly consistent with the existence of a duty of care in certain circumstances to the purchaser.
It is also clear that the transmission by a solicitor to a third party of information which turns out to be inaccurate and upon which the third party relied to his detriment does not, of itself, afford a cause of action in negligence to the injured third party. The factors necessary to give rise to liability were set out by Jauncey LJ. in the passage so frequently referred to in the present case in Midland Bank v Cameron, Thom Peterkin and Duncans [1988] S.L.T. 611 as follows at p. 616:-
“In my opinion four factors are relevant to a determination of the question whether in a particular case a solicitor, while acting for a client, also owed a duty of care to a third party:-
(1) the solicitor must assume responsibility for the advice or information furnished to the third party.
(2) the solicitor must let it be known to the third party expressly or impliedly that he claims, by reason of his calling, to have the requisite skill or knowledge to give the advice or furnish the information;
(3) the third party must have relied upon that advice or information as a matter for which the solicitor has assumed personal responsibility; and
(4) the solicitor must have been aware that the third party was likely so to rely.”
It is clear that, at least in cases where those four factors are present, a solicitor may be held liable in negligence to a third party under the more general principle laid down in Hedley Byrne & Co Ltd. v Heller & Partners Ltd. [1964] AC 465. An example of a case in which they were clearly met is the New Zealand decision of Allied Finance and Investments Ltd. v Haddow [1983] N.Z.L.R. 22, to which we were also referred.
In that case, the plaintiff, a money lending company, lent a person money on the security of a yacht which the plaintiff understood that he was buying. Before the loan was made, the plaintiff’s solicitors forwarded to the borrower’s solicitors an instrument by way of security and asked them for a certain certificate. The borrower’s solicitors returned the instrument signed by him and certified, inter alia, “that the instrument by way of security is fully binding on RKH”. In fact, and to the knowledge of RKH’s solicitors, the yacht was being purchased by a company of which he was a director and controlling shareholder. When the yacht was seized by the unpaid seller and H. became bankrupt, the plaintiff sued his solicitors for the balance of the loan. The New Zealand Court of Appeal held that the solicitors were liable, Cooke J saying:-
“The relationship between two solicitors acting for their respective clients does not normally of itself impose a duty of care on one solicitor to the client of the other. Normally the relationship is not sufficiently proximate. Each solicitor is entitled to expect that the other party will look to his own solicitor for advice and protection . . .
But surely the result of the established principle is different when on request a solicitor gives a certificate on which the other party must naturally be expected to act. That is a classic duty of care situation, now that it is accepted that the likelihood of economic loss only does not automatically rule out a duty. The proximity is almost as close as it could be short of contract . . .”
The fact that the vendors in this case have been found to be liable to the plaintiffs for misrepresenation made directly by themselves to the plaintiffs or (as the learned trial judge found) in the form of statements transmitted in good faith by their solicitors is not a relevant consideration in determining whether the solicitors themselves were in breach of a duty of care which they owed to the plaintiffs. A different view was taken in England in Gran Gelato Ltd. v Richcliff (Group) Ltd. [1992] Ch. 560, but was not accepted in a subsequent English decision of McCullagh v Lane Fox & Partners Ltd.[1994] 8 E.G. 118. I would adopt the view taken by Coleman J in the latter case that, in general, the fact that there will be a duplication of remedy should not negate the existence of liability.
Finally, it should always be borne in mind, in considering whether a particular statement amounts to a negligent mis-statement, that the omission of significantly relevant facts may be sufficient to convert a literally accurate statement into a mis-statement.
Conclusions
There are many occasions when, in furnishing replies to objections or requisitions in a contract for the sale of land, the solicitor for the vendor cannot be said to assume any responsibility for information being transmitted to the purchaser’s solicitor. Typically in the course of such a contract the solicitor or counsel for the purchaser may raise an objection or requisition to the effect that, for example, a particular estate has not been got in or appropriate words of limitation have not been used in a deed forming part of the proffered title. The vendor’s solicitor or counsel, in reply, may refer to some other document furnished or some legal principle as meeting the difficulty. In such cases, it cannot be said that the vendor’s solicitor or counsel, in drafting the reply, is assuming responsibility for information being furnished in the sense in which that expression is used in Midland Bank v Cameron, Thom Peterkin and Duncan [1988] S.L.T. 611. The solicitors and counsel on either side are dealing with the same set of documents and doing no more than expressing their professional opinion on matters of title.
Similarly, there are many circumstances in which the vendor’s solicitor in drafting a reply could be described as transmitting information but could not reasonably be regarded as assuming any particular responsibility for that information. Thus, in the present case, the standard requisition 11 asked whether any notice, certificate or order had been served on the vendor under a long series of listed statutes or “under any other Act. . .” The answer was a terse “no”. The purchasers’ solicitor from his own experience would be well aware that the most that could be inferred from such a reply was that the vendors’ solicitor’s clients had so instructed her. It would be wholly unreal to suppose that the vendors’ solicitor was accepting any responsibility for the accuracy of the information being furnished.
But that is not to say that there are no circumstances in which the vendors’ solicitor will not assume at least some degree of responsibility for the information being furnished to the purchaser’s solicitors. Specifically, in a case such as the present, where the vendor’s solicitor is asked whether there is any litigation pending or whether any adverse claim has been made to the property and is aware of his or her own knowledge of threats of litigation and adverse claims having been made, he or she assumes at least some responsibility for the information given in reply and cannot be exonerated from responsibility solely on the ground that he or she is simply transmitting the vendor’s instructions. Whether he or she can be regarded as so relieved from responsibility must depend upon the circumstances of the particular case and whether it was reasonable, in those circumstances, for the vendor’s solicitor simply to transmit what he or she was told without further enquiry.
It is also clear that, in such a situation, the vendor’s solicitor in assessing the instructions he or she is given, determining whether further enquiries should be made and deciding on the information to which the vendor’s solicitors are entitled is acting in a professional capacity and must be assumed to be applying the skill and knowledge to be expected of a solicitor in such circumstances.
I would, accordingly, take the view, differing with respect from the learned trial judge, that the first two requirements indicated in Midland Bank v Cameron, Thom Peterkin & Duncans [1988] S.L.T. 611, before a duty of care can arise as between a solicitor and a third party are met in this case.
As to the third and fourth requirements, that the plaintiffs were relying upon the reply and that the vendors’ solicitors must have been aware that they were likely so to rely, the context in which the reply was given is crucial. The contract for sale had expressly provided that the site was being sold with the benefit of a specified planning permission. Not merely were the vendors’ solicitors aware of this: they were also aware that there was no physical boundary between the site and Mrs McKimm’s land and that she had threatened to institute proceedings if the vendors continued to gain access to the land from the main road, on the ground that they would be trespassing on the triangular area. They were also aware that she had claimed through her solicitors that the map on which the planning permission was based erroneously included the triangular area and that, accordingly, the planning permission was invalid. They were also aware of the first plaintiff’s concerns as to the boundary in question, since he had unsuccessfully sought to have the boundary staked out or an ordnance survey map incorporated in the contract. In these circumstances, they must have known that, whether or not their reply accurately reflected the vendors’ instructions to them, it would unquestionably be relied on by the plaintiffs. In the event, of course, it was relied on, since the plaintiffs closed the sale wholly unaware of the fact that the vendors had been embroiled in a dispute concerning this very boundary which, as the learned trial judge found, had led to their selling on the property to the plaintiffs and the reply to the requisition, however else it may be viewed, certainly gave not the slightest hint of any trouble as to the boundary to the plaintiffs.
I conclude, accordingly, that the vendors’ solicitors owed a duty of care to the plaintiffs when they replied to requisition 13.8. It remains to be considered whether they were in breach of that duty. In the circumstances of this case, I am satisfied that they were. There are many instances in which a solicitor acting in a transaction such as this would be perfectly entitled to convey without comment the information furnished to him by his client, but this was not one of them. It is not a question of the vendors’ solicitors having to query the veracity of the instructions being furnished to them by their own client: even if those instructions were perfectly correct, it could have meant that the dispute had been settled on terms that the vendors acknowledged the title of Mrs McKimm to the triangular area. In failing to ascertain the terms on which the dispute had been settled and conveying that information to the plaintiffs, they were in breach of their duty of care to them. On one view, that urged on behalf of the plaintiffs, they had, in any event, not accurately transmitted the vendors’ instructions, since those merely indicated that the dispute had been settled: they did not indicate, as the reply to the requisition on one reading did, that no claim to the triangular portion was at the date of the reply being made by Mrs McKimm. At the very least, however, the reply, because of the manner in which it was framed did not convey all the information to which the plaintifffs were entitled and, as I have already said, a partial statement in such circumstances may be equivalent to a mis-statement or misrepresentation. It is right to say that no one in this case has suggested that the vendors’ solicitors deliberately intended to mislead the plaintiffs or their solicitor: unfortunately, however, they had, in all the circumstances insufficient regard to the duty which they clearly owed to the plaintiffs. Had they got in touch with Cunningham & Co, it would have transpired that Mrs McKimm had not abandoned her claim to the 54 square metres and that her claim was well founded in law. The plaintiffs would then clearly have been in a position to rescind the contract and recover their deposit because of the vendors’ misrepresentations.
I would allow the appeal and vary the order of the learned trial judge by finding the fourth and fifth defendants liable in damages for negligence to the plaintiffs. The action should then be remitted to the High Court for the assessment of damages.
BARRON J:
I agree with the judgment which has just been delivered by Keane J
In my view a solicitor’s responsibility, if any, for replies to requisitions should not depend upon the wording used. Answers such as “vendor says no”, “no”, or “not to vendor’s knowledge”, all mean the same thing: “it is believed that there is no information of relevance”.
The solicitor is not a conduit pipe. Once he is acting professionally he warrants that so far as his own acts are concerned he has taken the care and applied the skill and knowledge expected of a member of his profession. He cannot therefore accept his client’s instructions without question when it is reasonable to query them. That is the difference between innocent and negligent mis-statement. It is not enough that the solicitor was acting bona fide. For that reason, the submission made by the defendants’ counsel sought to apply the wrong test. Of course, as against his own client, if the solicitor acted on the client’s express instructions, this is generally a good defence to a claim by his own client.
The question which is involved here is the normal rule. If reliance is going to be placed upon what you say, then you have a duty of care towards the person who will rely upon that to ensure that he will not be injured as a result of any lack of the required care on your part. The standard of care depends upon the person making the statement. In the case of a professional person the standard is that laid down in the relevant authorities.
In the circumstances of the present case, I regard the words of Cooke J in Allied Finance and Investments Ltd. v Haddow [1983] N.Z.L.R. 22, as particularly appropriate:-
“But surely the result of the established principle is different when on request a solicitor gives a certificate on which the other party must naturally be expected to act.”
The question in the instant case is, is this a case of information being supplied by the vendor’s solicitor on which the purchaser’s solicitor must naturally be expected to act Will the latter rely upon the truth of the answer to the requisition because it has been made but also because it is warranted by the solicitor that acting professionally he believes it to be true. The answer to that question must be, yes.
The learned trial judge has applied the first of the four requirements of Jauncey LJ. in Midland Bank v Cameron, Thom Peterkin and Duncans [1988] S.L.T. 611, as requiring the solicitor to assume responsibility for the answers “and thus the role of principal in relation thereto”, as involving the intention of the solicitor. I prefer the view of Keane J that, if in law he can be made liable for giving misleading information, he is assuming responsibility for the answers.
In any event, it is important in relation to the facts of that case that the plaintiffs conceded that, if the solicitors were a mere mouthpiece for their client and known to be such by the plaintiffs, no liability could attach to them in respect of information which they provided on behalf of their client. That is not the case here. Jauncey LJ. himself suggested that the answer to the following question required to be asked: is he however careless if, without checking, he merely passes on information, of whose accuracy he has no reason to doubt Even though he answered the question in the negative, I am sure that, if he had changed the word “no” in that question to “any” not alone to “good” he would have answered it in the affirmative.
In the present case the solicitors ought to have known that the answer in the form in which it was given was not necessarily either the truth or the whole truth. They were under a duty to inquire further. Not having done so and the answer proving to be misleading, they cannot avoid liability to the plaintiffs.
I would allow the appeal.
McShane Wholesale Fruit and Vegetables Ltd v Johnston Haulage Co. Ltd and Carbrook Chemicals Ltd
1994 No. 32 CA
High Court
19 January 1996
[1997] 1 I.L.R.M. 86
(Flood J)
FLOOD J
delivered his judgment on 19 January 1996 saying: This matter comes before this Court by way of notice of appeal from the whole of the judgment of the Circuit Court given on 14 December 1993.
The plaintiff’s complaint in the indorsement of claim on the civil bill herein is:
4. The plaintiff was at all material times the occupier and carrying on business from the premises 106 Castleforbes Industrial Estate, East Wall, Dublin 1 which said premises adjoins the premises situated at No. 2 Castleforbes Industrial Estate which at all material times was under the occupational control of the defendants herein in each one or other of them their servants and agents.
5. On or about 18 February 1991 a serious fire occurred on the defendants’ said premises as a result of which the plaintiff’s premises suffered a loss of electrical power in consequence of which it suffered loss and damage in carrying out its wholesale fruit and vegetable business.
6. The said fire and consequent loss of power to the plaintiff’s said premises was occasioned by reason of the negligence and breach of duty, including statutory duty and/or a nuisance of the defendants, their servants or agents.
Particulars
(a) Causing or permitting a fire to take place on their said premises.
(b) Causing or permitting dangerous and inflammable substances to be stored on their said premises.
(c) Storing the said substances in close proximity to bales of paper and other combustible materials.
(d) Failing to take any or any adequate measures whether by way of periodic *88 or other examination, inspection, test or otherwise to ensure that a fire would not occur on their said premises.
(e) Failing to take any or any adequate precaution to ensure that the said fire would not spread to and cause damage to the plaintiff and its said premises.
And finally,
(k) Failing to comply with the provisions of the Dangerous Substances Act 1972 and regulations made thereunder.
7. Further or in the alternative, the defendants their servants or agents failed to adequately ensure that the said premises would not constitute a fire hazard having regard in particular to the storage of dangerous inflammable substances whereof they thereby maintained a public nuisance by reason whereof the said fire occurred thereby causing damage and expense to the plaintiff’s company.
The defendants and each of them filed defences which may be generally described as being traverses of the allegations of fact, a plea that the loss or damage was not reasonably foreseeable and was too remote and a plea by way of estoppel on the premises that the said fire was an accidental fire and that in consequence no cause of action arose therefrom and there is an estoppel from maintaining the claim pursuant to s. 1(1)(a) of the Accidental Fires Act 1943.
On the matter being opened in this Court, I was advised that the plaintiff and defendants had agreed that I should try a preliminary issue as to whether economic loss consequent on a negligent act is recoverable as damages, within this jurisdiction.
In Ireland since the Supreme Court decision in Ward v. McMaster [1988] IR 337; [1989] ILRM 400, the test for actionable negligence is:
(a) A sufficient relationship of proximity between the alleged wrongdoer and the person who has suffered damage.
(b) Such relationship that in the reasonable contemplation of the former carelessness on his part may be likely to cause damage to the latter — in which case a prima facie duty of care arises.
(c) Subject always to any compelling exemption based on public policy.
McCarthy J stated the position as follows at pp. 349/409:
… I prefer to express the duty as arising from the proximity of the parties, the foreseeability of the damage and the absence of any compelling exemption based on public policy. I do not in any fashion seek to exclude the latter consideration although I confess that such a consideration must be a very powerful one if it is to be used to deny any injured party his right to redress at the expense of the person or body that injured him.
The quality of the damage does not arise. It can be damage to property, to the *89 person, financial or economic — see Sweeney v. Duggan [1991] 2 IR 274. The question as to whether the damage (of whatever type) is recoverable is dependent on proximity and foreseeability subject to the caveat of compelling exemption on public policy.
In short, the proximity of the parties giving rise to the duty of care must be such, as a matter of probability to be causal of the damage. If it is not, the damage is too remote and the action will fail. It will fail not because the damage is of a particular type but because the relationship between the wrongdoer and the person who suffers the damage does not have the essential of sufficient relationship of proximity or neighbourhood.
It therefore follows that the fact that the damage is economic is not in itself a bar to recovery where the other elements above stated are present.
Whether the damage in this instance is or is not too remote is a question of fact to be determined on evidence.
UK Cases
Cattle v Stockton Waterworks Co
Court of Queen’s Bench [1874-80] All ER Rep 220
BLACKBURN J: . . .
This was an action tried before my Brother Amphlett B., at Leeds, when the plaintiff had a verdict for £26, subject to leave to move to enter a nonsuit… On the argument before my Brothers Mellor and Lush and myself, the plaintiff’s counsel contended that, according to the doctrine laid down in
Fletcher v Rylands,1 the defendants were under an obligation to keep in the water in their pipes, and therefore that it was not necessary to prove negligence in fact, in the defendants; but that, at all events, negligence was clearly shown from the time they had notice of the mischief in not taking immediate steps to repair it.
The defendants’ counsel contended that the doctrine of Fletcher v Rylands did not apply to a case like the present, where the defendants were authorised by statute to make and maintain the pipe; and that the damages were assessed on the supposition that the defendants were liable for the damage during the whole time, and consequently, if the plaintiff was entitled to recover only for a part, there should be a new trial to ascertain the quantum. If it were necessary to decide these questions, we should require further time to consider, as we are not as yet quite agreed on the principle of law applicable to such a case. But there is another point on which we are agreed that the rule must be absolute to enter a nonsuit.
Assuming for the present what we purposely leave undecided, that Knight, if himself doing the work, might have maintained an action in his own name for this damage and even assuming that he might, under the circumstances that exist, have maintained the action in his own name, and recovered the amount as trustee for the plaintiff, on the ground that he would have had to bear this loss if the plaintiff had not by his contract indemnified him against it, the question arises can the plaintiff sue in his own name for the loss which he has sustained, in consequence of the damage which the defendants have done to the property of Knight, causing the plaintiff to lose money under his contract? We think he cannot.
In the present case the objection is technical and against the merits, and we should be glad to avoid giving it effect. But if we did so we should establish an authority for saying that in such a case as that of Fletcher v Rylands, the defendant would be liable, not only to an action by the owner of the drowned mine, and by such of his workmen as had their tools or clothes destroyed, but also to an action by every workman and person employed in the mine, who in consequence of its stoppage made less wages than he would otherwise have done. Many similar cases to which this would apply might be suggested. It may be said that it is just that all such persons should have compensation for such a loss, and that if the law does not give them redress it is imperfect. Perhaps it may be so. But, as was pointed by COLERIDGE J, in Lumley v
Gye,2 courts of justice should not ‘allow themselves, in the pursuit of perfectly complete remedies for all wrongful acts, to transgress the bounds which our law, in a wise consciousness, as I conceive, of its limited powers, has imposed on itself, of redressing only the proximate and direct consequences of wrongful acts.’ In this we quite agree. No authority in favour of the plaintiff’s right to sue was cited, and as far as our knowledge goes, there was none that could have been cited.
The two cases which go further in allowing a right of action to one injured in consequence of a breach of a contract with a third person, or of a breach of
duty to a third person, are Langridge v Levy3 and Lumley v Gye. In Langridge v Levy, the plaintiff was a son whose hand was shattered by the bursting of a gun which had been sold to the father for his (the son’s) use with a false and fraudulent representation that it was a safe one. But the court below and the court in error both carefully point out . . . as the ground of their judgment, that:
`as there was fraud and damage, the result of that fraud, not from an act remote and consequential, but one contemplated by the defendant at the time as one of its results, the party guilty of the fraud is responsible to the
party injured.’4
In Lumley v Gye the majority of the court held that an action would lie for maliciously procuring a third person to break her contract with the plaintiff. But all three of the judges who gave judgment for the plaintiff relied upon malicious intention. It would be a waste of time to do more than refer to the elaborate judgments in that case for the law and authorities on this branch of the law.
In the present case there is no pretence for saying that the defendants were malicious or had any intention to injure anyone. They were at most guilty of a neglect of duty, which occasioned injury to the property of Knight, but which did not injure any property of the plaintiff. The plaintiff’s claim is to recover the damage which he has sustained by his contract with Knight becoming less profitable; or, it may be a losing contract, in consequence of this injury to Knight’s property. We think this does not give him any right of action.
Leigh and Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon
House of Lords [1985] UKHL 10, [1986] 2 All ER 145
LORD BRANDON OF OAKBROOK: . . .
My Lords, this appeal arises in an action in the Commercial Court in which the appellants, who were the c & f buyers of goods carried in the respondents’ ship, the Aliakmon, claim damages against the latter for damage done to such goods at a time when the risk, but not yet the legal property in them, had passed to the appellants. The main question to be determined is whether, in the circumstances just stated, the respondents (the shipowners) owed a duty of care in tort to the appellants (the buyers) in respect of the carriage of such goods; and, if so, whether and to what extent such duty was qualified by the terms of the bill of lading under which the goods were carried.
The buyers’ claim was put forward originally in both contract and tort. Staughton J at first instance gave judgment for the buyers on their claim in contract, so making it unnecessary for him to reach a decision on their further claim in tort (see [1983] 1 Lloyd’s Rep 203). However, on appeal by the shipowners to the Court of Appeal (Sir John Donaldson MR, Oliver and Robert Goff LJJ), that court set aside the judgment of Staughton J and dismissed the buyers’ claims in both contract and tort (see [1985] 2 All ER 44, [1985] QB 350). Sir John Donaldson MR and Oliver LJ rejected the claim in tort on the ground that the shipowners did not at the material time owe any duty of care to the buyers. Robert Goff LJ rejected the claim in tort on the ground that, although the shipowners owed a duty of care to the buyers, they had not, on the facts, committed any breach of that duty . . .
My Lords, there is a long line of authority for a principle of law that, in order to enable a person to claim in negligence for loss caused to him by reason of loss of or damage to property, he must have had either the legal ownership of or a possessory title to the property concerned at the time when the loss or damage occurred, and it is not enough for him to have only had contractual rights in relation to such property which have been adversely affected by the loss of or damage to it . . .
His Lordship then considered each of the five grounds on which counsel for the buyers relied. First, he held that the fact that a buyer under a cif or c & f contract was the prospective legal owner of the goods was not a material
distinction from the other non-recovery cases in which the plaintiffs were not persons who had contracted to buy the property. Secondly, he held that even if an equitable property in the goods could be created or passed under the contract of sale (of which he was ‘extremely doubtful’), an equitable owner not in possession has no right to sue without joining the legal owner as a party to the action. Thirdly, he decided that there was nothing in what Lord Wilberforce said in Anns v Merton London Borough Council [1978] AC 728 at 751-752 about the role of policy in negativing a prima facie duty of care, which would compel a departure from the line of authorities against recovery, and went … Counsel for the buyers said, rightly in my view, that the policy reason for excluding a duty of care in cases like The Mineral Transporter [[1986] AC 1] and what I earlier called the other non-recovery cases was to avoid the opening of the floodgates so as to expose a person guilty of want of care to unlimited liability to an indefinite number of other persons whose contractual rights have been adversely affected by such want of care. Counsel for the buyers went on to argue that recognition by the law of a duty of care owed by shipowners to a cif or c & f buyer, to whom the risk, but not yet the property in the goods carried in such shipowners’ ship has passed, would not of itself open any floodgates of the kind described. It would, he said, only create a strictly limited exception to the general rule, based on the circumstance that the considerations of policy on which that general rule was founded did not apply to that particular case. I do not accept that argument. If an exception to the general rule were to be made in the field of carriage by sea, it would no doubt have to be extended to the field of carriage by land, and I do not think that it is possible to say that no undue increase in the scope of a person’s liability for want of care would follow. In any event, where a general rule, which is simple to understand and easy to apply, has been established by a long line of authority over many years, I do not think that the law should allow special pleading in a particular case within the general rule to detract from its application. If such detraction were to be permitted in one particular case, it would lead to attempts to have it permitted in a variety of other particular cases, and the result would be that the certainty, which the application of the general rule presently provides, would be seriously undermined. Yet certainty of the law is of the utmost importance, especially but by no means only, in commercial matters. I therefore think that the general rule, reaffirmed as it has been so recently by the Privy Council in The Mineral Transporter, ought to apply to a case like the present one, and that there is nothing in what Lord Wilberforce said in the Anns case which would compel a different conclusion . . .
Ground 4: the requirements of a rational system of law
My Lords, under this head counsel for the buyers submitted that any rational system of law ought to provide a remedy for persons who suffered the kind of loss which the buyers suffered in the present case, with the clear implication that, if your Lordships’ House were to hold that the remedy for which he contended was not available, it would be lending its authority to an irrational feature of English law. I do not agree with this submission for, as I shall endeavour to show, English law does, in all normal cases, provide a fair and adequate remedy for loss of or damage to goods the subject matter of a cif or c & f contract, and the buyers in this case could easily, if properly advised at the time when they agreed to the variation of the original c & f contract, have secured to themselves the benefit of such a remedy.
As I indicated earlier, under the usual cif or c & f contract the bill of lading issued in respect of the goods is indorsed and delivered by the seller to the buyer against payment by the buyer of the price. When that happens, the property in the goods passes from the sellers to the buyers on or by reason of such indorsement, and the buyer is entitled, by virtue of s 1 of the Bills of Lading Act 1855, to sue the shipowner for loss of or damage to the goods on the contract contained in the bill of lading. The remedy so available to the buyer is adequate and fair to both parties, and there is no need for any parallel or alternative remedy in tort for negligence. In the present case, as I also indicated earlier, the variation of the original c & f contract agreed between the sellers and the buyers produced a hybrid contract of an extremely unusual character. It was extremely unusual in that what had originally been an ordinary c & f contract became, in effect, a sale ex warehouse at Immingham, but the risk in the goods during their carriage by sea remained with the buyers as if the sale had still been on a c & f basis. In this situation the persons who had a right to sue the shipowners for loss of or damage to the goods on the contract contained in the bill of lading were the sellers, and the buyers, if properly advised, should have made it a further term of the variation that the sellers should either exercise this right for their account (see The Albazero [1976] 3 All ER 129, [1977] AC 774) or assign such right to
them to exercise for themselves. If either of these two precautions had been taken, the law would have provided the buyers with a fair and adequate remedy for their loss.
These considerations show, in my opinion, not that there is some lacuna in English law relating to these matters, but only that the buyers, when they agreed to the variation of the original contract of sale, did not take the steps to protect themselves which, if properly advised, they should have done. To put the matter quite simply the buyers, by the variation to which they agreed, were depriving themselves of the right of suit under s 1 of the Bills of Lading Act 1855 which they would otherwise have had, and commercial good sense required that they should obtain the benefit of an equivalent right in one or other of the two different ways which I have suggested.
Ground 5: the judgment of Robert Goff LJ
My Lords, after a full examination of numerous authorities relating to the law
of negligence Goff LJ said5 ([1985] 2 All ER 44 at 77, [1985] QB 350 at 399):
`In my judgment, there is no good reason in principle or in policy, why the c & f buyer should not have . . . a direct cause of action. The factors which I have already listed point strongly towards liability. I am particularly influenced by the fact that the loss in question is of a character which will ordinarily fall on the goods’ owner, who will have a good claim against the shipowner, but in a case such as the present the loss may, in practical terms, fall on the buyer. It seems to me that the policy reasons pointing towards a direct right of action by the buyer against the shipowner in a case of this kind outweigh the policy reasons which generally preclude recovery for purely economic loss. There is here no question of any wide or indeterminate liability being imposed on wrongdoers; on the contrary, the shipowner is simply held liable to the buyer in damages for loss for which he would ordinarily be liable to the goods’ owner. There is a recognised principle underlying the imposition of liability, which can be called ‘the principle of transferred loss’. Furthermore, that principle can be formulated. For the purposes of the present case, I would formulate it in the following deliberately narrow terms, while recognising that it may require modification in the light of experience. Where A owes a duty of care in tort not to cause physical
damage to B’s property, and commits a breach of that duty in circumstances in which the loss of or physical damage to the property will ordinarily fall on B but (as is reasonably foreseeable by A) such loss or damage, by reason of a contractual relationship between B and C, falls on C, then C will be entitled, subject to the terms of any contract restricting A’s liability to B, to bring an action in tort against A in respect of such loss or damage to the extent that it falls on him, C. To that proposition there must be exceptions. In particular, there must, for the reasons I have given, be an exception in the case of contracts of insurance. I have also attempted so to draw the principle as to exclude the case of the time charterer who remains liable for hire for the chartered ship while under repair following collision damage, though this could if necessary be treated as another exception having regard to the present state of the authorities.’
With the greatest possible respect to Robert Goff LJ, the principle of transferred loss which he there enunciated, however useful in dealing with special factual situations it may be in theory, is not only not supported by authority, but is on the contrary inconsistent with it. Even if it were necessary to introduce such a principle in order to fill a genuine lacuna in the law, I should myself, perhaps because I am more faint hearted than Robert Goff LJ, be reluctant to do so. As I have tried to show earlier, however, there is in truth no such lacuna in the law which requires to be filled. Neither Sir John Donaldson MR nor Oliver LJ was prepared to accept the introduction of such a principle and I find myself entirely in agreement with their unwillingness to do so ..
Murphy v Brentwood District Council
House of Lords [1991] UKHL 2, [1991] 2 All ER 908
LORD KEITH OF KINKEL: . . .
Before your Lordships’ House it was argued on behalf of the council that Anns was wrongly decided and should be departed from under the practice statement of 26 July 1966 (see Note [1966] 3 All ER 77, [1966] 1 WLR 1234). The speeches of Lord Bridge and Lord Oliver in D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992, [1989] AC 177 contain some passages expressing doubts as to the extent to which the decision in Anns is capable of being reconciled with pre-existing principle. It is therefore appropriate to subject the decision to careful reconsideration.
As is well known, it was held in Anns that a local authority might be liable in negligence to long lessees occupying maisonettes built on inadequate foundations not complying with relevant building regulations, on the ground of failure by the authority to discover by inspection the inadequacy of the foundations before they were covered over. The proceedings arose out of the trial of a preliminary issue whether or not the plaintiffs had any cause of action against the local authority, and the damages claimed by them were not specified in the pleadings. It appeared, however, that such damages would include the cost of repairing cracks in the structure and of underpinning the foundations of the block of maisonettes . . .
In Anns the House of Lords approved, subject to explanation, the decision of the Court of Appeal in Dutton v Bognor Regis United Building Co Ltd [1972] 1 All ER 462, [1972] 1 QB 373. In that case Lord Denning MR said ([1972] 1 All ER 462 at 474, [1972] 1 QB 373 at 396):
`Counsel for the Council submitted that the liability of the council would, in any case, be limited to those who suffered bodily harm; and did not extend to those who only suffered economic loss. He suggested, therefore, that although the council might be liable if the ceiling fell down and injured a visitor, they would not be liable simply because the house was diminished in value . . . I cannot accept this submission. The damage done here was not solely economic loss. It was physical damage to the house. If counsel’s submission were right, it would mean that, if the inspector negligently passes the house as properly built and it collapses and injures a person, the council are liable; but, if the owner discovers the defect in time to repair it—and he does repair it—the council are not liable. That is an impossible distinction. They are liable in either case. I would say the same about the manufacturer of an article. If he makes it
negligently, with a latent defect (so that it breaks to pieces and injures someone), he is undoubtedly liable. Suppose that the defect is discovered in time to prevent the injury. Surely he is liable for the cost of repair.’
The jump which is here made from liability under the Donoghue v Stevenson principle for damage to person or property caused by a latent defect in a carelessly manufactured article to liability for the cost of rectifying a defect in such an article which is ex hypothesi no longer latent is difficult to accept. As Stamp LJ recognised in the same case, there is no liability in tort on a manufacturer towards the purchaser from a retailer of an article which turns out to be useless or valueless through defects due to careless manufacture (see [1972] 1 All ER 426 at 489-490 [1972] 1 QB 373 at 414-415). The loss is economic. It is difficult to draw a distinction in principle between an article which is useless or valueless and one which suffers from a defect which would render it dangerous in use but which is discovered by the purchaser in time to avert any possibility of injury. The purchaser may incur expense in putting right the defect, or, more probably, discard the article. In either case the loss is purely economic. Stamp LJ appears to have taken the view that in the case of a house the builder would not be liable to a purchaser where the defect was discovered in time to prevent injury but that a local authority which had failed to discover the defect by careful inspection during the course of construction was so liable . . .
Consideration of the nature of the loss suffered in this category of cases is closely tied up with the question of when the cause of action arises. Lord Wilberforce in Anns v Merton London Borough [1977] 2 All ER 492 at 505, [1978] AC 728 at 760 regarded it as arising when the state of the building is such that there is present an imminent danger to the health or safety of persons occupying it. That state of affairs may exist when there is no actual physical damage to the building itself, though Lord Wilberforce had earlier referred to the relevant damage being material physical damage. So his meaning may have been that there must be a concurrence of material physical damage and also present or imminent danger to the health or safety of occupants. On that view there would be no cause of action where the building had suffered no damage (or possibly, having regard to the word ‘material’, only very slight damage) but a structural survey had revealed an underlying defect, presenting imminent danger. Such a discovery would inevitably cause a fall in the value of the building, resulting in economic loss to the owner. That such is the nature of the loss is made clear in cases where the owner
abandons the building as incapable of being put in a safe condition (as in Batty [Batty v Metropolitan Property Realisations Ltd [1978] QB 554]) or where he chooses to sell it at the lower value rather than undertake remedial works. In Pirelli General Cable Works Ltd v Oscar Faber & Partners (a firm) [1983] 1 All ER 65, [1983] 2 AC 1 it was held that the cause of action in tort against consulting engineers who had negligently approved a defective design for a chimney arose when damage to the chimney caused by the defective design first occurred, not when the damage was discovered or with reasonable diligence might have been discovered. The defendants there had in relation to the design been in contractual relations with the plaintiffs, but it was common ground that a claim in contract was time-barred. If the plaintiffs had happened to discover the defect before any damage had occurred there would seem to be no good reason for holding that they would not have had a cause of action in tort at that stage, without having to wait until some damage had occurred. They would have suffered economic loss through having a defective chimney on which they required to expend money for the purpose of removing the defect. It would seem that in a case such as the Pirelli General Cable Works case, where the tortious liability arose out of a contractual relationship with professional people, the duty extended to take reasonable care not to cause economic loss to the client by the advice given. The plaintiffs built the chimney as they did in reliance on that advice. The case would accordingly fall within the principle of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. I regard Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520 as being an application of that principle.
In my opinion it must now be recognised that, although the damage in Anns was characterised as physical damage by Lord Wilberforce, it was purely economic loss …
It being recognised that the nature of the loss held to be recoverable in Anns was pure economic loss, the next point for examination is whether the avoidance of loss of that nature fell within the scope of any duty of care owed to the plaintiffs by the local authority. On the basis of the law as it stood at the time of the decision the answer to that question must be in the negative.
The right to recover for pure economic loss, not flowing from physical injury, did not then extend beyond the situation where the loss had been sustained through reliance on negligence misstatements, as in Hedley Byrne . . .
The existence of a duty of that nature should not, in my opinion, be affirmed without a careful examination of the implications of such affirmation. To start with, if such a duty 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 on 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 not also 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 a building collapses when unoccupied . . .
In D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992, [1989] AC 177 both Lord Bridge and Lord Oliver expressed themselves as having difficulty in reconciling the decision in Anns with pre-existing principle and as being uncertain as to the nature and scope of such new principle as it introduced. Lord Bridge suggested that in the case of a complex structure such as a building one element of the structure might be regarded for Donoghue v Stevenson purposes as distinct from another element, so that damage to one part of the structure caused by a hidden defect in another part might qualify to be treated as damage to ‘other property’ (see [1988] 2 All ER 992 at 1006, [1989] AC 177 at 206). I think that it would be unrealistic to take this view as regards a building the whole of which had been erected and equipped by the same contractor. In that situation the whole package provided by the contractor would, in my opinion, fall to be regarded as one unit rendered unsound as such by a defect in the particular part. On the
other hand, where, for example, the electric wiring had been installed by a sub-contractor and due to a defect caused by lack of care a fire occurred which destroyed the building, it might not be stretching ordinary principles too far to hold the electrical sub-contractor liable for the damage . . . But, even if Lord Bridge’s theory were to be held acceptable, it would not seem to extend to the founding of liability on a local authority, considering that the purposes of the 1936 Act are concerned with averting danger to health and safety, not danger or damage to property. Further, it would not cover the situation which might arise through discovery, before any damage had occurred, of a defect likely to give rise to damage in the future.
Liability under the Anns decision is postulated on the existence of as present or imminent danger to health or safety. But, considering that the loss involved in incurring expenditure to avert the danger is pure economic loss, there would seem to be no logic in confining the remedy to cases where such danger exists. There is likewise no logic confining it to cases where some damage (perhaps comparatively slight) has been caused to the building, but refusing it where the existence of the danger has come to light in some other way, for example through a structural survey which happens to have been carried out, or where the danger inherent in some particular component or material has been revealed through failure in some other building. Then there is the question whether the remedy is available where the defect is rectified, not in order to avert danger to an inhabitant occupier himself, but in order to enable an occupier, who may be a corporation, to continue to occupy the building through its employees without putting those employees at risk.
In my opinion it is clear that Arms did not proceed on any basis of established principle, but introduced a new species of liability governed by a principle indeterminate in character but having the potentiality of covering a wide range of situations, involving chattels as well as real property, in which it had never hitherto been thought that the law of negligence had any proper place . . .
In my opinion there can be no doubt that Anns has for long been widely regarded as an unsatisfactory decision. In relation to the scope of the duty owed by a local authority it proceeded on what must, with due respect to its source, be regarded as a somewhat superficial examination of principle and there has been extreme difficulty, highlighted most recently by the speeches in the D & F Estates case, in ascertaining on exactly what basis of principle it
did proceed. I think it must now be recognised that it did not proceed on any basis of principle at all, but constituted a remarkable example of judicial legislation. It has engendered a vast spate of litigation, and each of the cases in the field which have reached this House has been distinguished. Others have been distinguished in the Court of Appeal. The result has been to keep the effect of the decision within reasonable bounds, but that has been achieved only by applying strictly the words of Lord Wilberforce and by refusing to accept the logical implications of the decision itself. These logical implications show that the case properly considered has potentiality for collision with long-established principles regarding liability in the tort of negligence for economic loss. There can be no doubt that to depart from the decision would re-establish a degree of certainty in this field of law which it has done a remarkable amount to upset . . .
It must, of course, be kept in mind that the decision has stood for some 13 years. On the other hand, it is not a decision of the type that is to a significant extent taken into account by citizens or indeed local authorities in ordering their affairs. No doubt its existence results in local authorities having to pay increased insurance premiums, but to be relieved of that necessity would be to their advantage, not to their detriment. To overrule it is unlikely to result in significantly increased insurance premiums for householders. It is perhaps of some significance that most litigation involving the decision consists in contests between insurance companies, as is largely the position in the present case. The decision is capable of being regarded as affording a measure of justice, but as against that the impossibility of finding any coherent and logically based doctrine behind it is calculated to put the law of negligence into a state of confusion defying rational analysis. It is also material that Anns has the effect of imposing on builders generally a liability going far beyond that which Parliament thought fit to impose on house builders alone by the Defective Premises Act 1972, a statute very material to the policy of the decision but not adverted to in it. There is much to be said for the view that in what is essentially a consumer protection field, as was observed by Lord Bridge in D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992 at 1007, [1989] AC 177 at 207, the precise extent and limits of the liabilities which in the public interest should be imposed on builders and local authorities are best left to the legislature.
My Lords, I would hold that Anns was wrongly decided as regards the scope of any private law duty of care resting on local authorities in relation to
their function of taking steps to secure compliance with building byelaws or regulations and should be departed from. It follows that Dutton v Bognor Regis United Building Co Ltd [1972] 1 All ER 462, [1972] 1 QB 373 should be overruled, as should all cases subsequent to Anns which were decided in reliance on it . . .
LORD BRIDGE OF HARWICH: . . .
My Lords, the speech of my noble and learned friend Lord Keith addresses comprehensively all the issues on which the outcome of this appeal depends. I find myself in full agreement with it . . .
Dangerous defects and defects of quality
If a manufacturer negligently puts into circulation a chattel containing a latent defect which renders it dangerous to persons or property, the manufacturer, on the well-known principles established by Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep, will be liable in tort for injury to persons or damage to property which the chattel causes. But if a manufacturer produces and sells a chattel which is merely defective in quality, even to the extent that it is valueless for the purpose for which it is intended, the manufacturer’s liability at common law arises only under and by reference to the terms of any contract to which he is a party in relation to the chattel; the common law does not impose on him any liability in tort to persons to whom he owes no duty in contract but who, having acquired the chattel, suffer economic loss because the chattel is defective in quality. If a dangerous defect in a chattel is discovered before it causes any personal injury or damage to property, because the danger is now known and the chattel cannot be safely used unless the defect is repaired, the defect becomes merely a defect in quality. The chattel is either capable of repair at economic cost or it is worthless and must be scrapped. In either case the loss sustained by the owner or hirer of the chattel is purely economic. It is recoverable against any party who owes the loser a relevant contractual duty. But it is not recoverable in tort in the absence of a special relationship of proximity imposing on the tortfeasor a duty of care to safeguard the plaintiff from economic loss. There is no such special relationship between the manufacturer of a chattel and a remote owner or hirer.
I believe that these principles are equally applicable to buildings. If a
builder erects a structure containing a latent defect which renders it dangerous to persons or property, he will be liable in tort for injury to persons or damage to property resulting from the dangerous defect. But, if the defect becomes apparent before any injury or damage has been caused, the loss sustained by the building owner is purely economic. If the defect can be repaired at economic cost, that is the measure of the loss. If the building cannot be repaired, it may have to be abandoned as unfit for occupation and therefore valueless. These economic losses are recoverable if they flow from breach of a relevant contractual duty, but, here again, in the absence of a special relationship of proximity they are not recoverable in tort. The only qualification I would make to this is that, if a building stands so close to the boundary of the building owner’s land that after discovery of the dangerous defect it remains a potential source of injury to persons or property on neighbouring land or on the highway, the building owner ought, in principle, to be entitled to recover in tort from the negligent builder the cost of obviating the danger, whether by repair or by demolition, so far as that cost is necessarily incurred in order to protect himself from potential liability to third parties . . .
The complex structure theory
In my speech in the D & F Estates case [1988] 2 All ER 992 at 1006-1007, [1989] AC 177 at 206-207 I mooted the possibility that in complex structures or complex chattels one part of a structure or chattel might, when it caused damage to another part of the same structure or chattel, be regarded in the law of tort as having caused damage to ‘other property’ for the purpose of the application of Donoghue v Stevenson principles. I expressed no opinion as to the validity of this theory, but put it forward for consideration as a possible ground on which the facts considered in Anns might be distinguishable from the facts which had to be considered in D & F Estates itself. I shall call this for convenience ‘the complex structure theory’ and it is, so far as I can see, only if and to the extent that this theory can be affirmed and applied that there can be any escape from the conclusions I have indicated above under the rubric ‘Dangerous defects and defects of quality’.
The complex structure theory has, so far as I know, never been subjected to express and detailed examination in any English authority . . .
. . . The reality is that the structural elements in any building form a single indivisible unit of which the different parts are essentially interdependent. To
the extent that there is any defect in one part of the structure it must to a greater or lesser degree necessarily affect all other parts of the structure. Therefore any defect in the structure is a defect in the quality of the whole and it is quite artificial, in order to impose a legal liability which the law would not otherwise impose, to treat a defect in an integral structure, so far as it weakens the structure, as a dangerous defect liable to cause damage to `other property’.
A critical distinction must be drawn here between some part of a complex structure which is said to be a ‘danger’ only because it does not perform its proper function in sustaining the other parts and some distinct item incorporated in the structure which positively malfunctions so as to inflict positive damage on the structure in which it is incorporated. Thus, if a defective central heating boiler explodes and damages a house or a defective electrical installation malfunctions and sets the house on fire, I see no reason to doubt that the owner of the house, if he can prove that the damage was due to the negligence of the boiler manufacturer in the one case or the electrical contractor in the other, can recover damages in tort on Donoghue v Stevenson principles. But the position in law is entirely different where, by reason of the inadequacy of the foundations of the building to support the weight of the superstructure, differential settlement and consequent cracking occurs. Here, once the first cracks appear, the structure as a whole is seen to be defective and the nature of the defect is known. Even if, contrary to my view, the initial damage could be regarded as damage to other property caused by a latent defect, once the defect is known the situation of the building owner is analogous to that of the car owner who discovers that the car has faulty
brakes.6 He may have a house which, until repairs are effected, is unfit for habitation, but, subject to the reservation I have expressed with respect to ruinous buildings at or near the boundary of the owner’s property, the building no longer represents a source of danger and as it deteriorates will only damage itself.
For these reasons the complex structure theory offers no escape from the conclusion that damage to a house itself which is attributable to a defect in the structure of the house is not recoverable in tort on Donoghue v Stevenson principles, but represents purely economic loss which is only recoverable in contract or in tort by reason of some special relationship of proximity which imposes on the tortfeasor a duty of care to protect against economic loss.
The relative positions of the builder and the local authority
I have so far been considering the potential liability of a builder for negligent defects in the structure of a building to persons to whom he owes no contractual duty. Since the relevant statutory function of the local authority is directed to no other purpose than securing compliance with building byelaws or regulations by the builder, I agree with the view expressed in Anns and by
the majority of the Court of Appeal in Dutton that a negligent performance of that function can attract no greater liability than attaches to the negligence of the builder whose fault was the primary tort giving rise to any relevant damage. I am content for present purposes to assume, though I am by no means satisfied that the assumption is correct, that where the local authority, as in this case or in Dutton, has in fact approved the defective plans or inspected the defective foundations and negligently failed to discover the defect, its potential liability in tort is coextensive with that of the builder . . .
Imminent danger to health or safety
A necessary element in the building owner’s cause of action against the negligent local authority, which does not appear to have been contemplated in Dutton but which, it is said in Anns, must be present before the cause of action accrues, is that the state of the building is such that there is present or imminent danger to the health or safety of persons occupying it. Correspondingly the damages recoverable are said to include the amount of expenditure necessary to restore the building to a condition in which it is no longer such a danger, but presumably not any further expenditure incurred in any merely qualitative restoration. I find these features of the Anns doctrine very difficult to understand. The theoretical difficulty of reconciling this aspect of the doctrine with previously accepted legal principle was pointed out by Lord Oliver in D & F Estates [1988] 2 All ER 992 at 1011, [1989] AC 177 at 212-213. But apart from this there are, as it appears to me, two insuperable difficulties arising from the requirement of imminent danger to health or safety as an ingredient of the cause of action which lead to quite irrational and capricious consequences in the application of the Anns doctrine. The first difficulty will arise where the relevant defect in the building, when it is first discovered, is not a present or imminent danger to health or safety. What is the owner to do if he is advised that the building will gradually deteriorate, if not repaired, and will in due course become a danger
to health and safety, but that the longer he waits to effect repairs the greater the cost will be? Must he spend £1,000 now on the necessary repairs with no redress against the local authority? Or is he entitled to wait until the building has so far deteriorated that he has a cause of action and then to recover from the local authority the £5,000 which the necessary repairs are now going to cost? I can find no answer to this conundrum. A second difficulty will arise where the latent defect is not discovered until it causes the sudden and total collapse of the building, which occurs when the building is temporarily unoccupied and causes no damage to property except to the building itself. The building is now no longer capable of occupation and hence cannot be a danger to health and safety. It seems a very strange result that the building owner should be without remedy in this situation if he would have been able to recover from the local authority the full cost of repairing the building if only the defect had been discovered before the building fell down.
Liability for economic loss
All these considerations lead inevitably to the conclusion that a building owner can only recover the cost of repairing a defective building on the ground of the authority’s negligence in performing its statutory function of approving plans or inspecting buildings in the course of construction if the scope of the authority’s duty of care is wide enough to embrace purely economic loss. The House has already held in D & F Estates that a builder, in the absence of any contractual duty or of a special relationship of proximity introducing the Hedley Byrne principle of reliance, owes no duty of care in tort in respect of the quality of his work. As I pointed out in D & F Estates, to hold that the builder owed such a duty of care to any person acquiring an interest in the product of the builder’s work would be to impose on him the obligations of an indefinitely transmissible warranty of quality.
By s. 1 of the Defective Premises Act 1972 Parliament has in fact imposed on builders and others undertaking work in the provision of dwellings the obligation of a transmissible warranty of the quality of their work and of the fitness for habitation of the completed dwelling. But, besides being limited to dwellings, liability under that Act is subject to a limitation period of six years from the completion of the work and to the exclusion provided for by s. 2. It would be remarkable to find that similar obligations in the nature of a transmissible warranty of quality, applicable to buildings of every kind and subject to no such limitations or exclusions as are imposed by the 1972 Act,
could be derived from the builder’s common law duty of care or from the duty imposed by building byelaws or regulations. In Anns Lord Wilberforce expressed the opinion that a builder could be held liable for a breach of statutory duty in respect of buildings which do not comply with the byelaws. But he cannot, I think, have meant that the statutory obligation to build in conformity with the byelaws by itself gives rise to obligations in the nature of transmissible warranties of quality. If he did mean that, I must respectfully disagree. I find it impossible to suppose that anything less than clear express language such as is used in s. 1 of the 1972 Act would suffice to impose such a statutory obligation.
As I have already said, since the function of a local authority in approving plans or inspecting buildings in the course of construction is directed to ensuring that the builder complies with building byelaws or regulations, I cannot see how, in principle, the scope of the liability of the authority for a negligent failure to ensure compliance can exceed that of the liability of the builder for his negligent failure to comply.
There may, of course, be situations where, even in the absence of contract, there is a special relationship of proximity between builder and building owner which is sufficiently akin to contract to introduce the element of reliance so that the scope of the duty of care owed by the builder to the owner is wide enough to embrace purely economic loss. The decision in Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520 can, I believe, only be understood on this basis.
In Sutherland Shire Council v Heyman (1985) 60 ALR 1 the critical role of the reliance principle as an element in the cause of action which the plaintiff sought to establish is the subject of close examination, particularly in the judgment of Mason J. The central theme of his judgment, and a subordinate theme in the judgments of Brennan and Deane JJ, who together with Mason J formed the majority rejecting the Anns doctrine, is that a duty of care of a scope sufficient to make authority liable for damage of the kind suffered can only be based on the principle of reliance and that there is nothing in the ordinary relationship of a local authority, as statutory supervisor of building operations, and the purchaser of a defective building capable of giving rise to such a duty. I agree with these judgments. It cannot, I think, be suggested, nor do I understand Anns . . . to be in fact suggesting, that the approval of plans or the inspection of a building in the course of construction by the local authority in performance of their statutory function and a subsequent
purchase of the building by the plaintiff are circumstances in themselves sufficient to introduce the principle of reliance which is the foundation of a duty of care of the kind identified in Hedley Byrne.
In Dutton [1972] 1 All ER 462 at 475, [1972] 1 QB 373 at 397-398 Lord Denning MR said:
`. . . Mrs Dutton has suffered a grievous loss. The house fell down without any fault of hers. She is in no position herself to bear the loss. Who ought in justice to bear it? I should think those who were responsible. Who are they? In the first place, the builder was responsible. It was he who laid the foundations so badly that the house fell down. In the second place, the council’s inspector was responsible. It was his job to examine the foundations to see if they would take the load of the house. He failed to do it properly. In the third place, the council should answer for his failure. They were entrusted by Parliament with the task of seeing that houses were properly built. They received public funds for the purpose. The very object was to protect purchasers and occupiers of houses. Yet, they failed to protect them. Their shoulders are broad enough to bear the loss.’
These may be cogent reasons of social policy for imposing liability on the authority. But the shoulders of a public authority are only ‘broad enough to bear the loss’ because they are financed by the public at large. It is pre-eminently for the legislature to decide whether these policy reasons should be accepted as sufficient for imposing on the public the burden of providing compensation for private financial losses. If they do so decide, it is not difficult for them to say so . . .
LORD OLIVER OF AYLMERTON: . . .
My Lords, I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Keith and Lord Bridge. For the reasons which they have given I too would allow this appeal . . .
. . . despite the categorisation of the damage as ‘material, physical damage’ (see Anns [1977] 2 All ER 492 at 595, [1978] AC 728 at 759 per Lord Wilberforce), it is, I think, incontestable on analysis that what the plaintiffs suffered was pure pecuniary loss and nothing more. If one asks, `What were the damages to be awarded for?’ clearly they were not to be awarded for injury to the health or person of the plaintiffs, for they had
suffered none. But equally clearly, although the ‘damage’ was described, both in the Court of Appeal in Dutton and in this House in Arms, as physical or material damage, this simply does not withstand analysis. To begin with, it makes no sort of sense to accord a remedy where the defective nature of the structure has manifested itself by some physical symptom, such as a crack or a fractured pipe, but to deny it where the defect has been brought to light by, for instance, a structural survey in connection with a proposed sale. Moreover, the imminent danger to health or safety which was said to be the essential ground of the action was not the result of the physical manifestations which had appeared but of the inherently defective nature of the structure which they revealed. They were merely the outward signs of a deterioration resulting from the inherently defective condition with which the building had been brought into being from its inception and cannot properly be described as damage caused to the building in any accepted use of the word ‘damage’.
In the speech of Lord Bridge and in my own speech in D & F Estates Ltd v Church Comrs for England [1988] 2 All ER 992, [1989] AC 177 there was canvassed what has been called ‘the complex structure theory’. This has been rightly criticised by academic writers, although I confess that I thought that both Lord Bridge and I had made it clear that it was a theory which was not embraced with any enthusiasm but was advanced as the only logically possible explanation of the categorisation of the damage in Anns as ‘material, physical damage’. Lord Bridge has, in the course of his speech in the present case, amply demonstrated the artificiality of the theory and, for the reasons which he has given, it must be rejected as a viable explanation of the underlying basis for the decision in Anns. However that decision is analysed, therefore, it is in the end inescapable that the only damage for which compensation was to be awarded and which formed the essential foundation of the action was pecuniary loss and nothing more. The injury which the plaintiff suffers in such a case is that his consciousness of the possible injury to his own health or safety or that of others puts him in a position in which, in order to enable him either to go on living in the property or to exploit its financial potentiality without that risk, whether substantial or insubstantial, he has to expend money in making good the defects which have now become patent . . .
It does not, of course, at all follow as a matter of necessity from the mere fact that the only damage suffered by a plaintiff in an action for the tort of
negligence is pecuniary or ‘economic’ that his claim is bound to fail . . .
The critical question, as was pointed out in the analysis of Brennan J in his judgment in Sutherland Shire Council v Heyman (1985) 60 ALR 1, is not the nature of the damage in itself, whether physical or pecuniary, but whether the scope of the duty of care in the circumstances of the case is such as to embrace damage of the kind which the plaintiff claims to have sustained (see Caparo Industries plc v Dickman [1990] 1 All ER 568, [1990] 2 WLR 358). The essential question which has to be asked in every case, given that damage which is the essential ingredient of the action has occurred, is whether the relationship between the plaintiff and the defendant is such, or, to use the favoured expression, whether it is of sufficient ‘proximity’, that it imposes on the latter a duty to take care to avoid or prevent that loss which has in fact been sustained . . .
[Having referred to the need to place some limits on the extent of liability for foreseeable pure economic loss, LORD OLIVER continued:] I frankly doubt whether, in searching for such limits, the categorisation of the damage as ‘material’, ‘physical’, ‘pecuniary’ or ‘economic’ provides a particularly useful contribution. Where it does, I think, serve a useful purpose is in identifying those cases in which it is necessary to search for and find something more than the mere reasonably foreseeability of damage which has occurred as providing the degree of ‘proximity’ necessary to support the action . . . The infliction of physical injury to the person or property of another universally requires to be justified. The causing of economic loss does not. If it is to be categorised as wrongful it is necessary to find some factor beyond the mere occurrence of the loss and the fact that its occurrence could be foreseen. Thus the categorisation of damage as economic serves at least the useful purpose of indicating that something more is required and it is one of the unfortunate features of Anns that it resulted initially in this essential distinction being lost sight of.
. . . Proximity is an expression which persistently defies definition, but my difficulty in rationalising the basis of Dutton and Anns is and has always been not so much in defining it as in discerning the circumstances from which it could have been derived. For reasons which I have endeavoured to explain, the starting-point in seeking to rationalise these decisions must, as it seems to me, be to establish the basis of the liability of the person who is the direct and immediate cause of the plaintiff’s loss. Anyone, whether he be a professional builder or a do-it-yourself enthusiast, who builds or alters a
semi-permanent structure must be taken to contemplate that at some time in the future it will, whether by purchase, gift or inheritance, come to be occupied by another person and that if it is defectively built or altered it may fall down and injure that person or his property or may put him in a position in which, if he wishes to occupy it safely or comfortably, he will have to expend money on rectifying the defect. The case of physical injury to the owner or his licensees or to his or their property presents no difficulty. He who was responsible for the defect (and it will be convenient to refer to him compendiously as `the builder’) is, by the reasonable foreseeability of that injury, in a proximate ‘neighbour’ relationship with the injured person on ordinary Donoghue v Stevenson principles. But, when no such injury has occurred and when the defect has been discovered and is therefore no longer latent, whence arises that relationship of proximity required to fix him with responsibility for putting right the defect? Foresight alone is not enough, but from what else can the relationship be derived? Apart from contract, the manufacturer of a chattel assumes no responsibility to a third party into whose hands it has come for the cost of putting it into a state in which it can safely continue to be used for the purpose for which it was intended. Anns, of course, does not go so far as to hold the builder liable for every latent defect which depreciates the value of the property but limits the recovery, and thus the duty, to the cost of putting it into a state in which it is no longer an imminent threat to the health or safety of the occupant. But it is difficult to see any logical basis for such a distinction. If there is no relationship of proximity such as to create a duty to avoid pecuniary loss resulting from the plaintiff’s perception of non-dangerous defects, on what principle can such a duty arise at the moment when the defect is perceived to be an imminent danger to health? Take the case of an owner-occupier who has inherited the property from a derivative purchaser. He suffers, in fact, no ‘loss’ save that the property for which he paid nothing is less valuable to him by the amount which it will cost him to repair it if he wishes to continue to live in it. If one assumes the parallel case of one who has come into possession of a defective chattel, for instance a yacht, which may be a danger if it is used without being repaired, it is impossible to see on what principle such a person, simply because the chattel has become dangerous, could recover the cost of repair from the original manufacturer . . .
My Lords, for the reasons which I endeavoured to state in the course of my speech in D & F Estates Ltd v Church Comrs for England [1988] 2 All ER
992, [1989] AC 177 and which are expounded in more felicitous terms both in the speeches of my noble and learned friends in the instant case and in that of Lord Keith in Dept of the Environment v Thomas Bates & Son Ltd [1990] 2 All ER 943, I have found it impossible to reconcile the liability of the builder propounded in Anns with any previously accepted principles of the tort of negligence and I am able to see no circumstances from which there can be deduced a relationship of proximity such as to render the builder liable in tort for pure pecuniary damage sustained by a derivative owner with whom he has no contractual or other relationship. Whether, as suggested in the speech of my noble and learned friend Lord Bridge, he could be held responsible for the cost necessarily incurred by a building owner in protecting himself from potential liability to third parties is a question on which I prefer to reserve my opinion until the case arises, although I am not at the moment convinced of the basis for making such a distinction . . .
For the reasons which I have endeavoured to express I do not think that Anns can be regarded as consistent withe] general principles . Nor do I think that it can properly be left to stand as a peculiar doctrine applicable simply to defective buildings, for I do not think that its logical consequences can be contained within so confined a compass. It may be said that to hold local authorities liable in damages for failure effectively to perform their regulatory functions serves a useful social purpose by providing what is, in effect, an insurance fund from which those who are unfortunate enough to have acquired defective premises can recover part at least of the expense to which they have been put or the loss of value which they have sustained. One cannot but have sympathy with such a view, although I am not sure that I see why the burden should fall on the community at large rather than be left to be covered by private insurance. But, in any event, like my noble and learned friends, I think that the achievement of beneficial social purposes by the creation of entirely new liabilities is a matter which properly falls within the province of the legislature and within that province alone. At the date when Anns was decided the Defective Premises Act 1972, enacted after a most careful consideration by the Law Commission, had shown clearly the limits within which Parliament had thought it right to superimpose additional liabilities on those previously existing at common law and it is one of the curious features of the case that no mention even of the existence of this important measure, let alone of its provisions, and in particular the provision regarding the
accrual of the cause of action, appears in any of the speeches or in the reported summary in the Law Reports of the argument of counsel.
There may be very sound social and political reasons for imposing on local authorities the burden of acting, in effect, as insurers that buildings erected in their areas have been properly constructed in accordance with the relevant building regulations. Statute may so provide. It has not done so and I do not, for my part, think that it is right for the courts not simply to expand existing principles but to create at large new principles in order to fulfil a social need in an area of consumer protection which has already been perceived by the legislature but for which, presumably advisedly, it has not thought it necessary to provide.
LORD JAUNCEY OF TULLICHETTLE: . . .
My Lords, I agree with the views of my noble and learned friend Lord Bridge in this appeal that to apply the complex structure theory to a house so that each part of the entire structure is treated as a separate piece of property is quite unrealistic. A builder who builds a house from foundations upwards is creating a single integrated unit of which the individual components are interdependent. To treat the foundations as a piece of property separate from the walls or the floors is a wholly artificial exercise. If the foundations are inadequate the whole house is affected. Furthermore, if the complex structure theory is tenable there is no reason in principle why it should not also be applied to chattels consisting of integrated parts such as a ship or a piece of machinery. The consequence of such an application would be far reaching. It seems to me that the only context for the complex structure theory in the case of a building would be where one integral component of the structure was built by a separate contractor and where a defect in such a component had caused damage to other parts of the structure, e.g. a steel frame erected by a specialist contractor which failed to give adequate support to floors or walls. Defects in such ancillary equipment as central heating boilers or electrical installations would be subject to the normal Donoghue v Stevenson principle if such defects gave rise to damage to other parts of the building . . .
Spartan Steel and Alloys Ltd v Martin & Co (Contractors) Ltd
Court of Appeal [1972] EWCA Civ 3, [1972] 3 All ER 557
LORD DENNING MR: . . .
The plaintiffs, Spartan Steel & Alloys Ltd, have a factory in Birmingham where they manufacture stainless steel. The factory obtains its electricity by a direct cable from a power station of the Midlands Electricity Board.
In June 1969 contractors called Martin & Co (Contractors) Ltd, the defendants, were doing work on a road about a quarter of a mile away. They were going to dig up the road with a big power-driven excavating shovel. They made enquiries about the place of the cables, mains and so forth, under the road. They were given plans showing them. But unfortunately their men did not take reasonable care. The shovel damaged the cable which supplied electricity to the plaintiffs’ works. The electricity board shut down the power whilst they mended the cable.
The factory was at that time working continuously for 24 hours all round the clock. The electric power was shut off at 7.40 pm on 12 June 1969, and was off for 14–1/2 hours until it was restored at 10.00 am on 13 June 1969. This was all through the night and a couple of hours more. But, as this factory was doing night work, it suffered loss. At the time when the power was shut off, there was an arc furnace in which metal was being melted in order to be converted into ingots. Electric power was needed throughout in order to
maintain the temperature and melt the metal. When the power failed, there was a danger that the metal might solidify in the furnace and do damage to the lining of the furnace. So the plaintiffs used oxygen to melt the material and poured it from a tap out of the furnace. But this meant that the melted material was of much less value. The physical damage was assessed at £368. In addition, if that particular melt had been properly completed, the plaintiffs would have made a profit on it of £400. Furthermore, during those 14-1/2 hours, when the power was cut off, the plaintiffs would have been able to put four more melts through the furnace; and, by being unable to do so, they lost a profit of £1,767.
The plaintiffs claim all those sums as damages against the defendants for negligence. No evidence was given at the trial, because the defendants admitted that they had been negligent. The contest was solely on the amount of damages. The defendants take their stand on the recent decision in this court of SCM (United Kingdom) Ltd v W.J. Whittall & Son Ltd. They admit that they are liable for the £368 physical damages. They did not greatly dispute that they are also liable for the £400 loss of profit on the first melt, because that was truly consequently on the physical damages and thus covered by SCM v Whittall. But they deny that they are liable for the £1,767 for the other four melts. They say that was economic loss for which they are not liable. The judge rejected their contention and held them liable for all the loss. The defendants appeal to this court . . .
At bottom I think the question of recovering economic loss is one of policy. Whenever the courts draw a line to mark out the bounds of duty, they do it as a matter of policy so as to limit the responsibility of the defendant. Whenever the courts set bounds to the damages recoverable—saying that they are, or are not, too remote—they do it as matter of policy so as to limit the liability of the defendant.
In many of the cases where economic loss has been held not to be recoverable, it has been put on the ground that the defendant was under no duty to the plaintiff. Thus where a person is injured in a road accident by the negligence of another, the negligent driver owes a duty to the injured man himself, but he owes no duty to the servant of the injured man: see Best v
Samuel Fox & Co Ltd;8 nor to the master of the injured man: Inland Revenue Comrs v Hambrook;9 nor to anyone else who suffers loss because he had a
contract with the injured man: see Simpson & Co v Thomson;1° nor indeed to anyone who only suffers economic loss on account of the accident: see
Kirkham v Boughey.11 Likewise, when property is damaged by the negligence of another, the negligent tortfeasor owes a duty to the owner or possessor of the chattel, but not to one who suffers loss only because he had a contract entitling him to use the chattel or giving him a right to receive it at
some later date: see Elliot Steam Tug Co v Shipping Controller12 and
Margarine Union GmbH v Cambay Prince Steamship Co Ltd.13
In other cases, however, the defendant seems clearly to have been under a duty to the plaintiff, but the economic loss has not been recovered because it is too remote. Take the illustration given by Blackburn J in Cattle v Stockton
Waterworks Co’ when water escapes from a reservoir and floods a coalmine where many men are working; those who had their tools or clothes destroyed could recover, but those who only lost their wages could not. Similarly, when the defendants’ ship negligently sank a ship which was being towed by a tug, the owner of the tug lost his remuneration, but he could not recover it from the negligent ship although the same duty (of navigation with reasonable care) was owed to both tug and tow: see Societe Remorquage a Helice v
Bennetts.15 In such cases if the plaintiff or his property had been physically injured, he would have recovered; but, as he only suffered economic loss, he is held not entitled to recover. This is, I should think, because the loss is
regarded by the law as too remote: see King v Phillips.16
On the other hand, in the cases where economic loss by itself has been held to be recoverable, it is plain that there was a duty to the plaintiff and the loss was not too remote. Such as when one ship negligently runs down another ship, and damages it, with the result that the cargo has to be discharged and reloaded. The negligent ship was already under a duty to the cargo-owners; and they can recover the cost of discharging and reloading it, as it is not too
remote: see Morrison Steamship Co Ltd v Steamship Greystoke Castle.17 Likewise, when a banker negligently gives a reference to one who acts on it, the duty is plain and the damage is not too remote: see Hedley Byrne & Co
Ltd v Heller & Partners Ltd.18
The more I think about these cases, the more difficult I find it to put each into its proper pigeon-hole. Sometimes I say: ‘There was no duty.’ In others I say: ‘The damage was too remote.’ So much so that I think the time has come to discard those tests which have proved so elusive. It seems to me better to consider the particular relationship in hand, and see whether or not, as a matter of policy, economic loss should be recoverable. Thus in Weller & Co v
Foot and Mouth Disease Research Institute19 it was plain that the loss suffered by the auctioneers was not recoverable, no matter whether it is put on the ground that there was no duty or that the damage was too remote.
Again, in Electrochrome Ltd v Welsh Plastics Ltd,2° it is plain that the economic loss suffered by the plaintiffs’ factory (due to the damage to the fire hydrant) was not recoverable, whether because there was no duty or that it was too remote.
So I turn to the relationship in the present case. It is of common occurrence. The parties concerned are the electricity board who are under a statutory duty to maintain supplies of electricity in their district; the inhabitants of the district, including this factory, who are entitled by statute to a continuous supply of electricity for their use; and the contractors who dig up the road. Similar relationships occur with other statutory bodies, such as gas and water undertakings. The cable may be damaged by the negligence of the statutory undertaker, or by the negligence of the contractor, or by accident without any negligence by anyone; and the power may have to be cut off whilst the cable is repaired. Or the power may be cut off owing to a short-circuit in the power house; and so forth. If the cutting off of the supply causes economic loss to the consumers, should it as matter of policy be recoverable? And against whom?
The first consideration is the position of the statutory undertakers. If the board do not keep up the voltage or pressure of electricity, gas or water—or, likewise, if they shut it off for repairs—and thereby cause economic loss to their consumers, they are not liable in damages, not even if the cause of it is due to their own negligence. The only remedy (which is hardly ever pursued) is to prosecute the board before the justices. Such is the result of many cases, starting with a water board: Atkinson v Newcastle and Gateshead Waterworks
Co;21 going on to a gas board: Clegg, Parkinson & Co v Earby Gas Co;22 and then to an electricity company: Stevens v Aldershot Gas, Water and District
Lighting Co.23 In those cases the courts, looking at the legislative enactments, held that Parliament did not intend to expose the board to liability for
damages to the inhabitants en masse: see what Lord Cairns LC said24 and
Wills J.25 No distinction was made between economic loss and physical damage; and taken at their face value the reasoning would mean that the board was not liable for physical damage either. But there is another group of cases which go to show that, if the board, by their negligence in the conduct
of their supply, cause direct physical damage to person or property, the cases
seem to show that they are liable: see Milnes v Huddersfield Corpn26 per Lord Blackburn;
Midwood & Co Ltd v Manchester Corpn;27 Heard v Brymbo Steel Co Ltd28
and Hartley v Mayoh & Co.29 But one thing is clear, the board have never been held liable for economic loss only. If such be the policy of the legislature in regard to electricity boards, it would seem right for the common law to adopt a similar policy in regard to contractors. If the electricity boards are not liable for economic loss due to negligence which results in the cutting off of the supply, nor should a contractor be liable.
The second consideration is the nature of the hazard, namely, the cutting of the supply of electricity. This is a hazard which we all run. It may be due to a short circuit, to a flash of lightning, to a tree falling on the wires, to an accidental cutting of the cable, or even to the negligence of someone or other. And when it does happen, it affects a multitude of persons; not as a rule by way of physical damage to them or their property, but by putting them to inconvenience, and sometimes to economic loss. The supply is usually restored in a few hours, so the economic loss is not very large. Such a hazard is regarded by most people as a thing they must put up with—without seeking compensation from anyone. Some there are who install a stand-by system. Others seek refuge by taking out an insurance policy against breakdown in the supply. But most people are content to take the risk on themselves. When the supply is cut off, they do not go running round to their solicitor. They do not try to find out whether it was anyone’s fault. They just put up with it. They try to make up the economic loss by doing more work next day. This is a healthy attitude which the law should encourage.
The third consideration is this. If claims for economic loss were permitted for this particular hazard, there would be no end of claims. Some might be genuine, but many might be inflated, or even false. A machine might not have been in use anyway, but it would be easy to put it down to the cut in supply. It would be well-nigh impossible to check the claims. If there was economic loss on one day, did the applicant do his best to mitigate it by working harder next day? And so forth. Rather than expose claimants to such temptation and defendants to such hard labour—on comparatively small claims—it is better to disallow economic loss altogether, at any rate when it
stands alone, independent of any physical damage.
The fourth consideration is that, in such a hazard as this, the risk of economic loss should be suffered by the whole community who suffer the losses—usually many but comparatively small losses—rather than on the one pair of shoulders, that is, on the contractor on whom the total of them, all added together, might be very heavy.
The fifth consideration is that the law provides for deserving cases. If the defendant is guilty of negligence which cuts off the electricity supply and causes actual physical damage to person or property, that physical damage
can be recovered; see Baker v Crow Carrying Co Ltd referred to by
Buckley LJ in SCM v Whitta11,31 and also any economic loss truly consequential on the material damage: see British Celanese Ltd v A H Hunt
(Capacitors) Ltd32 and SCM v Whitta11.33 Such cases will be comparatively few. They will be readily capable of proof and will be easily checked. They should be and are admitted.
These considerations lead me to the conclusion that the plaintiffs should recover for the physical damage to the one melt (E368), and the loss of profit on that melt consequent thereon (£400); but not for the loss of profit on the four melts (£1,767), because that was economic loss independent of the physical damage. I would, therefore, allow the appeal and reduce the damages to £768.
Marc Rich & Co AG v Bishop Rock Marine Co Ltd, The Nicholas H
House of Lords [1995] 3 All ER 307
LORD STEYN: . . .
(c) The bill of lading contracts
The first and principal ground of the decision of Saville LJ [in the Court of Appeal] was the impact of the terms of the bill of lading contracts. He said ([1994] 3 All ER 686 at 695-696, [1994] 1 WLR 1071 at 1080):
`The Hague Rules (and their successor the Hague Visby Rules (which are scheduled to the Carriage of Goods by Sea Act 1971)) form an
internationally recognised code adjusting the rights and duties existing between shipowners and those shipping goods under bills of lading. As Donaldson MR said in Leigh & Sillavan Ltd v Aliakmon Shipping Co Ltd, The Aliakmon [1985] 2 All ER 44 at 54, [1985] QB 350 at 368 the rules create an intricate blend of responsibilities and liabilities, rights and immunities, limitations on the amount of damages recoverable, time bars, evidential provisions, indemnities and liberties, all in relation to the carriage of goods under bills of lading. The proposition advanced by Mr Gross would add an identical or virtually identical duty owed by the classification society to that owed by the shipowners, but without any of these balancing factors, which are internationally recognised and accepted. I do not regard that as a just, fair or reasonable proposition.’
Saville LJ ended this part of his judgment by explicitly stating ([1994] 3 All ER 686 at 697, [1994] 1 WLR 1071 at 1081):
`The question is not whether the classification society is covered by the rules, but whether in all the circumstances it is just, fair and reasonable to require them to shoulder a duty which by the rules primarily lies on the shipowners, without the benefits of those rules or other international conventions.’
That question Saville LJ (and, by adoption, Balcombe LJ) answered in the negative. And Mann LJ was in substantial agreement on this point.
It was the principal task of counsel for the cargo owners to try to dismantle the reasoning of Saville LJ. He pointed out that Saville LJ apparently assumed that the limitation of the claim of cargo owners against the shipowners arose under the Hague Rules. In truth the limitation arose by reason of tonnage limitation as already explained. This is not a point of substance. Tonnage limitation is a part of the international code which governs the claims under consideration. It is as relevant as any limitation under the Hague Rules.
Moving on to more substantial matters, counsel for the cargo owners submitted that the allocation of risks in the Hague Rules between shipowners and the owners of cargo is irrelevant to the question whether NKK [the employer of the surveyor who actually surveyed the ship] owed a duty of care to the owners of the cargo. He said the bill of lading contract on Hague Rules terms, and the international character of those rules, is only a piece of history, which explains the positions in which NKK and the owners of the cargo
found themselves. In the course of these submissions Mr Gross referred your Lordships to a valuable article by P F Cane ‘The Liability of Classification Societies’ [1994] LMCLQ 363. Mr Cane observed trenchantly (at 373):
`But why should an allocation of risks between shipowners and cargo owners be enforced as between cargo owners and classification societies? Whatever good reasons there may be to do so, the mere existence of the Hague Rules is surely not one of them.’
That is a cogent argument against the reasoning of the Court of Appeal. There is, however, a further dimension of the problem that must be considered.
The dealings between shipowners and cargo owners are based on a contractual structure, the Hague Rules, and tonnage limitation, on which the insurance of international trade depends: see Dr Malcolm Clarke `Misdelivery and Time Bars’ [1990] LMCLQ 314. Underlying it is the system of double or overlapping insurance of cargo. Cargo owners take out direct insurance in respect of the cargo. Shipowners take out liability risks insurance in respect of breaches of their duties of care in respect of the cargo. The insurance system is structured on the basis that the potential liability of shipowners to cargo owners is limited under the Hague Rules and by virtue of tonnage limitation provisions. And insurance premiums payable by owners obviously reflect such limitations on the shipowners’ exposure.
If a duty of care by classification societies to cargo owners is recognised in this case, it must have a substantial impact on international trade. In his article Mr Cane described the likely effect of imposing such duty of care as follows ([1994] LMCLQ 363 at 375):
`Societies would be forced to buy appropriate liability insurance unless they could bargain with shipowners for an indemnity. To the extent that societies were successful in securing indemnities from shipowners in respect of loss suffered by cargo owners, the limitation of the liability of shipowners to cargo owners under the Hague(-Visby) Rules would effectively be destroyed. Shipowners would need to increase their insurance cover in respect of losses suffered by cargo owners; but at the same time, cargo owners would still need to insure against losses above the Hague-Visby recovery limit which did not result from actionable negligence on the part of a classification society. At least if classification societies are immune from non-contractual liability, they can confidently
go without insurance in respect of third-party losses, leaving third parties to insure themselves in respect of losses for which they could not recover from shipowners.’
Counsel for the cargo owners challenged this analysis. On instructions he said that classification societies already carry liability risks insurance. That is no doubt right since classification societies do not have a blanket immunity from all tortious liability. On the other hand, if a duty of care is held to exist in this case, the potential exposure of classification societies to claims by cargo owners will be large. That greater exposure is likely to lead to an increase in the cost to classification societies of obtaining appropriate liability risks insurance. Given their role in maritime trade classification societies are likely to seek to pass on the higher cost to owners. Moreover, it is readily predictable that classification societies will require owners to give appropriate indemnities. Ultimately, shipowners will pay.
The result of a recognition of a duty of care in this case will be to enable cargo owners, or rather their insurers, to disturb the balance created by the Hague Rules and Hague Visby Rules as well as by tonnage limitation provisions, by enabling cargo owners to recover in tort against a peripheral party to the prejudice of the protection of shipowners under the existing system. For these reasons I would hold that the international trade system tends to militate against the recognition of the claim in tort put forward by the cargo owners against the classification society.
Caparo Industries plc v Dickman
House of Lords [1990] UKHL 2, [1990] 1 All ER 568
LORD BRIDGE OF HARWICH: . . .
…The damage which may be caused by the negligently spoken or written word will normally be confined to economic loss sustained by those who rely on the accuracy of the information or advice they receive as a basis for action. The question what, if any, duty is owed by the maker of a statement to exercise due care to ensure its accuracy arises typically in relation to statements made by a person in the exercise of his calling or profession. In advising the client who employs him the professional man owes a duty to exercise that standard of skill and care appropriate to his professional status and will be liable both in contract and in tort for all losses which his client may suffer by reason of any breach of that duty. But the possibility of any duty of care being owed to third parties with whom the professional man was in no contractual relationship was for long denied because of the wrong turning taken by the law in Le Lievre v Gould [1893] 1 QB 491 in overruling Cann v Willson (1888) 39 Ch D 39. In Candler v Crane Christmas & Co [1951] 1 All ER 426, [1951] 2 KB 164 Denning LJ, in his dissenting judgment, made a valiant attempt to correct the error. But it was not until the decision of this House in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465 that the law was once more set on the right path.
… The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or
information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate. To hold the maker of the statement to be under a duty of care in respect of the accuracy of the statement to all and sundry for any purpose for which they may choose to rely on it is not only to subject him, in the classic words of Cardozo CJ, to ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’ (see Ultramares Corpn v Touche (1931) 255 NY 170 at 179), it is also to confer on the world at large a quite unwarranted entitlement to appropriate for their own purposes the benefit of the expert knowledge or professional expertise attributed to the maker of the statement. Hence, looking only at the circumstances of these decided cases where a duty of care in respect of negligent statements has been held to exist, I should expect to find that the ‘limit or control mechanism . . . imposed on the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence’ (see the Candlewood case [1985] 2 All ER 935 at 945, [1986] AC 1 at 25) rested on the necessity to prove in this category of the tort of negligence, as an essential ingredient of the ‘proximity’ between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (e.g. in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter on that transaction or on a transaction of that kind . . .
[His Lordship reviewed other authorities, and then considered the
position of auditors in relation to the shareholders of a public limited company arising from the provisions of the Companies Act 1985.]
No doubt these provisions establish a relationship between the auditors and the shareholders of a company on which the shareholder is entitled to rely for the protection of his interest. But the crucial question concerns the extent of the shareholder’s interest which the auditor has a duty to protect. The shareholders of a company have a collective interest in the company’s proper management and in so far as a negligent failure of the auditor to report accurately on the state of the company’s finances deprives the shareholders of the opportunity to exercise their powers in general meeting to call the directors to book and to ensure that errors in management are corrected, the shareholders ought to be entitled to a remedy. But in practice no problem arises in this regard since the interest of the shareholders in the proper management of the company’s affairs is indistinguishable from the interest of the company itself and any loss suffered by the shareholders, e.g. by the negligent failure of the auditor to discover and expose a misappropriation of funds by a director of the company, will be recouped by a claim against the auditor in the name of the company, not by individual shareholders.
I find it difficult to visualise a situation arising in the real world in which the individual shareholder could claim to have sustained a loss in respect of his existing shareholding referable to the negligence of the auditor which could not be recouped by the company. But on this part of the case your Lordships were much pressed with the argument that such a loss might occur by a negligent undervaluation of the company’s assets in the auditor’s report relied on by the individual shareholder in deciding to sell his shares at an undervalue. The argument then runs thus. The shareholder, qua shareholder, is entitled to rely on the auditor’s report as the basis of his investment decision to sell his existing shareholding. If he sells at an undervalue he is entitled to recover the loss from the auditor. There can be no distinction in law between the shareholder’s investment decision to sell the shares he has or to buy additional shares. It follows, therefore, that the scope of the duty of care owed to him by the auditor extends to cover any loss sustained consequent on the purchase of additional shares in reliance on the auditor’s negligent report.
I believe this argument to be fallacious. Assuming without deciding
that a claim by a shareholder to recover a loss suffered by selling his shares at an undervalue attributable to an undervaluation of the company’s assets in the auditor’s report could be sustained at all, it would not be by reason of any reliance by the shareholder on the auditor’s report in deciding to sell: the loss would be referable to the depreciatory effect of the report on the market value of the shares before ever the decision of the shareholder to sell was taken. A claim to recoup a loss alleged to flow from the purchase of overvalued shares, on the other hand, can only be sustained on the basis of the purchaser’s reliance on the report. The specious equation of ‘investment decisions’ to sell or to buy as giving rise to parallel claims thus appears to me to be untenable. Moreover, the loss in the case of the sale would be of a loss of part of the value of the shareholder’s existing holding, which, assuming a duty of care owed to individual shareholders, it might sensibly lie within the scope of the auditor’s duty to protect. A loss, on the other hand, resulting from the purchase of additional shares would result from a wholly independent transaction having no connection with the existing shareholding.
I believe it is this last distinction which is of critical importance and which demonstrates the unsoundness of the conclusion reached by the majority of the Court of Appeal. It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless:
`The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it.’
See Sutherland Shire Council v Heyman (1985) 60 ALR 1 at 48 per Brennan J.
Assuming for the purpose of the argument that the relationship between the auditor of a company and individual shareholders is of sufficient proximity to give rise to a duty of care, I do not understand how the scope of that duty can possibly extend beyond the protection of any individual shareholder from losses in the value of the shares which he holds. As a purchaser of additional shares in reliance on the auditor’s
report, he stands in no different position from any other investing member of the public to whom the auditor owes no duty. I would allow the appeal and dismiss the cross-appeal.
LORD OLIVER OF AYLMERTON:
… What can be deduced from the Hedley Byrne case . . . is that the necessary relationship between the maker of a statement or giver of advice (the adviser) and the recipient who acts in reliance on it (the advisee) may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given, (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose, (3) it is known, either actually or inferentially, that the advice so communicated is likely to be acted on by the advisee for that purpose without independent inquiry and (4) it is so acted on by the advisee to his detriment. That is not, of course, to suggest that these conditions are either conclusive or exclusive, but merely that the actual decision in the case does not warrant any broader propositions . . .
My Lords, no decision of this House has gone further than Smith v Eric S Bush, but your Lordships are asked by Caparo to widen the area of responsibility even beyond the limits to which it was extended by the Court of Appeal in this case and to find a relationship of proximity between the adviser and third parties to whose attention the advice may come in circumstances in which the reliance said to have given rise to the loss is strictly unrelated either to the intended recipient or to the purpose for which the advice was required. My Lords, I discern no pressing reason of policy which would require such an extension and there seems to me to be powerful reasons against it. As Lord Reid observed in the course of his speech in the Hedley Byrne case [1963] 2 All ER 575 at 581, [1964] AC 465 at 483, words can be broadcast with or without the consent or foresight of the speaker or writer; and in his speech in the same case Lord Pearce drew attention to the necessity for the imposition of some discernible limits to liability in such cases . . .
In seeking to ascertain whether there should be imposed on the adviser a duty to avoid the occurrence of the kind of damage which the advisee claims to have suffered it is not, I think, sufficient to ask simply whether there existed a ‘closeness’ between them in the sense that the advisee had a legal entitlement to receive the information on the basis of which he has acted or in the sense that the information was intended to serve his interest or to protect him. One must, I think, go further and ask, in what capacity was his interest to be served and from what was he intended to be protected? A company’s annual accounts are capable of being utilised for a number of purposes and if one thinks about it it is entirely foreseeable that they may be so employed. But many of such purposes have absolutely no connection with the recipient’s status or capacity, whether as a shareholder, voting or non-voting, or as a debenture-holder. Before it can be concluded that the duty is imposed to protect the recipient against harm which he suffers by reason of the particular use that he chooses to make of the information which he receives, one must, I think, first ascertain the purpose for which the information is required to be given. Indeed, the paradigmatic Donoghue v Stevenson case of a manufactured article requires, as an essential ingredient of liability, that the article has been used by the consumer in the manner in which it was intended to be used (see Grant v Australian Knitting Mills Ltd [1936] AC 85 at 104, [1935] All ER Rep 209 at 217 and Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201 at 216, 218, [1983] 1 AC 520 at 549, 552). I entirely follow that if the conclusion is reached that the very purpose of providing the information is to serve as the basis for making investment decisions or giving investment advice, it is not difficult then to conclude also that the duty imposed on the adviser extends to protecting the recipient against loss occasioned by an unfortunate investment decision which is based on carelessly inaccurate information . . .
. . . I do not believe and I see no grounds for believing that, in enacting the statutory provisions, Parliament had in mind the provision of information for the assistance of purchasers of shares or debentures in the market, whether they be already the holders of shares or other securities or persons having no previous proprietary interest in the company. It is unnecessary to decide the point on this appeal, but I can see more force in the contention that one purpose of providing the
statutory information might be to enable the recipient to exercise whatever rights he has in relation to his proprietary interest by virtue of which he receives it, by way, for instance of disposing of that interest. I can, however, see no ground for supposing that the legislature was intending to foster a market for the existing holders of shares or debentures by providing information for the purpose of enabling them to acquire such securities from other holders who might be minded to sell .
In my judgment, accordingly, the purpose for which the auditors’ certificate is made and published is that of providing those entitled to receive the report with information to enable them to exercise in conjunction those powers which their respective proprietary interests confer on them and not for the purposes of individual speculation with a view to profit. The same considerations as limit the existence of a duty of care also, in my judgment, limit the scope of the duty and I agree with O’Connor LJ that the duty of care is one owed to the shareholders as a body and not to individual shareholders.
To widen the scope of the duty to include loss caused to an individual by reliance on the accounts for a purpose for which they were not supplied and were not intended would be to extend it beyond the limits which are so far deducible from the decisions of this House. It is not, as I think, an extension which either logic requires or policy dictates and I, for my part, am not prepared to follow the majority of the Court of Appeal in making it. In relation to the purchase of shares of other shareholders in a company, whether in the open market or as a result of an offer made to all or a majority of the existing shareholders, I can see no sensible distinction, so far as a duty of care is concerned, between a potential purchaser who is, vis-à-vis the company, a total outsider and one who is already the holder of one or more shares. I accordingly agree with what has already fallen from my noble and learned friend Lord Bridge, and I, too, would allow the appeal and dismiss the cross-appeal.
Henderson v Merrett Syndicates Ltd
House of Lords [1994] UKHL 5, [1994] 3 All ER 506
LORD GOFF:
(1) Introduction
The first issue ….is concerned with the question whether managing agents, which were not also members’ agents, owed to indirect names a duty of care in tort to carry out their underwriting functions with reasonable care and skill. The second issue is concerned with the question whether managing agents, which were also members’ agents, owed such a duty to direct names.
The first of these issues, relating to indirect names, arises in both the Merrett appeals and the Feltrim appeals. However the issue in the Merrett appeals arises in the context of the pre-1985 byelaw forms of agency and sub-agency agreements, whereas that in the Feltrim appeals does so in the context of the forms of agreement prescribed under the 1985 byelaw. The second of these issues, relating to direct names, arises only in the Merrett appeals, in the context of the pre-1985 byelaw forms.
It is desirable that I should at once identify the reasons why names in the Merrett and Feltrim actions are seeking to establish that there is a duty of care owed to them by managing agents in tort. First, the direct names in the Merrett actions seek to hold the managing agents concurrently liable in contract and in tort. Where, as in the case of direct names, the agents are combined agents, there can be no doubt that there is a contract between the names and the agents, acting as managing agents, in respect of the underwriting carried out by the managing agents on behalf of the names as members of the syndicate or syndicates under their management, the only question being as to the scope of the managing agents’ contractual responsibility in this respect. Even so, in the Merrett actions, names are concerned to establish the existence of a concurrent duty of care in tort, if only because there is a limitation issue in one of the actions, in which names wish therefore to be able to take advantage of the more favourable date for the accrual of the cause of
action in tort, as opposed to that in contract. Second, the indirect names in both the Merrett and the Feltrim actions are seeking to establish the existence of a duty of care on the part of the managing agents in tort, no doubt primarily to establish a direct liability to them by the managing agents, but also, in the case of the Merrett actions, to take advantage of the more advantageous position on limitation. Your Lordships were informed that there is no limitation issue in the Feltrim actions.
I turn next to the forms of agreement which provide the contractual context for these issues. I have already recorded that, so far as the pre-1985 byelaw forms are concerned, no form was prescribed, but those in use were substantially similar if not identical, and that specimen forms of agency and sub-agency agreement were agreed for the purposes of these preliminary issues and are scheduled to the judgment of Saville J.
…. In the result, in neither the specimen agreements nor the agreements prescribed by the 1985 byelaw is there any express provision imposing on the agent a duty to exercise care and skill in the exercise of the relevant functions under the agreement; but I understand it not to be in dispute that a term to that effect must be implied into the agreements. It is against that background that the question falls to be considered whether a like obligation rested upon the managing agents in tort, so that the managing agents which were also members’ agents owed such a duty of care in tort to direct names, with the effect that the direct names had alternative remedies, in contract and tort, against the managing agents; and whether managing agents which were not also members’ agents owed such a duty of care in tort to indirect names, so that the indirect names had a remedy in tort against the managing agents, notwithstanding the existence of a contractual structure embracing indirect names, members’ agents and managing agents, under which such a duty was owed in contract by the managing agents to the members’ agents, and by the members’ agents to the indirect names . . .
Saville J resolved all these issues in favour of the names. He held that a duty of care was owed by managing agents in tort both to direct names and to indirect names, and that the existence of such a duty of care was not excluded by reason of the relevant contractual regime, whether under the pre-1985 specimen agreements, or under the forms of agreement prescribed by the 1985 byelaw. In particular, he held that the absolute
discretion conferred on the agent under cl 6(a) of the pre-1985 byelaw specimen agency agreement, and delegated to the managing agent under cll 5 and 6 of the related sub-agency agreement, did not exclude any such duty of care. On all these points Saville J’s decision was, as I have recorded, affirmed by the Court of Appeal.
(2) The argument of the managing agents
The main argument advanced by the managing agents against the existence of a duty of care in tort was that the imposition of such a duty upon them was inconsistent with the contractual relationship between the parties. In the case of direct names, where there was a direct contract between the names and the managing agents, the argument was that the contract legislated exclusively for the relationship between the parties, and that a parallel duty of care in tort was therefore excluded by the contract. In the case of indirect names, reliance was placed on the fact that there had been brought into existence a contractual chain, between name and members’ agent, and between members’ agent and managing agent; and it was said that, by structuring their contractual relationship in this way, the indirect names and the managing agents had deliberately excluded any direct responsibility, including any tortious duty of care, to the indirect names by the managing agents. In particular, the argument ran, it was as a result not permissible for the names to pray in aid, for limitation purposes, the more favourable time for accrual of a cause of action in tort. To do so, submitted the managing agents, would deprive them of their contractual expectations, and would avoid the policy of Parliament that there are different limitation regimes for contract and tort.
Such was the main argument advanced on behalf of the managing agents. Moreover, as appears from my summary of it, the argument is not precisely the same in the case of direct names and indirect names respectively. However, in any event, I think it desirable first to consider the principle upon which a duty of care in tort may in the present context be imposed upon the managing agents, assuming that to impose such a duty would not be inconsistent with the relevant contractual relationship. In considering this principle, I bear in mind in particular the separate submission of the managing agents that no such duty should be imposed, because the loss claimed by the names is purely economic loss. However
the identification of the principle is, in my opinion, relevant to the broader question of the impact of the relevant contract or contracts.
(3) The governing principle
Even so, I can take this fairly shortly. I turn immediately to the decision of this House in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465. There, as is of course well known, the question arose whether bankers could be held liable in tort in respect of the gratuitous provision of a negligently favourable reference for one of their customers, when they knew or ought to have known that the plaintiff would rely on their skill and judgment in furnishing the reference, and the plaintiff in fact relied upon it and in consequence suffered financial loss. Your Lordships’ House held that, in principle, an action would lie in such circumstances in tort; but that, in the particular case, a duty of care was negatived by a disclaimer of responsibility under cover of which the reference was supplied.
The case has always been regarded as important in that it established that, in certain circumstances, a duty of care may exist in respect of words as well as deeds, and further that liability may arise in negligence in respect of pure economic loss which is not parasitic upon physical damage. But, perhaps more important for the future development of the law, and certainly more relevant for the purposes of the present case, is the principle upon which the decision was founded. The governing principles are perhaps now perceived to be most clearly stated in the speeches of Lord Morris of Borth-y-Gest (with whom Lord Hodson agreed) and of Lord Devlin.
[…. From these statements, and from their application in Hedley Byrne, we can derive some understanding of the breadth of the principle underlying the case. We can see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other. On this point, Lord Devlin spoke in particularly clear terms in both passages from his speech which I have quoted above. Further, Lord Morris spoke of that party being
possessed of a ‘special skill’ which he undertakes to ‘apply for the assistance of another who relies upon such skill’. But the facts of Hedley Byrne itself, which was concerned with the liability of a banker to the recipient for negligence in the provision of a reference gratuitously supplied, show that the concept of a ‘special skill’ must be understood broadly, certainly broadly enough to include special knowledge. Again, though Hedley Byrne was concerned with the provision of information and advice, the example given by Lord Devlin of the relationship between solicitor and client, and his and Lord Morris’s statements of principle, show that the principle extends beyond the provision of information and advice to include the performance of other services. 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 defendant with 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.
In subsequent cases concerned with liability under the Hedley Byrne principle in respect of negligent mis-statements, the question has frequently arisen whether the plaintiff falls within the category of persons to whom the maker of the statement owes a duty of care. In seeking to contain that category of persons within reasonable bounds, there has been some tendency on the part of the courts to criticise the concept of ‘assumption of responsibility’ as being ‘unlikely to be a helpful or realistic test in most cases’ (see Smith v Eric S Bush (a firm), Harris v Wyre Forest DC [1989] 2 All ER 514 at 536, [1990] 1 AC 831 at 864-865 per Lord Griffiths; and see also Caparo Industries plc v Dickman [1990] 1 All ER 568 at 582-583, [1990] 2 AC 605 at 628 per Lord Roskill). However, at least in cases such as the present, in which the same problem does not arise, there seems to be no reason why recourse should not be had to the concept, which appears after all to have been adopted, in one form or another, by all of their Lordships in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at
581, 583, 588, 610-611, 612, 616, [1964] AC 465 at 483, 486, 487, 494, 529, 531, 538, per Lord Reid, Lord Morris (with whom Lord Hodson agreed), Lord Devlin and Lord Pearce. Furthermore, especially in a context concerned with a liability which may arise under a contract or in a situation ‘equivalent to contract’, it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff: see Caparo Industries plc v Dickman [1990] 1 All ER 568 at 588-589, [1990] 2 AC 605 at 637 per Lord Oliver of Aylmerton. In addition, the concept provides its own explanation why there is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further inquiry whether it is ‘fair, just and reasonable’ to impose liability for economic loss—a point which is, I consider, of some importance in the present case. The concept indicates too that in some circumstances, for example where the undertaking to furnish the relevant service is given on an informal occasion, there may be no assumption of responsibility; and likewise that an assumption of responsibility may be negatived by an appropriate disclaimer. I wish to add in parenthesis that, as Oliver J recognised in Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1978] 3 All ER 571 at 595, [1979] Ch 384 at 416 (a case concerned with concurrent liability of solicitors in tort and contract, to which I will have to refer in a moment), an assumption of responsibility by, for example, a professional man may give rise to liability in respect of negligent omissions as much as negligent acts of commission, as for example when a solicitor assumes responsibility for business on behalf of his client and omits to take a certain step, such as the service of a document, which falls within the responsibility so assumed by him.
(4) The application of the principle to managing agents at Lloyd’s
Since it has been submitted on behalf of the managing agents that no liability should attach to them in negligence in the present case because
the only damage suffered by the names consists of pure economic loss, the question arises whether the principle in Hedley Byrne is capable of applying in the case of underwriting agents at Lloyd’s who are managing agents. Like Saville J and the Court of Appeal, I have no difficulty in concluding that the principle is indeed capable of such application. The principle has been expressly applied to a number of different categories of person who perform services of a professional or quasi-professional nature, such as bankers (in Hedley Byrne itself); solicitors (as foreshadowed by Lord Devlin in Hedley Byrne, and as held in the leading case of Midland Bank Trust Co Ltd v Hett Stubbs & Kemp (a firm) [1978] 3 All ER 571, [1979] Ch 384, and other cases in which that authority has been followed); surveyors and valuers (as in Smith v Eric S Bush (a firm), Harris v Wyre Forest DC [1989] 2 All ER 514, [1990] 1 AC 831); and accountants (as in Caparo Industries plc v Dickman [1990] 1 All ER 568, [1990] 2 AC 605). Another category of persons to whom the principle has been applied, and on which particular reliance was placed by the names in the courts below and in argument before your Lordships, is insurance brokers. As Phillips J pointed out in Youell v Bland Welch & Co Ltd (The `Superhulls Cover’ Case) (No 2) [1990] 2 Lloyd’s Rep 431 at 459, it has been accepted, since before 1964, that an insurance broker owes a duty of care in negligence towards his client, whether the broker is bound by contract or not. Furthermore, in Punjab National Bank v de Boinville [1992] 3 All ER 104, [1992] 1 WLR 1138 it was held by the Court of Appeal, affirming the decision of Hobhouse J, that a duty of care was owed by an insurance broker not only to his client but also to a specific person whom he knew was to become an assignee of the policy. For my part I can see no reason why a duty of care should not likewise be owed by managing agents at Lloyd’s to a name who is a member of a syndicate under the management of the agents. Indeed, as Saville J and the Court of Appeal both thought, the relationship between name and managing agent appears to provide a classic example of the type of relationship to which the principle in Hedley Byrne applies. In so saying, I put on one side the question of the impact, if any, upon the relationship of the contractual context in which it is set. But, that apart, there is in my opinion plainly an assumption of responsibility in the relevant sense by the managing agents towards the names in their syndicates. The managing agents have accepted the
names as members of a syndicate under their management. They obviously hold themselves out as possessing a special expertise to advise the names on the suitability of risks to be underwritten; and on the circumstances in which, and the extent to which, reinsurance should be taken out and claims should be settled. The names, as the managing agents well knew, placed implicit reliance on that expertise, in that they gave authority to the managing agents to bind them to contracts of insurance and reinsurance and to the settlement of claims. I can see no escape from the conclusion that, in these circumstances, prima fade a duty of care is owed in tort by the managing agents to such names. To me, it does not matter if one proceeds by way of analogy from the categories of relationship already recognised as falling within the principle in Hedley Byrne or by a straight application of the principle stated in the Hedley Byrne case itself. On either basis the conclusion is, in my opinion, clear. Furthermore, since the duty rests on the principle in Hedley Byrne, no problem arises from the fact that the loss suffered by the names is pure economic loss . . .
…. in the present case liability can, and in my opinion should, be founded squarely on the principle established in Hedley Byrne itself, from which it follows that an assumption of responsibility coupled with the concomitant reliance may give rise to a tortious duty of care irrespective of whether there is a contractual relationship between the parties, and in consequence, unless his contract precludes him from doing so, the plaintiff, who has available to him concurrent remedies in contract and tort, may choose that remedy which appears to him to be the most advantageous . . .
(7) Application of the above principles in the present case
. . . I turn to the indirect names . . . It is . . . submitted on behalf of the managing agents that the indirect names and the managing agents, as parties to the chain of contracts contained in the relevant agency and sub-agency agreements, must be taken to have thereby structured their relationship so as to exclude any duty of care owed directly by the
managing agents to the indirect names in tort.
In essence the argument must be that, because the managing agents have, with the consent of the indirect names, assumed responsibility in respect of the relevant activities to another party, i.e. the members’ agents, under a sub-agency agreement, it would be inconsistent to hold that they have also assumed responsibility in respect of the same activities to the indirect names. I for my part cannot see why in principle a party should not assume responsibility to more than one person in respect of the same activity. Let it be assumed (unlikely though it may be) that, in the present case, the managing agents were in a contractual relationship not only with the members’ agents under a sub-agency agreement but also directly with the relevant names, under both of which they assumed responsibility for the same activities. I can see no reason in principle why the two duties of care so arising should not be capable of co-existing . . .
I wish, however, to add that I strongly suspect that the situation which arises in the present case is most unusual; and that in many cases in which a contractual chain comparable to that in the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of, so to speak, short-circuiting the contractual structure so put in place by the parties. It cannot therefore be inferred from the present case that other sub-agents will be held directly liable to the agent’s principal in tort. Let me take the analogy of the common case of an ordinary building contract, under which main contractors contract with the building owner for the construction of the relevant building, and the main contractor sub-contracts with sub-contractors or suppliers (often nominated by the building owner) for the performance of work or the supply of materials in accordance with standards and subject to terms established in the sub-contract. I put on one side cases in which the sub-contractor causes physical damage to property of the building owner, where the claim does not depend on an assumption of responsibility by the sub-contractor to the building owner; though the sub-contractor may be protected from liability by a contractual exemption clause authorised by the building owner. But if the sub-contracted work or materials do not in the result conform to the required standard, it will not ordinarily be open to the building owner to sue the sub-contractor or supplier direct under the Hedley Byrne
principle, claiming damages from him on the basis that he has been negligent in relation to the performance of his functions. For there is generally no assumption of responsibility by the sub-contractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility. This was the conclusion of the Court of Appeal in Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988] 1 All ER 791 at 803, [1988] QB 758 at 781. As Bingham LJ put it:
`I do not, however, see any basis on which [they] could be said to have assumed a direct responsibility for the quality of the goods to [the owners]; such a responsibility is, I think, inconsistent with the structure of the contract the parties have chosen to make.’
It is true that, in this connection, some difficulty has been created by the decision of your Lordships’ House in Junior Books Ltd v Veitchi Co Ltd [1982] 3 All ER 201, [1983] 1 AC 520. In my opinion, however, it is unnecessary for your Lordships to reconsider that decision for the purposes of the present appeal. Here however I can see no inconsistency between the assumption of responsibility by the managing agents to the indirect names, and that which arises under the sub-agency agreement between the managing agents and the members’ agents, whether viewed in isolation or as part of the contractual chain stretching back to and so including the indirect names. For these reasons, I can see no reason why the indirect names should not be free to pursue their remedy against the managing agents in tort under the Hedley Byrne principle.
………
For these reasons, I would answer all the questions in the same manner as Saville J and the Court of Appeal, and I would dismiss the appeals of the members’ agents and the managing agents with costs.
Robinson v PE Jones (Contractors) Ltd Court of
Appeal [2011] EWCA Civ 9
JACKSON LJ:
PART 7. DID THE DEFENDANT OWE A RELEVANT DUTY OF CARE IN TORT TO THE CLAIMANT?.. .
(i) Tortious Liability After Murphy
67 Having reviewed the two streams of authority set out in Pt 5 above, my conclusion is that the relationship between (a) the manufacturer of a product or the builder of a building and (b)
the immediate client is primarily governed by the contract between those two parties. Long established principles of freedom of contract enable those parties to allocate risk between themselves as they see fit. In the case of consumer contracts, of course, those principles yield to the requirements of UCTA. However, even in the case of a consumer, the contract (as modified by UCTA) is the primary determinant of each party’s obligations and remedies.
68 Absent any assumption of responsibility, there do not spring up between the parties duties of care co-extensive with their contractual obligations. The law of tort imposes a different and more limited duty upon the manufacturer or builder. That more limited duty is to take reasonable care to protect the client against suffering personal injury or damage to other property. The law of tort imposes this duty, not only towards the first person to acquire the chattel or the building, but also towards others who foreseeably own or use it.
69 The analysis in the preceding paragraph fits with, indeed is dictated by, the House of Lords’ decision in Donoghue v Stevenson [[1932] AC 562], the House of Lords decision in Murphy [[1991] 1 AC 398] and May J’s decision in Nitrigin [[1992] 1 WLR 498]. Although Nitrigin is a first instance decision, it commands respect because of the force of the reasoning in the judgment. Also it should be noted that the trial judge in Nitrigin was a specialist in this field as well as being the then editor of Keating on Building Contracts.
(ii) Assumption of Responsibility
[70] The next question to consider is when and how a builder may acquire tortious liabilities through the doctrine of assumption of responsibility. This doctrine is a separate and
broader basis for tortious liability, which has its origins in Hedley Byrne [[1964] AC 465]. It embraces liability for economic loss as well as the more familiar heads of recoverable damage in negligence.
71 In Hedley Byrne it was held that bankers would have been liable for economic loss caused by giving a negligent reference, but for an express disclaimer of responsibility. The House of Lords based this hypothetical finding of liability upon a special relationship between the parties flowing from an assumption of responsibility: see the speeches of Lord Reid at 483, Lord Morris at 494-5, Lord Hodson at 514 and Lord Devlin at 529.
72 During the heroic age of the law of negligence, which I would define as the 1970’s and 1980’s, the concept of assumption of responsibility receded as other more expansive bases were developed for negligence liability. However, this concept resumed its primacy in the 1990’s. To take one example, this was the basis of the solicitors’ liability to disappointed beneficiaries in White v Jones [1995] 2 AC 207, [1995] 1 All ER 691, [1995] 3 FCR 51. To take another example, assumption of responsibility was the basis of a company director’s liability for negligent advice in a company brochure in Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577, [1998] 1 BCLC 689, [1998] 1 WLR 830.
73 In Henderson [[1995] 2 AC 145] Lord Goff said this about Hedley Byrne at p 178:
“The case has always been regarded as important in that it established that, in certain circumstances, a duty of care may exist in respect of words as well as deeds, and further that liability may arise in negligence in respect of pure economic loss which is not parasitic upon physical damage.
But, perhaps more important for the future development of the law, and certainly more relevant for the purposes of the present case, is the principle upon which the decision was founded.”
Lord Goff then went on to identify the governing principle of Hedley Byrne as assumption of responsibility.
74 Henderson is now taken as the leading authority on concurrent liability in professional negligence. In my view, the conceptual basis upon which the concurrent liability of professional persons in tort to their clients now rests is assumption of responsibility. That is, for example, the underlying rationale of the engineers’ liability to their clients in Pirelli [[1983] 2 AC 1]. It is also the basis of the duty of care owed by the architects to their client in Belle field (No 2) [[2002] EWCA Civ 1823]. It is also the basis of the engineers’ tortious liability to their clients in Mirant-Asia [[2004] EWH C 1750 (TCC)]. See para 395: “Arup assumed a responsibility for economic loss.”
75 It is perhaps understandable that professional persons are taken to assume responsibility for economic loss to their clients. Typically, they give advice, prepare reports, draw up accounts, produce plans and so forth. They expect their clients and possibly others to act in reliance upon their work product, often with financial or economic consequences.
76 When one moves beyond the realm of professional retainers, it by no means follows that every contracting party assumes responsibilities (in the Hedley Byrne sense) to the other parties co-extensive with the contractual obligations. Such an analysis would be nonsensical. Contractual and tortious duties have different origins and different functions. Contractual obligations spring from the consent of the parties
and the common law principle that contracts should be enforced. Tortious duties are imposed by law, as a matter of policy, in specific situations. Sometimes a particular set of facts may give rise to identical contractual and tortious duties, but self-evidently that is not always the case.
(iii) The Relationship between Contract and Tort after Henderson
77 There has been no elaborate debate during the hearing of this appeal about the basic principles of contract and tort or how they interrelate. However, Lord Goff’s discussion of concurrent liability at pp 184-194 of Henderson sits there in the bundle of authorities and is relied upon by counsel. This is a passage which requires and repays careful study. Lord Goff is not saying that every contractual obligation to do something carries with it a parallel tortious duty to the same effect. He is simply saying that the existence of a contract does not prevent a tortious duty from arising.
78 In his discussion of comparative law, Lord Goff identifies that in some legal systems (eg French law) a contract between the parties positively precludes a tortious duty from arising, whereas in other legal systems (eg German law) a contract does not have that drastic consequence. However, Lord Goff does not suggest, and it is not the case, that under German law contracting parties have duties in tort or delict replicating their contractual obligations. For a fuller discussion of the differing approaches to concurrent liability, see the review of French and German law (set against the background of Roman law) in Tortious Liability for Unintentional Harm in the Common Law and the Civil Law by Lawson and Markesinis (Cambridge University Press, 1982). For a more detailed review of German
law, see The German Law of Torts by Markesinis & Unberath (Hart Publishing, 2002) and The German Law of Contract by Markesinis, Unberath & Johnston (Hart Publishing, 2006).
79 It seems to me that the distinction between contract and tort/delict is essentially the same in both civil law and common law. It was originally articulated by Roman jurists (see Gaius, Justinian’s Institutes, 3.88) and it remains the case that (a) contracts and (b) the law of tort are separate sources of obligations. Contractual obligations are negotiated by the parties and then enforced by law because the performance of contracts is vital to the functioning of society. Tortious duties are imposed by law (without any need for agreement by the parties) because society demands certain standards of conduct. There is no reason why the law of tort should impose duties which are identical to the obligations negotiated by the parties. I see nothing in Lord Goff’s speech which is inimical to this analysis. On the contrary, Lord Goff observes at 194A “the tortious duty is imposed by the general law, and the contractual duty is attributable to the will of the parties”.
80 The essential points which Lord Goff is making in his detailed discussion at pp 184-194 of Henderson may be distilled as follows:
(i) When A assumes responsibility to B in the Hedley Byrne sense, A comes under a tortious duty to B, which may extend to protecting B against economic loss.
(ii) The existence of a contract between A and B does not prevent such a duty from arising.
(iii) In contracts of professional retainer, there is commonly an assumption of responsibility which generates a duty of care to protect the client against economic loss.
(iv) Application of the Above Principles to Building Contracts
81 Building contracts come in all shapes and sizes from the simple house building contract to the suite of JCT, NEC or FIDIC contracts. The law does not automatically impose upon every contractor or sub-contractor tortious duties of care co-extensive with the contractual terms and carrying liability for economic loss. Such an approach would involve wholesale subordination of the law of tort to the law of contract.
82 If the matter were free from authority, I would incline to the view that the only tortious obligations imposed by law in the context of a building contract are those referred to in para 68 above. I accept, however, that such an approach is too restrictive. It is also necessary to look at the relationship and the dealings between the parties, in order to ascertain whether the contractor or sub-contractor “assumed responsibility” to its counter-parties, so as to give rise to Hedley Byrne duties.
83 In the present case I see nothing to suggest that the Defendant “assumed responsibility” to the Claimant in the Hedley Byrne sense. The parties entered into a normal contract whereby the Defendant would complete the construction of a house for the Claimant to an agreed specification and the Claimant would pay the purchase price. The Defendant’s warranties of quality were set out and the Claimant’s remedies in the event of breach of warranty were also set out. The parties were not in a professional relationship whereby, for example, the Claimant was paying the Defendant to give advice or to prepare reports or plans upon which the Claimant would act.
84 Even if the agreement did not contain clauses 8 and 10 of the building conditions, I would be disinclined to find that the Defendant owed to the Claimant the duty of care which is alleged in this case. To my mind, however, clauses 8 and 10 of the building conditions put the matter beyond doubt. Those
clauses limit the Defendant’s liability for building defects to the first two years, after which different provision is made for dealing with defects. For the reasons set out in Pt 6 above, those two clauses satisfy the test of reasonableness in UCTA. It would be inconsistent with the whole scheme of this contract, if the law were to impose upon the Defendant duties of care in tort far exceeding the Defendant’s contractual liabilities. Finally, cl 10 of the building conditions is relevant in another way. The parties expressly agreed that the Defendant’s only liability to the Claimant should be that arising from the NHBC agreement. The parties were thereby expressly agreeing to exclude any liability in negligence which might otherwise arise.
85 The Claimant contends, in reliance upon Rutter v Palmer [1922] 2 KB 87, 91 LJKB 657, [1922] All ER Rep 367 and Smith v South Wales Switchgear Co Ltd [1978] 1 All ER 18, [1978] 1 WLR 165, 8 BLR 1, that cl 10 is not sufficiently clear to exclude liability in negligence. I do not accept that contention. In my view the only sensible interpretation of cl 10 is that the parties are agreeing to exclude any liability in negligence.
86 At this point in the analysis it is necessary to revert to UCTA. The House of Lords held in Smith v Bush that, before a term such as this can operate to prevent a duty of care in tort arising, it is necessary to consider the impact of UCTA. If a defect in the house were to cause personal injury, then s 2(1) of UCTA would prevent any exclusion of tortious liability. However, if a defect in the house simply generates economic loss, namely the cost of repair, then I see no reason why cl 10 of the building conditions should not exclude any tortious liability for that loss which might otherwise arise. For broadly the same reasons as set out in Pt 6 above, I think that an
exclusion clause with those consequences satisfies the requirement of reasonableness. The reasoning of the Court of Appeal in McCullagh v Lane Fox and Partners (1995) 49 ConLR 124, [1996] 1 EGLR 35, [1996] 18 EG 104 provides further support for this conclusion. See the judgment of Hobhouse LJ (with whom Nourse LJ and Sir Christopher Slade agreed) at pp 45 to 46.
87 Let me now draw the threads together. The rights and remedies of the parties to this case were set out in a written contract, the terms of which are clear and simple. That contract provided the Claimant with extensive (but not total) protection against defects. The contract represents a perfectly sensible allocation of risk between the parties. At the time of contracting, both parties were represented by solicitors and they must have known where they stood.
88 It is a matter of great misfortune that a latent defect in the Claimant’s house emerged 121/2 years after completion and that this defect was outside the scope of the NHBC agreement. That, however, is a consequence of the contractual allocation of risk between the parties. In my judgment it is not possible for the Claimant to invoke the law of tort in order to impose liabilities upon the Defendant which are inconsistent with the contract.
89 My answer to the question posed in Pt 7 of this judgment is no.
90 … I would therefore dismiss this appeal.
Customs and Excise Commissioners v BarclaysBank plc
House of Lords [2006] UKHL 28, [2006] 4 All ER 256
LORD BINGHAM OF CORNHILL: .
1 My Lords, the important question raised by this appeal is whether a bank, notified by a third party of a freezing injunction granted to the third party against one of the bank’s customers, affecting an account
held by the customer with the bank, owes a duty to the third party to take reasonable care to comply with the terms of the injunction . . .
4 The parties were agreed that the authorities disclose three tests which have been used in deciding whether a defendant sued as causing pure economic loss to a claimant owed him a duty of care in tort. The first is whether the defendant assumed responsibility for what he said and did vis-à-vis the claimant, or is to be treated by the law as having done so. The second is commonly known as the threefold test: whether loss to the claimant was a reasonably foreseeable consequence of what the defendant did or failed to do; whether the relationship between the parties was one of sufficient proximity; and whether in all the circumstances it is fair, just and reasonable to impose a duty of care on the defendant towards the claimant (what Kirby J in Perre v Apand Pty Ltd (1999) 164 ALR 606 at 676, (1999) 198 CLR 180 at 275 (para 259), succinctly labelled `policy’). Third is the incremental test, based on the observation of Brennan J in Sutherland Shire Council v Heyman (1985) 60 ALR 1 at 43-44, (1985) 157 CLR 424 at 481, approved by Lord Bridge of Harwich in Caparo Industries plc v Dickman [1990] 1 All ER 568 at 576, [1990] 2 AC 605 at 618, that:
`It is preferable in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable “considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed”.’
Mr Brindle QC for the bank contended that the assumption of responsibility test was most appropriately applied to this case, and that if applied it showed that the bank owed no duty of care to the commissioners on the present facts. But if it was appropriate to apply either of the other tests the same result was achieved. Mr Sales for the commissioners submitted that the threefold test was appropriate here, and that if applied it showed that a duty of care was owed. But if it was appropriate to apply either of the other tests they showed the same thing. In support of their competing submissions counsel made detailed reference to the leading authorities . . . These authorities yield many valuable insights, but they contain statements which cannot readily be
reconciled. I intend no discourtesy to counsel in declining to embark on yet another exegesis of these well-known texts. I content myself at this stage with five general observations. First, there are cases in which one party can accurately be said to have assumed responsibility for what is said or done to another, the paradigm situation being a relationship having all the indicia of contract save consideration. Hedley Byrne & Co Ltd v Heller & Partners Ltd would, but for the express disclaimer, have been such a case. White v Jones and Henderson v Merrett Syndicates Ltd, although the relationship was more remote, can be seen as analogous. Thus, like Colman J (whose methodology was commended by Paul Mitchell and Charles Mitchell, ‘Negligence Liability for Pure Economic Loss’ (2005) 121 LQR 194, 199), I think it is correct to regard an assumption of responsibility as a sufficient but not a necessary condition of liability, a first test which, if answered positively, may obviate the need for further inquiry. If answered negatively, further consideration is called for.
5 Secondly, however, it is clear that the assumption of responsibility test is to be applied objectively (see Henderson v Merrett Syndicates Ltd [1994] 3 All ER 506 at 521, [1995] 2 AC 145 at 181) and is not answered by consideration of what the defendant thought or intended . . . Lord Oliver of Aylmerton, in Caparo Industries plc v Dickman [1990] 1 All ER 568 at 589, [1990] 2 AC 605 at 637, thought ‘voluntary assumption of responsibility’—
`a convenient phrase but it is clear that it was not intended to be a test for the existence of the duty for, on analysis, it means no more than that the act of the defendant in making the statement or tendering the advice was voluntary and that the law attributes to it an assumption of responsibility if the statement or advice is inaccurate and is acted on. It tells us nothing about the circumstances from which such attribution arises.’.. .
The problem here is, as I see it, that the further this test is removed from the actions and intentions of the actual defendant, and the more notional the assumption of responsibility becomes, the less difference there is between this test and the threefold test.
6 Thirdly, the threefold test itself provides no straightforward answer to the vexed question whether or not, in a novel situation, a party owes a
duty of care . . .
7 Fourthly, I incline to agree with the view expressed by the Messrs Mitchell in their article cited above (‘Negligence Liability for Pure Economic Loss’ (2005) 121 LQR 194, 199) that the incremental test is of little value as a test in itself, and is only helpful when used in combination with a test or principle which identifies the legally significant features of a situation. The closer the facts of the case in issue to those of a case in which a duty of care has been held to exist, the readier a court will be, on the approach of Brennan J adopted in Caparo Industries plc v Dickman, to find that there has been an assumption of responsibility or that the proximity and policy conditions of the threefold test are satisfied. The converse is also true.
8 Fifthly, it seems to me that the outcomes (or majority outcomes) of the leading cases cited above are in every or almost every instance sensible and just, irrespective of the test applied to achieve that outcome. This is not to disparage the value of and need for a test of liability in tortious negligence, which any law of tort must propound if it is not to become a morass of single instances. But it does in my opinion concentrate attention on the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole . . .
[LORD BINGHAM proceeded to analyse the nature of the freezing orders at issue and the consequences of a breach of these orders. He then continued:]
12 There was discussion in argument whether the relationship of the commissioners and the bank as a notified party, was adverse or antagonistic, like that of opposing parties to litigation. The commissioners contended that it was not. The bank carried on banking business, and it is now a routine feature of such business that freezing injunctions are notified to it and are given effect. The substantial relief the commissioners were seeking was against the bank’s customers, not it. The bank answered that this analysis did not fully reflect the reality of the situation . . .
13 . . . commissioners are right that they were not claiming substantive relief against the bank as a claimant seeks it against a defendant. But I think the bank is right to say that that is not the whole
story, for three main reasons. First, the effect of notification of the order is to override the ordinary contractual duties which govern the relationship of banker and customer. This is not something of which a bank can complain or of which the bank does complain. A bank’s relationship with its customers is subject to the law of the land, which provides for the grant of freezing injunctions. But the effect is none the less to oblige the bank to act in a way which but for the order would be a gross breach of contract. Such a situation must necessarily be very unwelcome to any bank which values its relationship with its customer. Secondly, the order exposes the bank to the risk that its employees may be imprisoned, the bank fined and its assets sequestrated. Of course, this is only a risk if the bank breaches the order in a sufficiently culpable way. But it is not a risk which exists independently of the order, and not a risk to which anyone would wish to be exposed. Thirdly, I think that the notice informing a bank of its right to set aside or discharge the order, addressed to both the customer and to the notified party, recognises its potentially prejudicial nature. If an order were neutral in its effect on the notified party, there would be no need to inform it of its right to vary or discharge it. While, therefore, the relationship of the commissioners and the bank was not, on notification of the order, that of hostile litigating parties, I think the bank is right to describe the relationship as adverse.
14 I do not think that the notion of assumption of responsibility, even on an objective approach, can aptly be applied to the situation which arose between the commissioners and the bank on notification to it of the orders. Of course […. was bound by law to comply. But it had no choice. It did not assume any responsibility towards the commissioners as the giver of references in Hedley Byrne & Co Ltd v Heller & Partners Ltd (but for the disclaimer) and Spring v Guardian Assurance plc, the valuers in Smith v Eric S Bush, the solicitors in White v Jones and the agents in Henderson v Merrett Syndicates Ltd may plausibly be said to have done towards the recipient or subject of the references, the purchasers, the beneficiaries and the Lloyd’s Names . . . Nor do I think that the commissioners can be said in any meaningful sense to have relied on the bank. The commissioners, having obtained their orders and notified them to the bank, were no doubt confident that the bank would act promptly and effectively to comply. But reliance in
the law is usually taken to mean that if A had not relied on B he would have acted differently. Here the commissioners could not have acted differently, since they had availed themselves of the only remedy which the law provided. Mr Sales suggested, although only as a fall-back argument, that the relationship between the commissioners and the bank was, in Lord Shaw’s words adopted by Lord Devlin in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 610, [1964] AC 465 at 529, ‘equivalent to contract’. But the essence of any contract is voluntariness, and the bank’s position was wholly involuntary.
15 It is common ground that the foreseeability element of the threefold test is satisfied here. The bank obviously appreciated that, since risk of dissipation has to be shown to obtain a freezing injunction, the commissioners were liable to suffer loss if the injunction were not given effect. It was not contended otherwise. The concept of proximity in the context of pure economic loss is notoriously elusive. But it seems to me that the parties were proximate only in the sense that one served a court order on the other and that other appreciated the risk of loss to the first party if it was not obeyed. I think it is the third, policy, ingredient of the threefold test which must be determinative . . .
16 In urging that a duty of care should be imposed on the bank the commissioners submitted that the orders were made by the court and notified to the bank to protect their interests; that recognition of a duty would in practical terms impose no new or burdensome obligation on the bank; that the rule of public policy which has first claim on the loyalty of the law is that wrongs should be remedied (see X (minors) v Bedfordshire CC, M (a minor) v Newham London BC, E (a minor) v Dorset CC [1995] 3 All ER 353 at 380, [1995] 2 AC 633 at 663, 749); that, since there are no facts here which would found a claim for effective redress in contempt, the commissioners will otherwise be left without any remedy; that a duty of care to the commissioners would not be inconsistent with the bank’s duty to the court; and that there would, in such a case, be no indeterminacy as to those to whom the duty would be owed. These are formidable arguments and I am not surprised that the Court of Appeal accepted them. But I have difficulty in doing so, for six main and closely associated reasons.
17 . . . [T]he Mareva jurisdiction has developed as one exercised by
court order enforceable only by the court’s power to punish those who break its orders. The documentation issued by the court does not hint at the existence of any other remedy. This regime makes perfect sense on the assumption that the only duty owed by a notified party is to the court.
18 Secondly, it cannot be suggested that the customer owes a duty to the party which obtains an order, since they are opposing parties in litigation and no duty is owed by a litigating party to its opponent . . .
19 It is clear, thirdly, that a duty of care in tort may co-exist with a similar duty in contract or a statutory duty, and I would accept in principle that a tortious duty of care to the commissioners could co-exist with a duty of compliance owed to the court. But I know of no instance in which a non-consensual court order, without more, has been held to give rise to a duty of care owed to the party obtaining the order, or a Norwich Pharmacal order (see Norwich Pharmacal Co v Comrs of Customs and Excise [1973] 2 All ER 943, [1974] AC 133), or a witness summons, in any case where economic loss is a foreseeable consequence of breach. It would seem that the commissioners’ argument involves a radical innovation.
20 Fourthly, it is a notable feature of this appeal that the commissioners adduce no comparative jurisprudence to support their argument . . .
21 Fifthly, the cases relied on by the commissioners as providing the closest analogy with the present case do not in my opinion, on examination, reveal any real similarity
23 Lastly, it seems to me in the final analysis unjust and unreasonable that the bank should, on being notified of an order which it had no opportunity to resist, become exposed to a liability which was in this case for a few million pounds only, but might in another case be for very much more. For this exposure it had not been in any way rewarded, its only protection being the commissioners’ undertaking to make good (if ordered to do so) any loss which the order might cause it, protection scarcely consistent with a duty of care owed to the commissioners but in any event valueless in a situation such as this.
24 I would allow the appeal and dismiss the commissioners’ claim with costs in the House and below.
LORD HOFFMANN: . . .
35 There is a tendency, which has been remarked upon by many judges, for phrases like ‘proximate’, ‘fair, just and reasonable’ and ‘assumption of responsibility’ to be used as slogans rather than practical guides to whether a duty should exist or not. These phrases are often illuminating but discrimination is needed to identify the factual situations in which they provide useful guidance. For example, in a case in which A provides information to C which he knows will be relied upon by D, it is useful to ask whether A assumed responsibility to D (see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575, [1964] AC 465; Smith v Eric S Bush (a firm), Harris v Wyre Forest DC [1989] 2 All ER 514, [1990] 1 AC 831). Likewise, in a case in which A provides information on behalf of B to C for the purpose of being relied upon by C, it is useful to ask whether A assumed responsibility to C for the information or was only discharging his duty to B (see Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577, [1998] 1 WLR 830). Or in a case in which A provided information to B for the purpose of enabling him to make one kind of decision, it may be useful to ask whether he assumed responsibility for its use for a different kind of decision (see Caparo Industries plc v Dickman [1990] 1 All ER 568, [1990] 2 AC 605). In these cases in which the loss has been caused by the claimant’s reliance on information provided by the defendant, it is critical to decide whether the defendant (rather than someone else) assumed responsibility for the accuracy of the information to the claimant (rather than to someone else) or for its use by the claimant for one purpose (rather than another). The answer does not depend upon what the defendant intended but, as in the case of contractual liability, upon what would reasonably be inferred from his conduct against the background of all the circumstances of the case. The purpose of the inquiry is to establish whether there was, in relation to the loss in question, the necessary relationship (or ‘proximity’) between the parties and, as Lord Goff of Chieveley pointed out in Henderson v Merrett Syndicates Ltd [1994] 3 All ER 506 at 521, [1995] 2 AC 145 at 181, the existence of that relationship and the foreseeability of economic loss will make it unnecessary to undertake any further inquiry into whether it would be fair, just and reasonable to impose liability. In truth, the case is one in which, but for the alleged absence of the necessary relationship,
there would be no dispute that a duty to take care existed and the relationship is what makes it fair, just and reasonable to impose the duty.
36 It is equally true to say that a sufficient relationship will be held to exist when it is fair, just and reasonable to do so. Because the question of whether a defendant has assumed responsibility is a legal inference to be drawn from his conduct against the background of all the circumstances of the case, it is by no means a simple question of fact. Questions of fairness and policy will enter into the decision and it may be more useful to try to identify these questions than simply to bandy terms like ‘assumption of responsibility’ and ‘fair, just and reasonable’. In Morgan Crucible Co plc v Hill Samuel Bank Ltd [1990] 3 All ER 330 at 333-335, sub nom Morgan Crucible Co plc v Hill Samuel & Co Ltd [1991] Ch 295 at 300-303 I tried to identify some of these considerations in order to encourage the evolution of lower-level principles which could be more useful than the high abstractions commonly used in such debates.
37 In Henderson v Merrett Syndicates Ltd itself, the House used the concept of assumption of responsibility in a situation which did not involve reliance upon information but where, once again, the issue was whether the necessary relationship between claimant and defendant existed. The issues in that case were whether the managing agents of a Lloyd’s syndicate owed a duty of care in respect of their underwriting to Names with whom they had no contractual relationship and whether they owed a separate duty in tort to Names with whom they did have a contractual relationship. In fact, the arguments in Henderson v Merrett Syndicates Ltd were a re-run of Donoghue v Stevenson in a claim for economic loss. In that case, as it seems to me, the use of the concept of assumption of responsibility, while perfectly legitimate, was less illuminating. The question was not whether the defendant had assumed responsibility for the accuracy of a particular statement but a much more general responsibility for the consequences of their conduct of the underwriting. To say that the managing agents assumed a responsibility to the Names to take care not to accept unreasonable risks is little different from saying that a manufacturer of ginger beer assumes a responsibility to consumers to take care to keep snails out of his bottles.
38 Even in this context, however, the notion of assumption of responsibility serves a different, weaker, but nevertheless useful purpose
in drawing attention to the fact that a duty of care is ordinarily generated by something which the defendant has decided to do: giving a reference, supplying a report, managing a syndicate, making ginger beer. It does not much matter why he decided to do it; it may be that he thought it would be profitable or it may be that he was providing a service pursuant to some statutory duty, as in Phelps v London Borough of Hillingdon, Anderton v Clwyd CC, Jarvis v Hampshire CC, Re G (a minor) [2000] 4 All ER 504, [2001] 2 AC 619 and Ministry of Housing and Local Government v Sharp [1970] 1 All ER 1009, [1970] 2 QB 223. In the present case, however, the duty is not alleged to arise from anything which the bank was doing. It is true that the bank was carrying on the business of banking, handling money on behalf of its customers. But that is not alleged to have been either necessary or sufficient to generate the duty in this case. Not necessary, because if such a duty is created by notice of the freezing order, it must apply to anyone who has possession or control of the defendant’s assets: the garage holding his car, the stockbroker nominee company holding his shares, his grandmother holding a drawer-full of his bank notes. On being given notice of the order, they would all be under an obligation to take reasonable care to ensure that the defendant did not get his hands on the assets. Not sufficient, because there is no suggestion that, apart from the freezing order, the bank in carrying on its ordinary business would be under any duty to protect the position of the commissioners.
39 There is, in my opinion, a compelling analogy with the general principle that, for the reasons which I discussed in Stovin v Wise [1996] 3 All ER 801 at 818-820, [1996] AC 923 at 943-944, the law of negligence does not impose liability for mere omissions. It is true that the complaint is that the bank did something: it paid away the money. But the payment is alleged to be the breach of the duty and not the conduct which generated the duty. The duty was generated ab extra, by service of the order. The question of whether the order can have generated a duty of care is comparable with the question of whether a statutory duty can generate a common law duty of care. The answer is that it cannot (see Gorringe v Calderdale Metropolitan BC [2004] UKHL 15, [2004] 2 All ER 326, [2004] 1 WLR 1057). The statute either creates a statutory duty or it does not. (That is not to say, as I have already mentioned, that conduct undertaken pursuant to a statutory duty
cannot generate a duty of care in the same way as the same conduct undertaken voluntarily.) But you cannot derive a common law duty of care directly from a statutory duty. Likewise, as it seems to me, you cannot derive one from an order of court. The order carries its own remedies and its reach does not extend any further.
40 Colman J relied upon the fact that the advisers of one party to litigation owe no duty to the other party and for this purpose treated a party’s bank as being in much the same position as his lawyers (see [2004] EWHC 122 (Comm), [2004] 2 All ER 789, [2004] 1 WLR 2027). For my part I prefer to place no particular weight upon this factor. The freezing order suspended the bank’s duty to its client and compliance would therefore have created no conflict of interest. The Court of Appeal relied upon the fact that the order provided for payment to the bank of its reasonable costs incurred as a result of this order. I do not regard this as a material factor either. It is one thing to have to do some paper work and another to be put on risk for millions of pounds.
41 I would therefore allow the appeal and restore the judgment of Colman J.
LORD RODGER OF EARLSFERRY: . . .
51 Part of the function of appeal courts is to try to assist judges and practitioners by boiling down a mass of case law and distilling some shorter statement of the applicable law. The temptation to try to identify some compact underlying rule which can then be applied to solve all future cases is obvious. Mr Brindle submitted that in this area the House had identified such a rule in the need to find that the defendant had voluntarily assumed responsibility. But the unhappy experience with the rule so elegantly formulated by Lord Wilberforce in Anns v London Borough of Merton [1977] 2 All ER 492 at 498-499, [1978] AC 728 at 751-752, suggests that appellate judges should follow the philosopher’s advice to ‘Seek simplicity, and distrust it’.
52 Therefore it is not surprising that there are cases in the books—notably Ministry of Housing and Local Government v Sharp [1970] 1 All ER 1009, [1970] 2 QB 223, approved by Lord Slynn of Hadley in Spring v Guardian Assurance plc [1994] 3 All ER 129 at 158-159, [1995] 2 AC 296 at 332—which do not readily yield to analysis in terms of a voluntary assumption of responsibility, but where liability has none
the less been held to exist. I see no reason to treat these cases as exceptions to some over-arching rule that there must be a voluntary assumption of responsibility before the law recognises a duty of care. Such a rule would inevitably lead to the concept of voluntary assumption of responsibility being stretched beyond its natural limits—which would in the long run undermine the very real value of the concept as a criterion of liability in the many cases where it is an appropriate guide . . . In any event, as the words which I have quoted from his speech in Henderson v Merrett Syndicates Ltd make clear, Lord Goff himself recognised that, although it may be decisive in many situations, the presence or absence of a voluntary assumption of responsibility does not necessarily provide the answer in all cases . . .
60 The courts make quite extensive use of freezing orders. So, in practice, banks like Barclays can be expected to have in place a system for freezing accounts when they are notified of an order—and to take care when they have to operate the system. But, of itself, this does not mean that if they fail to take care they are liable to the applicant who obtained the order. For instance, as I pointed out in Brooks v Metropolitan Police Comr [2005] UKHL 24 at [38], [2005] 2 All ER 489 at [38], [2005] 1 WLR 1495, a prosecutor is under a professional and ethical duty to take care in preparing and presenting the case against a defendant whom he is prosecuting. If he fails to take the necessary care, any conviction may be unsafe and he himself may be subject to some disciplinary sanction. Nevertheless, the prosecutor does not assume a responsibility to the defendant to act carefully and owes him no duty of care in the law of tort (see Elguzouli-Daf v Metropolitan Police Comr, McBrearty v Ministry of Defence [1995] 1 All ER 833 at 842, [1995] QB 335 at 349 per Steyn LJ).
61 In most cases the third party will be a bank or similar institution. But sometimes a private individual who happens, for example, to be looking after the addressee’s car will be startled to receive notification of a freezing order. This puts him in essentially the same position as a bank which is notified of an order. Usually, he will do his best to respect the order and to hold on to the car. Should the law add to his burdens, however, by exposing him to an uninsured liability in damages if he fails to take the care which is ultimately considered to be reasonable and the addressee makes off with the car?
62 Punishment for contempt of court is the remedy which the law provides for the addressee’s failure to comply with an injunction such as a freezing order. Liability is strict and so he may be guilty of contempt even where he did not deliberately flout the order, the degree of his fault being relevant in determining the appropriate punishment (see A-G v Times Newspapers Ltd [1991] 2 All ER 398 at 415, [1992] 1 AC 191 at 217 per Lord Oliver of Aylmerton).
63 By contrast, a third party who is notified of an injunction is guilty of contempt of court only if he knowingly takes a step which will frustrate the court’s purpose in granting the order. So a bank will be in contempt only if it knowingly fails to freeze a customer’s account and pays away sums in the account after being notified of an order. [Counsel for the Revenue Commissioners] argued that this was not a sufficient sanction: the law of tort could usefully supplement the law of contempt by imposing on the bank a duty of care in favour of the party who obtained the freezing order. I would reject that argument.
64 The policy of the law is that a third party, such as a bank, which is notified of a freezing order, must not knowingly undermine the court’s purpose in granting the order. If this is all that the court which makes the order can demand, it would be inconsistent to hold that, by reason of the selfsame notification, the applicant could simultaneously demand a higher standard of performance from the bank—and then claim damages for the bank’s failure to achieve it. Notification imposes a duty on the bank to respect the order of the court; it does not of itself generate a duty of care to the applicant. And here the commissioners can point to nothing more than the order and Barclays’ negligent failure to respond to it.
· • •
66 . . . Having regard to all these circumstances, in my view, not only is there not the necessary proximity between the applicant and a third party, such as a bank, who is notified of a freezing order, but it would not be fair, just and reasonable to hold that the third party owes a duty of care to the applicant.
LORD WALKER OF GESTINGTHORPE: . . .
this expression seems to be traceable mainly to the speeches of Lord Reid and Lord Devlin in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] 2 All ER 575 at 583, [1964] AC 465 at 486 (`held to have accepted some responsibility’) and [1963] 2 All ER 575 at 611, [1964] AC 465 at 529 Ca voluntary undertaking to assume responsibility’). Earlier in his speech Lord Devlin had referred ([1963] 2 All ER 575 at 608, [1964] AC 465 at 526) to early authority going back as far as Coggs v Bernard (1703) 2 Ld Raym 909, 91 ER 25 . . . The old cases show liability being imposed despite the defendant’s conduct having been (in one or both senses) voluntary. As the law has developed (and in the field of pure economic loss) liability is imposed because of the voluntary assumption of responsibility. But in the modern context the word `voluntary’ is being used, it seems to me, with the connotation of `conscious’, ‘considered’ or ‘deliberate’. That appears, for instance, in White v Jones [1995] 1 All ER 691, [1995] 2 AC 207, both in the speech of Lord Browne-Wilkinson ([1995] 1 All ER 691 at 716, [1995] 2 AC 207 at 274) and in the dissenting speech of Lord Mustill ([1995] 1 All ER 691 at 729, [1995] 2 AC 207 at 286-287). That is particularly important in considering whether the defendant has undertaken responsibility for economic loss towards anyone other than the person or persons with whom he is in an obviously proximate relationship. In such cases the voluntary assumption of responsibility towards others, judged objectively, may provide the necessary proximity.
75 . . . If this issue affected only banks, I would be slow to conclude that there could never be liability for carelessly failing to comply with a freezing order. Banks are already subject to strict regulation and potential sanctions in connection with money-laundering and similar activities. They are enjoined to know their customers. They become liable for breach of fiduciary duty if they shut their eyes to dishonest dealings by their customers . . .
76 I am also rather disinclined to put much weight on the litigation context. A bank whose customer is a party to litigation may occasionally be joined as a party to the litigation, either for the purposes of a freezing order or in the pursuit of a proprietary remedy. But that is unusual, and it did not happen in this case. The bank’s duty to its customer was overridden and suspended by the freezing order. Its position was a neutral position.
77 However, Mr Sales, appearing for the commissioners, realistically acknowledged that if in these circumstances a duty of care is to be imposed on a bank, it must also be imposed on any other person affected by notice of a freezing order. In many cases that would produce unfair, unjust and unreasonable results. I too would allow this appeal and make the order which Lord Bingham proposes.
LORD MANCE: . . .
82 The conceptual basis on which courts decide whether a duty of care exists in particular circumstances has been repeatedly examined. Three broad approaches have been suggested, involving consideration (a) whether there has been an assumption of responsibility, (b) whether a threefold test of foreseeability, proximity and ‘fairness, justice and reasonableness’ has been satisfied or (c) whether the alleged duty would be ‘incremental’ to previous cases. Mr Michael Brindle QC for the bank argues that in cases of economic loss the only relevant question is whether there has been an ‘assumption of responsibility’. Mr Philip Sales for the commissioners submits that the primary approach should be through the threefold test of foreseeability, proximity and ‘fairness, justice and reasonableness’ and that assumption of responsibility and incrementalism are no more than potentially relevant factors under that test.
83 All three approaches may often (though not inevitably) lead to the same result. Assumption of responsibility is on any view a core area of liability for economic loss. But all three tests operate at a high level of abstraction. What matters is how and by reference to what lower-level factors are interpreted in practice, see eg Caparo Industries plc v Dickman [1990] 1 All ER 568 at 573-574, [1990] 2 AC 605 at 617-618 per Lord Bridge of Harwich and [1990] 1 All ER 568 at 585, [1990] 2 AC 605 at 633 per Lord Oliver of Aylmerton.
84 As to incrementalism, I note that the House’s support for this approach in Caparo Industries plc v Dickman was given with reference to a passage in Brennan J’s judgment in Sutherland Shire Council v Heyman (1985) 60 ALR 1 at 43-44, (1985) 157 CLR 424 at 481, where he was rejecting the House’s approach in Anns v London Borough of Merton [1977] 2 All ER 492, [1978] AC 728, from which the House itself resiled a year after Caparo Industries plc v Dickman in Murphy v
Brentwood DC [1990] 2 All ER 908, [1991] 1 AC 398. Brennan J said of Anns v London Borough of Merton:
`I am unable to accept that approach. It is preferable, in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable “considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed”.’
Incrementalism was therefore viewed as a corollary of the rejection, now uncontroversial, of any generalised liability for negligently caused economic loss, rather than as necessarily inconsistent with the development of novel categories of negligence. Having said that, caution and analogical reasoning are generally valuable accompaniments to judicial activity, and this is particularly true in the present area . . .
86 In Hedley Byrne & Co Ltd v Heller & Partners Ltd the concept was one of assumption of responsibility by the defendant towards the claimant. Lord Devlin’s contractual analogy also indicates, and Mr Brindle accepts, that whether there has been an assumption of responsibility is to be assessed objectively: see Henderson v Merrett Syndicates Ltd [1994] 3 All ER 506 at 521, [1995] 2 AC 145 at 181 per Lord Goff, with whose speech all other members of the House agreed. Similarly, an assumption of responsibility may arise from the provision not merely of information or advice, but also of services: see [1994] 3 All ER 506 at 520, [1995] 2 AC 145 at 180 per Lord Goff.
87 However, it has been said on a number of occasions that it is artificial or unhelpful to insist on fitting all claims for breach of a duty of care to avoid economic loss within the conception of assumption of responsibility, and there are several cases involving economic loss where the threefold test and incrementalism have been preferred . . .
93 This review of authority confirms that there is no single common denominator, even in cases of economic loss, by which liability may be determined. The threefold test of foreseeability, proximity and fairness, justice and reasonableness provides a convenient general framework although it operates at so high a level of abstraction. Assumption of responsibility is particularly useful as a concept in the two core
categories of case identified by Lord Browne-Wilkinson in White v Jones [1995] 1 All ER 691 at 716-717, [1995] 2 AC 207 at 274, when it may effectively subsume all aspects of the threefold approach. But if all that is meant by voluntary assumption of responsibility is the voluntary assumption of responsibility for a task, rather than of liability towards the defendant, then questions of foreseeability, proximity and fairness, reasonableness and justice may be very relevant. In White v Jones itself there was no doubt that the solicitor had voluntarily undertaken responsibility for a task, but it was the very fact that he had done so for the testator, not the disappointed beneficiary, that gave rise to the stark division of opinion in the House. Incrementalism operates as an important cross-check on any other approach.
94 The present cannot be regarded as a case of assumption of responsibility. The involuntary nature of the bank’s involvement with the commissioners makes it impossible to regard the situation as one `akin to contract’; it is also difficult in any meaningful sense to speak of the bank as having voluntarily assumed responsibility even for the task in relation to which it was allegedly negligent, let alone responsibility towards the commissioners for the task. In a very general sense any bank, indeed anyone carrying on any activity during the course of which they might have cause to hold the monies or possessions of another, might be said to accept the risk that a third party might obtain a freezing order in respect of such monies or possessions. But that is to assign to the concept of voluntary assumption of responsibility so wide a meaning as to deprive it of effective utility.
95 Mr Brindle thus submits that no duty of care on the bank can be recognised because the bank did not voluntarily undertake responsibility even for the task which it is now alleged negligently to have executed. But Mr Sales can point to cases where a duty of care has been recognised even though the defendant cannot realistically be said to have voluntarily undertaken the relevant task. Instances may be found in Ministry of Housing and Local Government v Sharp [1970] 1 All ER 1009, [1970] 2 QB 223, Spring v Guardian Assurance plc [1994] 3 All ER 129, [1995] 2 AC 296 and Phelps v London Borough of Hillingdon [2000] 4 All ER 504, [2001] 2 AC 619 …