Loss Prevention Alerts

Alert No 6 - AN EXAMPLE OF ECONOMIC LOSS

Date of Issue: 14 February, 2000

This loss prevention alert has been produced by the loss prevention working group (LPWG) of the AGS. It highlights issues that the LPWG considers may be of relevance to members. It is not intended to provide a definitive response to any issues and before taking action members should consider carefully whether they need to seek independent legal advice.

A recent case, as yet unreported, is an interesting example of the restriction on the recovery of economic loss. The defendant built a dairy building for a predecessor in title of Unigate. Due to the defendant's failure to build a fire wall to a satisfactory height, a fire which broke out in the storage area of the dairy in May 1996 was able to spread over the top of the wall causing substantial damage to other parts of the dairy building and to the plant, machinery and equipment that was kept there. There would have been no such spread of the fire if the wall had been built correctly. The first instance judge held that the defendant owed a tortious duty of care to Unigate (there being no collateral warranty with them), but that Unigate could only recover in respect of the damage to the plant, machinery and equipment and not in respect of the damage to that part of the building as lay on the far side of the wall beyond which the fire had started. The claimant appealed against the judge's exclusion of damage to the structure of the building contending that the wall was supposed to act as a barrier against the very danger which in fact had happened. Accordingly, the area beyond the wall should be regarded as a separate building. This submission sought to escape the effect of the decision in Murphy v. Brentwood District Council (1990) 3 WLR 414 which states that a defect in quality which merely damages the thing itself, and does not cause human injury or damage to other property, constitutes irrecoverable economic loss. The defendant cross-appealed contending that liability did not attach in respect of a negligent omission.

The Court of Appeal held that although it seemed to be a paradox that damage to the plant and machinery was recoverable whilst damage to the building was not, that was undoubtedly the consequence of the decision in Murphy and it was too artificial to treat the wall as a separate building. The Courts also held that the distinction between acts and omissions which was important in cases involving public authorities, had no particular relevance in the current case.

Bellefield Computer Services and others v. E. Turner & Sons Ltd (2000) LTL 28/01/2000.

This decision does not alter the law, but it is an interesting example of the artificial distinctions which exist between types of damage in the law of tort, so altering radically the potential exposure of executing collateral warranties. For example, a person who negligently designs foundations which then cause damage to the walls of the building would, it seems likely, be held to have caused only irrecoverable economic loss in which case a collateral warranty in favour of subsequent purchasers substantially increases the designer's liability risk. On the other hand, a contractor who fails to carry out ground strengthening work properly would be liable in tort for damage to the walls because the building would in this case constitute other property. Any collateral warranty in favour of subsequent purchasers hardly alters his risk. Until this area of law settles down, developers will have little confidence in duties in tort and will continue to press for collateral warranties or other protection for third parties as is now possible under the Contracts (Rights of Third Parties) Act 1999.

The Court of Appeal's decision with respect to an omission is surely right. It makes little sense to say that the defendant would have been liable if the wall had been wrongly built of combustible material (that constituting an act) but not liable if the wall was not built high enough (on one view of events, a negligent omission). This is surely a case where the defendant's omission took place during his positive carrying out of a task.

Prepared for the Members of the AGS by Steven Francis, Dibb Lupton Alsop