Legal update

Citation

Lee, R. (2006), "Legal update", Property Management, Vol. 24 No. 5. https://doi.org/10.1108/pm.2006.11324eab.001

Legal update

Abbott v. Will Gannon and Smith Ltd [2005] EWCA CIV 198, [2005] 10 EG154(CS)

The issue in this case was when in respect of latent damage to a building or structure does the loss arise? Is it when the building is completed or when there is physical damage that will need repair? This question has exercised the minds of the judges since the 1970s but as yet, there has never been a clear answer as many of the past decisions on this issue are not fully consistent with one another.

Before the decision in the case of Anns v. Merton London Borough Council [1977] 2 AllER 492, [1977] 243 EG 523 and; 591, the courts had upheld the rule of caveat emptor (let the buyer beware) in respect of defects in a building and the owner was unable to sue in negligence no matter how serious the defects turned out to be. However, in the Anns case the House of Lords decided that an owner ought to be able to sue in negligence for serious damage to the building where the damage was the result of negligence in its design or construction. This was despite the fact that hitherto no claim had been allowed in tort for purely financial loss (in this case the devaluation of the building) unless there was some kind of “special relationship” between the parties. In 1983 the House of Lords was called upon in Pirelli General Cable Works Ltd v. Oscar Faber and Partners [1983] 265 EG 979 to decide precisely when this purely financial loss occurred. This was necessary for the purpose of the Limitation Act 1980. The Pirelli case concerned cracks in a factory chimney that only became apparent some years after completion of the building works. The House of Lords decided that time did not begin to run against the negligent engineers as soon as the chimney was finished (at which point its value must have been affected because it was defective) but only when the physical damage caused by the negligent design actually manifested itself, clearly this could be many years later. However, in Murphy v. Brentwood District Council [1991] AC 398 their Lordships further muddied the waters by overturning the decision in Anns v. Merton LBC and other similar cases to return to the recognition that a claim in tort for loss arising from a defectively constructed building is in fact a claim for purely financial loss and consequently can only succeed where the parties have some kind of “special relationship”. However, no decision was made about the time at which such loss occurs. The latest development on this issue came in the Privy Council in a case on appeal from New Zealand. In Invercargill City Council v. Hamlin [1996] AC 624 their Lordships considered all of the previous decisions and concluded that in discussing the loss arising from a latent defect in a building talking of physical damage only muddies the water because as long as the defect is latent the market value of the building is unaffected. It does not help therefore to describe the latent defect as damage. The defect will only affect the market value of the building once it becomes discoverable. Thus loss only occurs at that point in time.

This seems to clarify the issue but it is important to remember that a decision of the Privy Council is not binding on the English Courts despite the fact that it is staffed by the same judges that sit in the House of Lords. However, it is likely that if the same issue came before the House of Lords that it would be decided in the same way.

In the current case the facts were in legal terms almost indistinguishable from the Pirelli case. In 1995 the owners of a hotel in Torquay instructed a structural engineer to carry out remedial works on a large bay window. The work was carried out by a local builder and was completed in 1997. The work was defective and further remedial work costing £20,000 was necessary in 1999. In 2003 the respondents commenced proceedings for negligence against the appellant. The question as to when time began to run was raised as a preliminary issue.

After a review of the relevant precedents the trial judge decided that Pirelli is still good law in England as it has never been overruled. Therefore, if the cracking occurred shortly before it was noticed, in 1999, as the evidence seemed to suggest, then the claimants had started their action in time.

The Court of Appeal agreed with the analysis of the trial judge. They concluded that that Pirelli was still good law in England despite the Privy Council’s decision in the New Zealand case of Invercargill. Thus the court was reluctantly bound to follow it and conclude that the action was begun in time. The appeal was dismissed.

However, as only the House of Lords can finally decide whether or not Pirelli is still the law in England it is inevitable that sooner or later this or a similar case will provide the opportunity to do so.

Haward v. Fawcetts (a firm) [2006] UKHL9; [2006] 1 WLR 682

This case concerned what counts as “knowledge” in order to start time running for the purposes of bringing a case in professional negligence under S14A Limitation Act 1980. S14A was introduced into the 1980 Limitation Act by the Latent Damage Act 1986. Under S14A an additional time for bringing an action in professional negligence is three years from when the claimant has actual or constructive knowledge of “the material facts about the damage in respect of which damages are claimed” and of certain other facts set out in S14A(8). One of these other facts is “that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence.” S14(9) further provides that “knowledge that any acts or omissions did not, as a matter of law, involve negligence is irrelevant.” Thus it appears that the claimant must know that his loss has resulted from the defendant’s act or omission but not necessarily that the defendant has been negligent in law.

The facts of the present case were that the first claimant, his family company and a family trust acquired in December 1994 a controlling interest in a company on advice from his accountant’s advice. The accountant was a family friend and also a partner in the defendant firm. The accountant had warned the claimants that they would need to inject about £100,000 of capital into the company to bring it into profitability and give them a return on their capital. In fact this estimate was wildly inaccurate and even after an injection of £430,000 in 1995 and more than £1 million by 1998 the annual company accounts still showed that the company was nowhere near solvent.

On 6 December 2001 the claimants began legal proceedings alleging that the defendant’s initial advice and his subsequent running of the company were negligent. The defendant denied negligence and also pleaded that in any case part of the claim was out of time under the Limitation Act 1980. The defendant claimed that a claim for breach of contract based on the advice could not be based on any advice given before 6 December 1995 (i.e. six years from the date of any breach) and that a claim in tort could not be based on any loss suffered before that date (i.e. six years from the date on which the claimant suffered loss by relying upon the negligent advice).

In reply the claimant claimed that he was entitled to rely on S14A of the 1980 Act and that consequently a claim in tort would not be barred until three years after he had acquired the relevant “knowledge” about his potential claim.

The courts have traditionally had difficulty in reconciling the provisions of S14(8) and S14(9) of the 1980 Act. In this case they found some support in the Court of Appeal decision in Dobbie v. Medway Health Authority [1994] 4 AllER 450. In that case a surgeon removed the complainant’s breast without first checking whether or not the lump in it was cancerous. In fact it was not. The court held that time began to run as soon as the claimant knew that a healthy breast had been removed. She did not need to know specifically that the decision to remove it was negligent.

Applying this logic to the current case their Lordships unanimously held that the claimant had sufficient knowledge soon after the take over when the disastrous losses clearly indicated that the defendant’s advice was flawed. It followed that the three year limitation period had expired before the proceedings were begun in December 2001.

Francis v. Barclay’s Bank plc [2004] EWHC 2782 [2005] PNLR 18

This case concerned the bank’s duty to a borrower on repossession of a mortgaged property. It is well known that the lender owes an equitable duty to the borrower to see that the property realises its proper value on disposal. If it fails to do so questions as to the negligence liability of the bank’s advisors will be raised. However, in Raja (administratix of the estate of Raja (deceased) v. Austin Gray (a firm) [2002] (see, Property Management (2003) Vol. 21 No. 5, p. 355) the Court of appeal ruled that the borrower has no direct right of action in negligence against the bank’s professional advisors. It is the lender who is responsible to the borrower for any negligence on the part of its advisors who will in turn be liable to the bank.

In the present case Mrs Francis and her husband owned some land. Loans by the bank to the couple had been secured by legal charges over the land and their house. Their business failed and Mr Francis was made bankrupt. The land was repossessed by the bank and sold to a development company with a “clawback” provision for ten years in the event of a resale or grant of planning permission. The clawback would amount to approximately one half of the developer’s profit. One year later the buyer approached the bank requesting a variation of the clawback agreement, including a cap on the amount that would be payable to the bank in the event of a resale. The bank instructed its surveyor who had acted in the original sale to investigate the offer. Acting on his advice the bank agreed to a variation of the agreement whereby the bank would receive an initial payment of £35,000 and a cap of £80,000 on any future payments. Shortly afterwards the site was zoned for development and the buyer sold it for £2.2 million.

Meanwhile the bank had obtained a possession order for the Francis’ house in order to recoup money still outstanding on the loans. Mrs Francis claimed that the bank had been in breach of its equitable duty to her as a person interested in the equity of redemption. She claimed that the bank should have refused a variation of the original clawback arrangements or have negotiated a much more favourable deal that would have resulted in a profitable sale and cleared her indebtedness to the bank. The bank claimed that it was not in breach of its duty to her as it had properly instructed its surveyor and had acted on that advice. In its turn the bank claimed that the surveyor had been negligent in giving its advice on the variation of the clawback agreement. It claimed damages amounting to what it would have received under the original clawback agreement.

The court had to consider whether the surveyor had been negligent in giving its advice as to the clawback agreement. The surveyor contended that he had acted properly in that he had contacted the local authority planning control department who had informed him that no recent changes had been made to the local development plan. (Under the existing plan the land in question was not marked as appropriate for residential development). However, the surveyor did not enquire as to any future zoning plans that might affect the site. The court therefore held that the surveyor had been negligent in failing to make these enquiries as a reasonably competent surveyor would have wondered why the buyer was so anxious to limit its future liability on the clawback agreement. If he had made enquiries he would have discovered that there was a distinct possibility of changes to the local plan that would have brought the land in question into the area deemed appropriate for residential development. If the bank had been made aware of this on the balance of probabilities it would not have varied the clawback agreement.

The surveyor’s defence further contended that despite his negligence he should not be liable for damages because if the agreement had not been varied the buyer would just have waited for the clawback agreement to expire before seeking planning permission. Thus the bank would have received nothing thus any loss now claimed was purely speculative.

The judge rejected this argument. Following the case of Raja, the court held that the bank had been negligent in carrying out its duty to the claimant as a party interested in the equity of redemption and was responsible for the negligence of the surveyor as its agent because the chance of the development going ahead and bringing into play the clawback agreement was two to one. Thus the surveyor was liable for two thirds of what the clawback payment would have been.

Wilson v. DM Hall & Sons [2005] PNLR 22

This was a Scottish case that turned on the extent to which the principles of professional negligence decided in the 1980s in Yianni v. Edwin Evans and Sons (1981) 259 EG 969 and Smith v. Eric S Bush [1989] EGLR 169 are applicable to a surveyor’s liability in the sale of commercial property.

In this case the claimant was a property developer who had built a block of six flats on some land he owned in Edinburgh with the aid of a loan from a bank. The bank instructed the defendant to provide a valuation of the flats as the basis for the loan. The defendant valued the resale price of the flats at £225,000 and the costs at £150,000. The valuation report contained a standard clause by which the valuer purported to disclaim liability to anyone other than the bank. The report was not shown to the claimant but the figures in it were passed on to him. On the basis of the valuation report the bank made a loan of £114,000. Later the claimant needed to borrow a further £30,000 so the bank asked the defendant to carry out a revised valuation. The flats had by this time been slightly upgraded so the defendant valued them at £ 306,000. This time the report was passed on to the claimant. The flats were advertised for sale at £311,000 but failed to sell. The claimant therefore failed to repay the loans and the bank repossessed the flats.

The claimant brought action against the defendant valuer alleging that if it had not been for its negligent overvaluation of the flats he would have marketed them at a lower price, they would have been sold and he would have been able to repay the loans.

The judge had to consider whether this claim fell within the principle in the Smith v Eric Bush case. After analysing the various tests for the existence of a duty of care she concluded that the defendant owed no duty of care to the claimant. This was not based on the disclaimer but on the question of what in the circumstances the reasonable surveyor could be expected to foresee. She stated that the claimant presented himself as an experienced businessman who was undertaking a commercial development for profit. He approached a commercial bank for a loan. The whole context was that of a commercial enterprise and thus everyone involved would expect that pricing and marketing strategy would be decided by the property developer himself in consultation with his own professional advisors based upon his own valuation of the property. A commercial surveyor valuing the property as the basis for security for a commercial bank’s loan would not expect the developer to be relying on his valuation as the basis for his pricing and marketing strategy.

Furthermore, even if negligence could have been established the failure of the flats to sell could have been attributed to other factors such as the state of the property market at the time or the way in which they were marketed and advertised. In addition there was no evidence of any established practice on the part of commercial banks of passing on valuation reports commissioned by them to potential borrowers such as property developers. Thus this was not a case that fell within the ambit of the decision in Smith.

Occupiers liability

Keown v. Coventry Healthcare NHS Trust [2006] EWCA Civ 39

The trend in the courts has been one of unwillingness to impose liability under the Occupiers Liability Act 1984 on occupiers for what is the trespasser’s own fault as illustrated by cases such as Tomlinson v. Congleton Borough Council [2003] UKHL 47 [2004]1 AC 46. This trend appears to be continuing even in respect of child trespassers as illustrated in Keown case.

In this case an 11 year-old boy was “showing off” to his friends by copying the dangerous behaviour of older children that he had witnessed. Basically it involved climbing up an outside hospital fire escape at the hospital from the underside of the stairs. He lost his grip and fell 30ft to the ground. He suffered a broken arm and severe, permanent brain damage. The occupiers of the hospital were aware that the hospital grounds were regularly used by the public as access to neighbouring streets and by the local children as a play area. However although they had seen older children on the fire escape they were unaware of the dangerous practice of climbing on its underside nor was there any suggestion that they should have been so aware.

The respondent brought legal action against the appellant in respect of his injuries. It was accepted by both parties that he must be treated as a trespasser at the time of the accident so that any liability would fall to be decided under the 1984 Act. The occupier owes a duty under the act if:

• •

  He is aware of the danger or has reasonable grounds to believe that it exists.

• •

  He knows or has reasonable grounds to believe that the trespasser is in the vicinity of the danger or that he or she may go there.

• •

  It is reasonable to expect him to offer some protection against that risk.

The question was therefore whether the respondent’s claim satisfied those provisions. The trial judge held that it did but reduced the respondent’s damages by two thirds in recognition of the fact that the child was aware of the danger of what he was doing. The appellant appealed.

After having reviewed the relevant case law the Court of Appeal held that the appellant was not liable at all. The court decided that there had been no danger due to the state of the premises as required y the 1984 Act. There was nothing wrong with the fire escape, it was not defective or in disrepair or dangerous in any way and there was no hidden danger. Thus the respondent’s injuries were not due to the dangerous state of the premises but were the result of his own choice to indulge in a dangerous practice. Thus there was no claim under the 1984 Act.

Defective premises

Catlin Estates Ltd v. Carter Jonas (a firm) [2005] EWCH 2315

In this case a family company controlled by the second claimant, Mr Catlin engaged the defendant under RICS conditions of engagement for building services to design the building of a hunting lodge and administer the building contract. The contract between them was made in February 1998. The claimants took possession of the lodge in August 1998 and the defendant certified practical completion of the contract works in February 1999. In March 1999, the property, was transferred by the first claimant, to the second claimant, Mr Catlin for full value.

After completion various defects were found the most important of which was the flooding of the basement due to the wet site and smoking fires due to the windy position of the site. The claimants brought action against the defendants seeking damages of about £1 million.

The first claimant’s claim was made in both contract and tort. However the defendant argued that as the company had sold the property to Mr Catlin for full value it had suffered no loss. The company replied that it was entitled to recover damages on behalf of Mr Catlin in tort.

It is generally rue that English law does not permit one party to claim damages for losses suffered by another. However, the House of Lords in St Martins Property Corporation Ltd v. Sir Robert McAlpine and Sons [1994] 1 AC 85 made and exception to this rule when they held that where the parties to a construction contract were aware when they entered the contract that on completion the building was likely to be transferred to a third party they would be taken to have intended that the original client would have the right to sue the contractor on behalf of the purchaser and would be obliged if successful to transfer the damages to the purchaser. However they held that his did not apply where the third party had some direct rights against the contract such as by means of a collateral warranty.

In the Catlin case the judge followed the ruling in the St Martins case because otherwise the defendant would get away scot-free merely because of the family arrangement made by Mr Catlin in respect of the property. Thus the first claimant was entitled to recover damages for the loss suffered by Mr Catlin.

This effectively disposed of the case. However, Mr Catlin had also brought an action in his own name under the Defective Premises Act 1972 on the grounds that the defendant had failed to carry out the work in a professional manner and was thus in breach of S1 of the Act. The judge held that the property was a dwelling despite the fact that the hunting lodge would be used on a business footing for shooting parties. The question then arose as to whether the dwelling was unfit for human habitation as was the interpretation of S1 adopted by the court in Thompson v. Clive Alexander and Partners [1993] 59 BLR 77.

In Catlin the judge held that the construction defects did not render the building unfit for human habitation. However, he found that it was unnecessary to reach a conclusion on the matter since the claim was in any case barred under the Limitation Act 1980.

The law stated as it is believed to be as at 14 August 2006.

Rosalind Lee