Construction: can a sub-contractor be liable for ecomomic loss?

A recent decision of the Technology & Construction Court opens the way for the court to decide when a sub-contractor owes a duty of care in tort to the main contractor’s employer. The case is likely to involve a re-examination of ‘complex structure’ theory as it applies to sub-contractors and clarification of the circumstances in which a sub-contractor can be liable for economic loss. In this case a sub-sub-contractor applied to strike out a claim for a contribution against it by a sub-contractor on the basis that it was clear law that it did not owe a duty of care to the employer. The court turned down that application and, therefore, the claim will proceed.

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The claimant leaseholder of a building, Linklaters Business Services (LBS), is suing the main contractor, Sir Robert McAlpine Limited, for negligence. The case is being brought in tort because the limitation period for a breach of contract claim has expired. LBS alleges that it suffered a loss of around £3.5m in replacing pipework that had rusted and leaked, attributing the damage to the negligent provision of insulation. The main contractor has added two sub-contractors to the proceedings, seeking a contribution. Those sub-contractors in turn brought proceedings for a contribution against the specialist M&E sub-sub-contractor, Southern Insulation (Medway) (“Southern”), alleging that Southern owed LBS a duty of care. Southern had no contractual relationship with LBS.

Southern applied to strike out the claim against it, arguing that it owed no duty of care to LBS in relation to careless workmanship on its part (if any), since any loss suffered was purely economic loss in respect of which no such duty applied. On hearing the application, Mr Justice Akenhead had cause to review the historic case law in order to assess whether the sub-contractors had a ‘realistic’ prospect of success.

Since the House of Lords' decision in Murphy v Brentwood District Council [1991], it is accepted law that in the absence of a special relationship of proximity, there is no duty of care imposed in tort to safeguard a claimant against economic loss. The fact that the owner/leaseholder of the building would rely on sub-contractors performing their duties with reasonable skill and care is not sufficient to create a special relationship. For policy reasons, to avoid a flood of claims, the courts have been keen to avoid the imposition on contractors of an ‘indefinitely transmissible warranty of quality’.

Murphy and other cases have generally considered instances where claimants bring actions in tort rather than for breach of contract because they were subsequent purchasers of a building rather than original owners (to whom a duty of care was indubitably owed). The Southern case is slightly different. The underlying claimant is the original employer of the main contractor, but Southern’s contract was with a sub-contractor, rather than with either the employer or the main contractor. Case-law appears to be silent as to whether a duty of care exists in such a case. As Mr Justice Akenhead put it: “The scope of this duty and where the dividing lines are remain to be explored jurisprudentially and in practice”.

Following Murphy, even where there is a duty of care, economic loss is not recoverable for damage to the object itself, but only to ‘other property’. Much debate in construction claims has centred upon what constitutes ‘other property’. Is a building a single thing, meaning that damage to one part of the building arising from negligence in relation to another part is irrecoverable? Or is it, as ‘complex structure’ theory would have it, a collection of separate parts such that damage caused by one defective component to other parts can be claimed?

Murphy to some extent laid the idea of the ‘complex structure’ to rest. Where faulty foundations cause damage to a building resting on those foundations, for instance, economic loss cannot be recovered. However, the door to claims remains open where defective ancillary equipment, such as a central heating boiler, damages the building in which it is installed. Moreover, Lord Jauncey, in Murphy, suggested that if a specialist contractor erected an inadequate steel frame economic loss from resulting damage to floors and walls could be recoverable. The steel frame can hardly be considered to be ‘ancillary equipment’. Conceptually, the difference between the steel frame and the foundations appears to lie in the fact that a specialist sub-contractor would inevitably be engaged on steelworks whereas foundation-laying would generally be a task undertaken by the main building contractor.

The dividing-line is certainly blurred. In the present case, the specialist sub-sub-contractor stuck insulation material to the pipework. The court will therefore have to decide whether the insulating material counts as ancillary equipment, or something akin to a structural steel frame, such that it is ‘other property’, permitting recoverability. The alternative is that it is simply an integral part of the building as a whole, precluding recoverability.

Mr Justice Akenhead declined to strike out the claim, stating that he was ‘nowhere near confident enough’ that this was an appropriate case for strike out. A material factor in his decision was that this is a area of developing jurisprudence. The direction of that development remains to be seen.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.