This month’s Ask the team considers the viability of a claim for pure economic loss based on complex structure theory.
Pure economic loss in a nutshell
In general, a claimant cannot recover in tort for damage to “the thing itself” because that is pure economic loss, but can recover for damage to “other property”. Akenhead J illustrated this principle in Linklaters Business Services v Sir Robert McAlpine Ltd by analogy with the facts in the famous case of Donoghue v Stevenson, pointing out that “…the purchaser of a ginger beer bottle which contains a snail may recover for personal injuries caused if she drinks the ginger but not for the cost of the bottle.”
What is complex structure theory?
Complex structure theory suggests that a claimant should be able to recover for damage where a structure is so complex that individual elements of it can be distinguished “so that damage to one part of the structure caused by a hidden defect in another part may qualify to be treated as damage to ‘other property’” (Lord Bridge in D&F Estates Ltd v Church Commissioners for England).
What are the latest construction law cases?
The Technology and Construction Court most recently considered complex structure theory in two disputes that came before Akenhead J:
- Linklaters and a subseqent judgment in the same litigation.
- Broster and others v Galliard Docklands Ltd and another.
In both cases the court found that complex structure theory did not assist the claimants and cast doubt on its overall usefulness. However, the court did not expressly rule out the applicability of complex structure theory in all cases. For example, in Linklaters Akenhead J remained undecided about its relevance to the case of a sub-contractor that provides one element of a building which then damages the rest of the building.
These latest cases mean that, as far as the current law is concerned, the usefulness of complex structure theory is limited, but not altogether ruled out. This uncertainty is considered in Blog posts:
- Why is negligence so complex?, by James Levy of Lewis Silkin LLP.
- A tale of leaks and complex structure theory, by Michael Mendelblat of Herbert Smith LLP.
Would a complex structure argument succeed in future litigation?
Complex structure theory has been criticised ever since its inception. However, recent months have seen renewed public criticism (for example, from James Cross QC of 4 Pump Court and Paul Bury of Keating Chambers). In summary, critics argue that:
- Complex structure theory was never a legal principle recognised by the courts. Even the judges who first mooted it in D&F Estates distanced themselves from it in later cases such as Murphy v Brentwood District Council.
- If one carries out a survey of all the relevant authorities, which was not done in either the Linklaters litigation or Broster, one sees that complex structure theory has been given credence in only a small number of judgments, with the bulk of case law finding it unhelpful.
- Applying complex structure theory is nigh on impossible in practice, because one can argue that almost anything is a complex structure composed of distinct elements.
- It leads to unfair results, imposing potentially huge liability on small sub-contractors down the procurement chain, even though they may only be responsible for a small, cheap component of the structure. This is precisely the injustice that the general bar on recovering pure economic loss is intended to prevent.
What is the law if complex structure theory doesn’t apply?
If complex theory is rejected, then the test for recovering damages is essentially that set out in the early authorities, such as Murphy. That is:
- Is the item under consideration physically damaged or just defective?
- Has the physical damage occurred to “the thing itself” or to “other property”?
This does not give a great deal of commercial certainty, because what constitutes “other property” depends on the facts in each case. However, at least it does away with the confusing and unhelpful notion of the complex structure. At the same time, there is some judicial guidance on what constitutes “other property” (for example, Jacobs v Morton and Partners [1994] BLR 92). Interestingly, James Cross QC also suggests that there may be some value in looking at other fields where recovery is often limited to damage to other property, such as product liability insurance and contractors all risks insurance.
Should you claim on the basis of complex structure theory?
The state of the case law and widespread criticism make a claim that relies solely on complex structure theory a risky one to bring. Even if such a claim was successful at first instance, it would run a substantial risk of being appealed. Perhaps just as importantly, even where the courts have refused to reject the concept of complex structure theory, there are few reported cases where they have actually awarded damages on the basis of it.
That said, after years of speculation we still await a conclusive Supreme Court ruling on complex structure theory, so anything remains possible.
