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Personal liability, contractual liability, tortious liability: what’s the difference?

Some of you may recall poor Mr Babb the surveyor who, in 2001, ended up with personal liability for a valuation he prepared when his employer went bust (Merrett v Babb).

Fast forward to 2014 and Sainsbury’s Supermarkets Ltd v Condek Holdings Ltd and others, where Sainsbury’s tried to run the same argument when it claimed that one of its car parks was so defective that it had to be demolished.

Unlike Miss Merrett and her mother, Sainsbury’s failed, giving designers some comfort as to their potential liability.

The North Cheam car park

Mr Pashouros invented a modular prefabricated car park construction system, which could be built very quickly. This suited Sainsbury’s, who contracted with Condek Holdings Ltd, a company owned by Mr Pashouros which had the benefit of an exclusive license to use the system. However, Condek went into liquidation and there was no insurance cover due to late notification.

Therefore, Sainsbury’s had to look outside the contract for recovery of its losses. It identified two potential targets, Mr Pashouros and CSL. Neither one took kindly to the claims and they applied for the claims to be struck out under CPR 3.4(2) and for summary judgment to be granted under CPR 24.

The case against Mr Pashouros

Mr Pashouros was the inventor of the system and main shareholder. He was heavily involved in negotiations, correspondence and had signed a letter of intent with Sainsbury’s. While Sainsbury’s had to accept that merely designing a novel system did not impose liability, it argued that Mr Pashouros had assumed responsibility because he:

  • Promoted the use of the Condek system.
  • Would benefit financially if the system was used.

Mr Justice Edwards-Stuart rejected these arguments. It was common for a person to transfer his business to a limited liability company, in order to benefit financially while having the protection of a separate legal personality. On the facts, Mr Pashouros did not do anything to suggest that he had assumed personal responsibility over and above that of his company.

The case against CSL

Sainsbury’s case against CSL was based on CSL taking over Nickalls Roche McMahon (NRM). NRM provided an independent check of the Condek system and produced a report which was provided to Sainsbury’s with the tender documents.

However, there was no direct contractual link between Sainsbury’s and NRM. Sainsbury’s argued this did not matter because:

  • This was a novel and untested design never before put into practice.
  • NRM were aware that a prototype and model was built with Sainsbury’s in mind.
  • NRM undertook the design calculations, were involved in meetings with Sainsbury’s, responded to queries from Sainsbury’s and inspected the ongoing installation.

The court was not convinced and relied on the basic principle that a clear contractual chain is inconsistent with an assumption of responsibility. However, it did identify two factors that could have resulted in NRM assuming responsibility and being liable:

  • NRM’s potential knowledge that its report was enclosed with Condek’s tender, which was done with the purpose of validating the design so that Sainsbury’s would accept it.
  • NRM’s active involvement in meetings with the client, including answering various technical questions.

The judge’s advice

When reviewing the factual background, the judge made the point that Sainsbury’s were very experienced in negotiating construction contracts. If they had wanted Mr Pashouros to have a clear duty or liability, they could have asked for:

  • Mr Pashouros to be a party to the contract.
  • A duty of care deed or other form of self standing warranty.

Neither was requested. Similarly, no warranty was requested of NRM. Collateral warranties are often used to protect against main supplier insolvency and had Sainsbury’s obtained a warranty, it would not have faced the difficulties it did.

Designer’s liability

Can designers rest easy? The claim failed on the facts but the judgment does make a few suggestions as to when such liability could arise. The dividing line is perhaps not as clear as it could be.

Both Mr Pashouros and NRM were deeply involved with Sainsbury’s and, as was to be expected, they supported the use of the system. Nothing unusual in that, but the judge seemed to think that being involved in meetings, dealing directly with the client and providing information could potentially give rise to liability even without a contractual link.

This case shows the difficulties in running such non contractual claims but also that such arguments will not always fail, as indeed was the case for Mr Babb.

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