REUTERS | Aly Song

Time to sort out limitation in economic loss cases

Alternatively, this post could be called, A critique of Co-Op Group Ltd v Birse Developments Ltd, given this case raises a fundamental question in relation to the law of limitation in professional negligence claims involving engineers and other construction professionals.

In cases of pure economic loss, what should we take as the relevant date for limitation purposes? Is it the date when the building was completed or is it the date when physical damage was suffered?

Co-Operative Group Ltd v Birse Developments Ltd and others

Birse Developments Ltd (Birse) was employed by a developer to build a warehouse. It engaged a number of sub-contractors including Jubb & Partners (Jubb), who provided engineering consultancy services, and Geofirma Soils Engineering Ltd (Geofirma), who provided specialist geotechnical design, engineering and contractor services.

The litigation arose because the leaseholder, Co-Operative Group Ltd (Co-Op), alleged that defects had developed in the external hardstanding, the drainage system and the floor slab as a result of defective design or construction. The building was completed in 1998. The defects were first discovered in 2004. Proceedings were only issued in 2010 (that is, some 12 years after practical completion). The two sub-contractors were made third parties to the action. The question whether Birse’s claims in negligence against Jubb and Geofirma were time-barred was directed to be tried as a preliminary issue.

When did time start to run?

Birse alleged against both Jubb and Geofirma that the loss it had suffered as a result of their alleged negligence was such sum as Birse might be held liable to pay Co-Op. For limitation purposes, Birse pleaded that the “relevant damage” was “contingent upon its liability to Co-Op” and, because that liability had not yet been ascertained, time had not started to run.

Stuart-Smith J disagreed. He held that time began to run at practical completion. He said that it was impossible to have a claim in negligence without proof of damage and that the first question should therefore be what damage was capable of constituting actionable damage in the context of Birse’s relationship with its sub-contractors.

The judge said that he would reject any argument that there was no recoverable loss until the loss was ascertained, and that that would not be until trial, as:

  • The liability that would be “ascertained” at a future trial had existed since the date on which Birse acted in breach of contract (by handing over a defective building).
  • The effect of the breach of contract would be to reduce the current value of Birse’s rights under the main contract because it would give rise to a financial liability to make good the breach either by carrying out remedial works or paying damages; and the cost of remedial works or damages were both quantifiable. The judge said that he “rebelled” against the notion that the accrual of a cause of action might otherwise be delayed almost indefinitely by a mere denial of liability.

These considerations suggested that Birse’s cause of action in negligence accrued when it incurred actual liability to the employer as a result of the negligent design, which was the subject of its claim against the sub-contractors. However, Birse submitted that such a conclusion was precluded by the decisions in cases such as Forster v Outred & Co [1982] 1 WLR 86, Law Society v Sephton & Co and Axa Insurance v Akhter & Darby. On the basis of those authorities, Birse submitted that the existence of a purely contingent liability was not of itself enough to constitute actionable damage. The judge agreed but decided, in effect, that the present case was not concerned with a purely contingent liability.

The “damaged asset” and “package of rights” rules

Having considered those authorities, the judge said there are at least two categories of case where a possible future liability might give rise to an actual present liability, such as:

  • Forster v Outred, where a contingent liability was incurred but did not crystallise into an actual liability until a future date, yet damage still occurred at the time the transaction was entered because the value of Mrs Forster’s property was diminished at that time (the “damaged asset rule”).
  • DW Moore & Co Ltd v Ferrier, where, owing to the negligence of a professional adviser, a party entered into a contract which, unknown to the parties at the time, contained an ineffective term and that party therefore failed to obtain the hoped-for benefits (the “package of rights rule”). The damage in such cases was suffered at the date the contract was made because the package of rights being transferred was worth less than it was thought to be.

The judge said that Birse’s interests in the development and in the benefit of its contractual rights were properly to be regarded as “assets” within the scope of the “damaged assets rule”. The object of the sub-contracts was to provide a design to enable the project to be built properly. The “assets” were capable of being devalued, which was measurable by reference to the cost of remedying the defects. Therefore, here there was a present liability that arose, at the latest, on practical completion.

The judge said that the present case was also within the “package of rights rule” because when Birse transferred the defective development to the employer, its legal position changed to its financial detriment: it became a contract-breaker whose rights under the main contract were devalued by its liability to the employer. He said it was not a case of a purely contingent liability: rather it was a case of an accrued liability that immediately affected the value of Birse’s interest in the development and its rights under the main contract.

For present purposes, it is especially noteworthy that the judge said the matter could be tested by asking what would have happened if Birse had learned of the subcontractors’ default shortly after transferring the development to the employer. He answered by saying that it could have recovered the cost of belatedly complying with its contractual obligations to the employer of making good. However, by asking that question, the judge highlights (unwittingly) the essential problem with this approach, namely the fact that no-one knew at practical completion that there was any physical damage or that there was anything to repair.

It is that fact which makes this decision difficult to square with the Court of Appeal’s decision in Abbott and another v Will Gannon & Smith Ltd.

Abbott and another v Will Gannon & Smith Ltd

The claimants owned a hotel in Torquay. They retained the defendant, a firm of consulting engineers, to design the remedial work for structural defects in a large bay window in the hotel. The work was completed in March 1997. The claimants first noticed that the lintel over the bay window had moved and cracked the surrounding structure in late 1999. However, they only issued proceedings in September 2003, which was only four years after they first noticed the defect, but more than six years after the work was completed.

On appeal, it was held that the House of Lords’ decisions in Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1 and Ketteman v Hansel Properties Ltd  [1987] AC 189 remained binding and had not been overruled by Murphy v Brentwood DC [1991] 1 AC 398. Therefore the building owner’s cause of action against the consulting engineer for negligent design accrued when physical damage to the building first occurred. Alternatively, even if that was wrong, the loss was suffered and the cause of action accrued not when the requisite works were finished, but when the defective design manifested itself in some way that would affect the value of the building.

It is worth noting that Tuckey LJ, who gave the Court of Appeal’s leading judgment, recited that Fraser LJ in Pirelli expressly disagreed with the proposition that the case of a negligent engineer was analogous to that of a solicitor who gives negligent advice where, following the Forster v Outred line of authority, the cause of action accrues when the client acts on the advice.

Tuckey LJ also drew attention to the Privy Council’s decision in Invercargill City Council v Hamlin [1996] AC 624, which was a claim against a local authority for negligent inspection of foundations. There Lloyd LJ said that it had to be remembered that the claimant was suing for economic loss, which had only occurred when the market value of the house was depreciated by reason of the defective foundations, and not before. Therefore, if the claimant had resold the house before the defect was discovered and at full value, then he suffered no loss.

Back to Co-Op v Birse

In Co-Op v Birse there was no evidence of any physical damage at practical completion or that the value of the building was depreciated as a result of the allegedly negligent design, and yet practical completion was taken as the relevant date. Given the decision in Abbott v Will Gannon, the question now must be why, if time did not begin to run against the building owner until there was physical damage (which would be the position under Pirelli), it should nevertheless begin to run against the contractor (which seems to be the position following Co-Op v Birse).

Frankly, it is difficult to see why it should. The much more logical and sensible position is the position adopted by Tuckey LJ. Subject to any extension achieved through the operation of Section 14A of the Limitation Act 1980, time should begin to run from the date when the value of the property was depreciated which, in almost all cases, will be the date when the defective design manifests itself as physical damage.

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