| Date | 13 August 1997 |
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| Judgment | Jacobs - v - Morton & Partners, 29 July 1994 72 BLR 92 |
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| The Issue | Recovery of the cost of putting right defects in building works in the absence of a contract. |
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| Implication |
Whilst the complex structure theory may still offer a solution in limited cases, collateral warranties remain necessary to safeguard the rights of subsequent purchasers and end users of property. |
printSince 1991, the construction industry has been populated with collateral warranties. These would not have been required to the same extent had the law permitted end users and subsequent purchasers of buildings (and for that matter anybody not an original party to the construction contract or consultancy agreements), to sue the original contractors and designers in the tort of negligence. In 1991, the House of Lords decided in the case of Murphy -v- Brentwood that these "third parties" would not be entitled to sue in negligence to recover the cost of putting right defects in their properties. In short, they would be entitled only to recover damages related to physical injury or damage to "other" possessions or property. The cost of repairing a defective building, even where work was carried out in order to prevent physical injury, would not however be recoverable. Such damages were labelled somewhat inappropriately "economic loss" and as such irrecoverable in tort. This whole principal might one day be thrown aside if the Law Commission Report No 242 is ever acted upon. This report sets out a draft bill to Parliament, the principal provision of which would allow a person who is not a party to a contract, in his own right, to enforce that contract if a) the contract contains an express term to that effect, or b) the contract purports to confer a benefit on that person. As it stands however, as with any rule of law there are exceptions. One exception which has stood the longest test of time concerns the case of Hedley Byrne & Co Limited -v- Heller & Partners, decided in the House of Lords in 1964. This case concerned a banker who gave a financial reference to a third party concerning one of its clients. The advice was given negligently and the third party suffered loss. Here the House of Lords decided that there was a right to sue, in effect to recover "economic loss". The giver of 'professional' advice is thus examined under a different microscope. A further exception to the general rule that one cannot sue in the tort of negligence to recover 'economic loss', such as the cost of putting right defects in a property, has been variously described as the "complex structure theory". The idea behind this circumvention of the general law is best illustrated by way of an example. Imagine a boiler which is defective in its construction or installation, explodes causing catastrophic damage to a building. Here the end user or subsequent purchaser who has no contract with the builder would nonetheless be able to sue the builder or its sub-contractor, and potentially recover the full cost of reinstatement on the basis that the objective is not to recover the cost of putting the boiler itself right, but to recover the cost of the damage caused to the 'adjacent' property. In the Murphy and Brentwood case this complex structure theory was rejected essentially on the basis that it was artificial to split the building up. At best it was a theory which was intended to be confined to cases where catastrophic damage had actually occurred. Nonetheless, the theory seems to have continued to persist. The case of Jacobs -v- Morton & Partners in July 1994 suggested that the absence of a collateral warranty might not be fatal to the recovery of loss following defects in a building. Jacobs were the freehold owners of a semi-detached house in Northolt, Middlesex. In 1986, Jacobs predecessors in title to the building had retained Morton to advise them in connection with remedial works to repair cracking in the property. Morton approved the design for the construction of foundations supported on small diameter bored piles, and thereafter supervised the execution of the works. Soon after Jacobs purchased the property further cracking occurred, and ultimately the only practical method of rectifying the fault was by the demolition and rebuilding of the property. Jacobs successfully sued Morton in tort, the judge holding that their loss did not represent economic loss. The foundations which had caused damage to the property were separable from the property itself and therefore the case was to be treated as falling within the complex structure exception. Their case was particularly assisted by the fact that the defective item was constructed by someone other than the main contractor responsible for the construction of the building as a whole, and constructed at a different time to the rest of the building. Although this case offers a restricted opportunity to sue for the cost of putting right defects in a building in the absence of a contract, it seems certain that the exclusion is so narrow that collateral warranties will be with us for some further time to come.
CJ-9729
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