England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MANCHESTER DISTRICT REGISTRY
HIS HONOUR JUDGE STEPHEN DAVIES
9MA50033

		Royal Courts of Justice Strand, London, WC2A 2LL
		18/01/2011

Lord Justice Jackson :

1. This judgment is in six parts, namely:

Part 1. Introduction,

Part 2. The Facts,

Part 3. The Present Proceedings,

Part 4. The Appeal to the Court of Appeal,

Part 5. The Law,

Part 6. The Impact of UCTA,

Part 7. Did the Defendant Owe a Relevant Duty of Care in Tort to the Claimant?

Part 8. Conclusion.

Part 1. Introduction
2. This is an appeal by a house owner who claims damages in respect of alleged defects against the builder from whom he purchased his house.
3. This action has been struck out following the trial of preliminary issues on the grounds that (a) the claims in contract against the builder are statute-barred and (b) the claimant has no cause of action in tort against the builder.
4. In this judgment I shall refer to the National House-Building Council as "the NHBC". I shall refer to the Limitation Act 1980 as "the Limitation Act". I shall refer to the Unfair Contract Terms Act 1977 as "UCTA".
5. Section 14A of the Limitation Act provides an extended limitation period for negligence claims where facts relevant to the cause of action are not known at the date of accrual. That extended limitation period is, in effect, three years from the date of knowledge.
6. Section 2 of UCTA provides:

"(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.

(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.

(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk."

7. Section 3 of UCTA provides:

"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term –

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled –

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."

8. Section 11 of UCTA provides:

"(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act, section 3 of the Misrepresentation Act 1967 and section 3 of the Misrepresentation Act (Northern Ireland) 1967 is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

……..

(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen."

9. After these brief introductory remarks, I must now turn to the facts.
Part 2. The Facts
10. By a written agreement made in December 1991 the defendant agreed to sell, and the claimant and his wife agreed to purchase, a house which was then under construction on plot number 5, Magnolia Drive, Prestbury. No copy of that agreement survives but it is common ground that it was in substantially the same terms as an unsigned draft agreement, which does survive. I shall refer to the written agreement of December 1991 as "the Agreement".
11. Clause 1 of the Agreement stated that the purchase price was £351,700. Clause 6 provided for completion to take place 14 days after the vendor gave notice to the purchaser that the property was complete. Clause 8 provided that the "building conditions" annexed to the Agreement were incorporated into the contract between the parties.
12. The building conditions included the following provisions:

"1.(a) The Vendor will in an efficient and workmanlike manner complete the work shown on the drawings and specification relative thereto already produced to and made available for inspection by the Purchaser at the offices of the Vendor with such additions variations or omissions as may from time to time be agreed in writing between the parties.

………

3. Any extra work or variations to the property which the Vendor may agree to carry out at the request of the Purchaser shall be paid for in addition to the sum specified in the Agreement and payment therefore shall be made in full on completion.

……….

8. The Vendor shall not be liable for any defect in or failure or inadequacy of any article item of equipment or fitting supplied to the Vendor by the manufacturer thereof (whether or not personally selected by the Purchaser) which is not within the terms of the Certificate of the National House-Building Council nor for any injury loss or damage arising from any such defect failure or inadequacy.

………

10. The Vendor and the Purchaser shall forthwith enter in to the National House-Building Council's standard form of Agreement No. HB5 (1986) (or any other standard form in current use at the relevant time for the like purpose) which said standard form is hereinafter called "the N.H.B.C. Agreement". The Vendor shall not be liable to the Purchaser or any successor in title of the Purchaser under the Agreement or any document incorporated therein in respect of any defect error or omission in the execution or the completion of the work save to the extent and for the period that it is liable under the provisions of the N.H.B.C. Agreement on which alone his rights and remedies are founded."

13. Whilst the house was under construction the claimant informed the defendant that he would like to have gas fires in two rooms, namely the lounge and the family room, whereas the specification only provided for a gas fire in one of those rooms. Pursuant to clause 3 of the building conditions, it was agreed that the defendant would construct a second chimney flue in order to serve a second gas fire. The claimant then arranged directly with British Gas for the supply and installation of that second fire.
14. Construction works were complete by April 1992. Completion of the Agreement between the claimant and defendant took place in that month. The claimant paid the agreed purchase price. The defendant transferred to the claimant and his wife the property which was to become known as 12 Magnolia Rise, Prestbury. The postal address was different from the plot number, but the property was the same.
15. In September 2004 the claimant arranged for a British Gas service engineer to attend and service the gas fires. The engineer conducted a test, known as a spillage test, to check that the gas fire was effectively drawing combustion products from the room in which it was located. The family room gas fire failed that test. The service engineer recorded this and he also recorded that the gas fire had a "poor flue run". Both gas fires were disconnected for safety reasons. The claimant then arranged for a surveyor to inspect and advise. In October 2004 the claimant wrote to the defendant reporting the surveyor's findings, which were that the flues had not been constructed (a) in accordance with good building practice or (b) in accordance with the Building Regulations in force at the time when the house was constructed.
16. It appeared that the cost of remedial works would be substantial because the flues would require reconstruction. The claimant, who was by then the sole owner of the property, looked to the defendant to meet the costs of the proposed remedial works.
17. No resolution of the claimant's claim was achieved through correspondence. Accordingly the claimant commenced the present proceedings.
Part 3. The Present Proceedings
18. By a claim form issued in the Manchester County Court on 8^th December 2006 the claimant claimed damages for breach of contract and/or negligence and/or breach of statutory duty on the part of the defendant. In his particulars of claim the claimant set out details of the alleged defects in the flues and asserted that remedial work would cost approximately £35,000. The claimant also claimed general damages for loss of use of the gas fires in the lounge and family room since September 2004. The claimant pleaded that his claim was not statute-barred by reason of the provisions of section 14A of the Limitation Act.
19. This action proceeded, most inappropriately, in the Manchester County Court. The defendant served a defence denying liability and an amended defence asserting that the claim was statute-barred.
20. On the 17^th October 2008 a district judge in the Manchester County Court gave case management directions, which were intended to lead to a trial in the spring of 2009. In March 2009 the parties and their advisors realised that this was a case which should be proceeding in the Technology and Construction Court. Accordingly there was a joint application to transfer this action to the Technology and Construction Court.
21. I should at this point mention that cases of this nature should be commenced in the Technology and Construction Court. If they are not so commenced, then the action should be transferred as soon as possible after issue to the Technology and Construction Court, so that the action can have the benefit of case management by a judge with specialist expertise in this field. I deplore the fact that this litigation ran on for 2 ½ years before it was transferred to the Technology and Construction Court and placed before a judge with appropriate expertise.
22. On 30^th March 2009 there was a case management conference before HHJ Stephen Davies, one of the specialist judges who sit in the Manchester Technology and Construction Court. Judge Davies ordered that there be a trial of the following two preliminary issues:

"1. Whether or not the defendant owed a duty of care in tort to the claimant in respect of the matters complained of in the particulars of claim.

2. Whether or not the claimant's claims in contract and/or tort (if any) are statute-barred by reason of the expiry of the relevant periods of limitation prior to proceedings being commenced."

23. The trial of the preliminary issues took place on 8^th and 9^th September 2009. The claimant gave oral evidence, as did the defendant's expert witness. The judge reserved his judgment, which he circulated in draft on 7^th October 2009.
24. The claimant's representatives, upon perusing the draft judgment and seeing that their client had lost, requested the judge to reconsider his decision. By an application notice dated 11^th January 2010, the claimant applied to the court to receive further documentary evidence in support of the contention that the judge should reconsider his decision and find in favour of the claimant.
25. At a hearing on 27^th January 2010 the judge rejected the claimant's application to adduce further evidence and to re-open the judge's decision. He then handed down judgment in accordance with the draft previously circulated.
26. In his judgment dated 27^th January 2010 the judge divided preliminary issue 1 into two sub-issues to which I shall refer as issue 1(1) and issue 1(2). Issue 1(1) was: "can a builder owe his client a concurrent duty of care in tort in relation to economic loss?" Issue 1(2) was: "did the defendant owe a duty of care to the claimant on the facts of this case?" The judge also divided issue 2 into two sub-divisions, but those matters are not relevant to this appeal.
27. In relation to issue 1(1), the judge reviewed a large number of authorities on the question of concurrent liability and concluded that the answer was as follows:

"In principle a builder can owe a duty of care in tort to his client, concurrent with his duty in contract, in relation to economic loss."

28. In relation to issue 1(2), the judge concluded that the answer was no. This was because clause 10 of the building conditions satisfied the requirement of reasonableness under UCTA and excluded concurrent liability in tort. In those circumstances the judge held that the claimant did not have a claim in tort. It was common ground that any claim which the claimant might have in contract was barred under the Limitation Act. Accordingly the judge dismissed the action.
29. The judge's reasoning in relation to preliminary issue 1 meant that preliminary issue 2 was academic. Nevertheless, the judge helpfully set out his conclusions on that second issue. In very brief summary, the judge's conclusions were that if the claimant had a cause of action in negligence, then that cause of action would not be statute-barred. For the purposes of section 14A of the Limitation Act, time did not start to run until September 2004. Therefore proceedings had been commenced within the three year period allowed by section 14A.
30. The claimant was aggrieved by the dismissal of his action. Accordingly he appealed to the Court of Appeal.
Part 4. The Appeal to the Court of Appeal
31. By a notice of appeal dated 17^th February 2010 the claimant applied for permission to appeal on ten grounds.
32. Grounds 1 to 3 effectively say the same thing, namely that the judge should have admitted fresh evidence and allowed further argument after he had circulated his judgment in draft. Ground 4 is that the judge erred in holding that clause 10 of the building conditions excluded a tortious duty of care. Ground 5 is a contention that the judge's construction of the contract renders the warranty in clause 1(a) of the building conditions ineffective. Grounds 6 to 10 are a series of arguments to the effect that the judge erred in his approach to clause 10 of the building conditions and the N.H.B.C. Agreement.
33. Aikens LJ considered the claimant's application on the papers. He refused permission to appeal on grounds 1, 2, 3 and 5. He granted permission to appeal on grounds 4 and 6 to 10.
34. Following the grant of permission the defendant served a respondent's notice, seeking to support the judge's decision on two additional grounds. The defendant's first contention is that the answer to issue 1(1) is no. The second additional ground raised by the defendant is that UCTA is not relevant to the question whether clause 10 of the building conditions precludes any duty of care in tort from arising.
35. Thus were the battle lines drawn. The hearing of this appeal took place on 23^rd November 2010. Ms Lucy Wilson-Barnes appeared for the claimant/appellant. Mr Martin Budworth appeared for the defendant/respondent.
36. Before I address the issues raised by this appeal I must first review the relevant law.
Part 5. The Law
37. In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 A.C. 803 the House of Lords upheld a decision that certain conditions of sale did not satisfy the requirement of reasonableness under section 55 of the Sale of Goods Act 1979. The House of Lords emphasised that the decision of a trial judge in relation to reasonableness under the Sale of Goods Act 1979 and under UCTA should be treated with the utmost respect. An appellate court should only interfere with that decision if it was satisfied that the decision proceeded upon some erroneous principle or was plainly and obviously wrong. See the speech of Lord Bridge at pages 815 to 816.
38. In Smith v Bush [1990] 1 AC 831 the House of Lords held that a valuer instructed by a prospective mortgagee to carry out the valuation of a modest house owed a duty of care to the mortgagor to exercise reasonable skill and care in carrying out that valuation. However, the House of Lords held that such a duty of care would not arise if there was an effective disclaimer of liability made on behalf of the valuer. In each of the two conjoined appeals before the House there was a disclaimer of liability made by the valuers. The House of Lords held that each of those disclaimers was a "notice" within the meaning of section 2 of UCTA. The House of Lords went on to hold that in each of those two cases the notice did not satisfy the requirement of reasonableness. It would not be fair and reasonable to allow the valuers in those two cases to rely on such a disclaimer to exclude their liability to the mortgagors for the accuracy of the valuations.
39. In Murphy v Brentwood [1991] 1 AC 398 the plaintiff purchased a house which had been built with defective foundations and claimed damages against the local authority for negligence in approval of the plans. The official referee found in favour of the plaintiff and awarded £38,777 damages. This sum represented the plaintiff's loss on resale of the house in its defective condition together with incidental expenses. That decision was upheld by the Court of Appeal, but reversed by the House of Lords. The House of Lords held that the local authority owed no duty of care to protect the plaintiff against the economic loss which he had suffered.
40. In Murphy the House of Lords subjected its earlier decision in Anns v Merton London Borough Council [1978] AC 728 to much critical analysis and comprehensively rejected the reasoning upon which it was based. At page 472 Lord Bridge said this:

"My Lords, I would hold that Anns was wrongly decided as regards the scope of any private law duty of care resting upon local authorities in relation to their function of taking steps to secure compliance with building byelaws or regulations and should be departed from. It follows that Dutton v Bognor Regis Urban District Council [1972] 1 Q.B. 373 should be overruled, as should all cases subsequent to Anns which were decided in reliance on it."

41. In the course of the speeches the House of Lords discussed the potential liability of the builder. At page 469 Lord Keith said this:

"To start with, if such a duty is incumbent upon the local authority, a similar duty must necessarily be incumbent also upon the builder of the house. If the builder of the house is to be so subject, there can be no grounds in logic or in principle for not extending liability upon like grounds to the manufacturer of a chattel. That would open up an exceedingly wide field of claims, involving the introduction of something in the nature of a transmissible warranty of quality. The purchaser of an article who discovered that it suffered from a dangerous defect before that defect had caused any damage would be entitled to recover from the manufacturer the cost of rectifying the defect, and presumably, if the article was not capable of economic repair, the amount of loss sustained through discarding it. Then it would be open to question whether there should not also be a right to recovery where the defect renders the article not dangerous but merely useless. The economic loss in either case would be the same. There would also be a problem where the defect causes the destruction of the article itself, without causing any personal injury or damage to other property. A similar problem could arise, if the Anns principle is to be treated as confined to real property, where a building collapses when unoccupied."

42. Lord Keith supported this reasoning by reference to two US decisions, namely East River Steamship Corporation v Transamerica Delaval Inc. [1986] 106 S. Ct. 2295 and Aloe Coal Co. v Clark Equipment Co (1987) 816 F.2d 110. Lord Keith concluded that neither a local authority nor a builder owed a duty of care in tort to protect the building owner against suffering economic loss in consequence of defects.
43. Lord Bridge came to a similar conclusion. At page 475 he said:

"I believe that these principles are equally applicable to buildings. If a builder erects a structure containing a latent defect which renders it dangerous to persons or property, he will be liable in tort for injury to persons or damage to property resulting from that dangerous defect. But if the defect becomes apparent before any injury or damage has been caused, the loss sustained by the building owner is purely economic. If the defect can be repaired at economic cost, that is the measure of the loss. If the building cannot be repaired, it may have to be abandoned as unfit for occupation and therefore valueless. These economic losses are recoverable if they flow from breach of a relevant contractual duty, but, here again, in the absence of a special relationship of proximity they are not recoverable in tort."

44. Lord Mackay L.C, Lord Ackner and Lord Oliver all agreed with Lord Keith and Lord Bridge. Lord Brandon agreed with Lord Bridge. I therefore treat the passages which I have quoted in paragraphs 41 and 43 above as representing the majority view of the House of Lords on an issue which (though strictly speaking obiter) played an important part in the House of Lords' decision. These passages are seen by many (myself included) as returning to the orthodox and principled basis of tortious liability for negligently inflicted harm, as formulated by the House of Lords in Donoghue v Stevenson [1932] AC 562, in particular at 582.
45. The House of Lords went on to discuss whether there was an exception to the principle just mentioned in the case of complex structures. There is no suggestion that the complex structure theory is engaged in the present case, so I shall pass over those passages in silence and not discuss whether the complex structure theory survives.
46. Consideration was also given in Murphy to an earlier decision of the House of Lords, Pirelli General Cable Works Ltd. v Oscar Faber & Partners [1983] 2 A.C. 1. That case had proceeded on the basis that consulting engineers designing a chimney owed concurrent duties to their client in both contract and tort. Lord Keith in Murphy said that Pirelli, which concerned a professional firm, fell within the principle of Hedley Byrne & Co. Ltd. v Heller & Partners Ltd. [1964] AC 465: see Murphy at page 466.
47. In Nitrigin Eireann Teoranta v Inco Alloys Ltd. [1992] 1 WLR 498 the first defendant (a specialist manufacturer) in 1981 supplied piping for the plaintiffs' chemical production plant pursuant to contract. In 1983 cracking occurred, which the plaintiffs took reasonable steps to repair. On 27^th June 1984 the pipe cracked again and an explosion occurred, causing damage to the plaintiffs' plant. It was assumed for the trial of preliminary issues (though denied by the first defendant) that the pipe was defective and cracked because of negligence in manufacture. The plaintiffs issued their writ on the 21^st June 1990. May J held on the trial of preliminary issues:

(i) The first defendant had no liability in respect of the cracking in 1983. That was pure economic loss. Pirelli was distinguished because the defendant in that case was a professional firm.

(ii) The first defendant incurred liability in tort for the first time on 27^th June 1984 when damage occurred to other property.

(iii) Therefore the plaintiffs' claim was not statute barred.

48. In Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 the Names on a number of syndicates at Lloyd's brought actions against both their members' agents and managing agents in respect of massive losses which they had suffered. Saville J, the Court of Appeal and the House of Lords all held that, in addition to their various contractual duties, managing agents owed a duty of care in tort both to direct and indirect Names to carry out their functions with reasonable skill and care. The principal speech was given by Lord Goff, with whom Lord Keith, Lord Mustill, Lord Nolan and Lord Browne-Wilkinson agreed. Lord Goff stated that the governing principle was that contained in Hedley Byrne. This established liability for words as well as deeds, and for pure economic loss as well as physical damage. The assumption of responsibility, although it had been criticised, was "at least in such cases as the present" a crucial feature for establishing Hedley Byrne liability.
49. At pages 184 to 194 Lord Goff discussed whether the contractual context excluded any duty of care in tort. He recognised that there were two possible views about the effect of the contractual relationship: first, the view taken in France that the contract excludes a remedy in tort: secondly, the view taken in Germany that contractual and tortious claims may be concurrent. After a full analysis of the authorities and the literature, Lord Goff rejected the view that the existence of a contractual duty excluded any parallel duty in tort between the same parties. At page 194 Lord Goff said this:

"But, for present purposes more important, in the instant case liability can, and in my opinion should, be founded squarely on the principle established in Hedley Byrne itself, from which it follows that an assumption of responsibility coupled with the concomitant reliance may give rise to a tortious duty of care irrespective of whether there is a contractual relationship between the parties, and in consequence, unless his contract precludes him from doing so, the plaintiff, who has available to him concurrent remedies in contract and tort, may choose that remedy which appears to him to be the most advantageous."

50. In Bellefield Computer Services Ltd v E Turner & Sons Ltd [2000] BLR 97 the subsequent purchaser of a dairy building claimed damages against the builder for negligence in the construction of a compartment wall, which failed to prevent the spread of fire as it should have done. Bell J held that the builder owed a duty to safeguard the claimant against damage to property other than the building itself. Thus the claimant could recover in respect of damage to plant and so forth, but not in respect of damage to the dairy building. The Court of Appeal upheld that decision. There is some discussion in the judgments about the extent of the builder's tortious liability to the original purchaser, but that discussion is obiter. Also, Schiemann LJ and Tuckey LJ tend to go in somewhat different directions in relation to that issue, which did not arise for decision.
51. There was subsequent litigation concerning the same fire between the builder and a firm of architects whom the builder had engaged to do design work. The builder failed in Part 20 proceedings against the architects and that decision was upheld by the Court of Appeal: see Bellefield Computer Services v E. Turner & Sons Ltd (No.2) [2002] EWCA Civ 1823. The court accepted, however, following Henderson, that the architects owed concurrent duties in tort to the builder by whom they were employed. May LJ noted at paragraph 76 that the borderline between design work and construction work was blurred.
52. The question whether building contractors owe concurrent duties of care in tort to protect their employers against economic loss has been discussed in a number of first instance decisions of official referees and TCC judges. In Storey v Charles Church Developments plc [1995] 73 Con LR 1 Judge Hicks QC, sitting as official referee, held that there was such a duty. In Payne v John Setchell Ltd [2002] BLR 489 Judge Humphrey Lloyd QC considered that there was not: see paragraph 30. In Tesco Stores Ltd v Costain Construction Limited [2003] EWHC 1487 (TCC) Judge Seymour QC considered that there was such a duty: see paragraph 230. In Mirant-Asia Pacific Limited v OAPIL [2004] EWHC 1750 (TCC); [2005] PNLR 10 Judge Toulmin CMG QC held that engineers owed concurrent duties of care in contract and tort to protect their clients against economic loss. However, he indicated that contractors might be in a different category: see paragraphs 395 to 397. Certain issues in Mirant-Asia were considered by the Court of Appeal, but these did not include the question of concurrent liability. See Ove Arup & Partners International v Mirant-Asia Pacific Construction (Hong Kong) Ltd [2005] EWCA Civ 1585.
53. The issue of concurrent liability was reviewed by the Court of Appeal in Riyad Bank v AHLI United Bank (UK) Plc [2006] EWCA Civ 780; [2007] PNLR 1. The court held that banks operating "Sharia compliant" funds owed a tortious duty to take reasonable care to protect investors against economic loss. The court (in particular Neuberger LJ at paragraphs 36 to 47) noted the conflicting arguments for and against imposing tortious duties in a contractual context. The court went on to hold, following Henderson, that the defendant owed a duty on the basis of assumption of responsibility.
54. The latest edition of Keating on Construction Contracts (8^th edition 2006, edited by Stephen First QC and Mr Justice Ramsey) reviews the conflicting authorities in this area and then concludes as follows at paragraph 7-018:

"It is difficult to disagree with the view that a contract which stipulates that the contracting party will perform certain services involves an assumption of responsibility which will normally be relied upon by the other contracting party. On the other hand it is true that the authorities prior to Henderson v Merrett, and in particular Murphy, did not envisage a builder (or possibly a builder-designer or a pure designer and supervisor of work) owing duties of care in respect of economic loss. This difference of view requires a reconciliation of these two different streams of authority which will have to await a decision from the Court of Appeal or the House of Lords."

55. That concludes my review of the principal authorities which have been cited by counsel. I must now turn to the issues under appeal, starting with the impact of UCTA.
Part 6. The Impact of UCTA
56. It is sensible to start by considering the contractual relationship between the parties.
57. The defendant agreed to complete the construction of the property which became 12 Magnolia Rise. The claimant agreed to pay the purchase price. The defendant warranted under clause 1 of the building conditions that it would complete the work in an efficient and workmanlike manner and in accordance with the drawings, subject to any agreed variations.
58. Clauses 8 and 10 of the building conditions go together. They provide that the defendant's liability to the claimant shall be limited to that set out in the NHBC Agreement. The claimant contends that this limitation of liability does not satisfy the requirement of reasonableness under UCTA. The judge held that the requirement of reasonableness was satisfied.
59. There are two aspects of this issue to consider. First do clauses 8 and 10 effectively limit the defendants' contractual liability or, alternatively, are they overridden by section 3 of UCTA? Secondly, in so far as the defendant owed tortious duties to the claimant, are those tortious duties overridden by section 2 of UCTA?
60. Let me deal first with the effect of section 3 of UCTA. Clauses 8 and 10 are by no means harsh provisions. Under the NHBC Agreement the builder has extensive liability to the house owner for defects during the first two years after completion. Furthermore, performance of these obligations is underwritten by the NHBC. During the following 8 years the NHBC undertakes to meet the cost of putting right major damage as defined in the NHBC agreement.
61. I readily accept that the protection given to house owners by those provisions is not total. On the other hand, that protection is of very substantial benefit to a huge number of house owners across the country. The biggest single risk which house owners face is that the original builder may be unable (e.g. through insolvency) or unwilling to put right defects in relatively new houses. The NHBC affords substantial protection against this risk. In my view, against that background it is quite impossible to say that contractual terms limiting a house purchaser's rights to those conferred by the NHBC agreement are unreasonable.
62. On this issue I agree with the approach of the judge. Furthermore, for the reasons explained by the House of Lords in George Mitchell, on the issue of reasonableness under UCTA and similar statutes, the trial judge's decision carries great weight. I am unable to say that the judge proceeded upon some erroneous principle or was plainly and obviously wrong in relation to this issue.
63. I now turn to the effect of section 2 of UCTA. Clearly clauses 8 and 10 of the building conditions cannot exclude the defendant's liability in tort for any personal injury caused by negligence in construction. For example, if the claimant suffered gas poisoning as a result of the defective flues, the defendant's liability in that regard could not be excluded by any contractual provision: see section 2(1) of UCTA.
64. Different considerations arise, however, in relation to tortious liability for economic loss. The House of Lords' decision in Smith v Bush indicates that section 2 of UCTA must be applied when the court is considering whether exclusion clauses prevent such a duty of care from arising: see the speech of Lord Griffiths at pages 857 to 860 and the speech of Lord Jauncey at pages 873 to 874. I shall therefore address this question when analysing the duty of care issue in Part 7 of this judgment.
Part 7. Did the Defendant Owe a Relevant Duty of Care in Tort to the Claimant?
65. The first and crucial feature of this litigation is that, fortunately, the defective flues did not cause personal injury. Nor did they, or could they, cause damage to other property. The claimant's claim is for economic loss consequential upon defects in a house which the defendant constructed and the claimant purchased.
66. Thus the present case raises the issue which Keating identifies as awaiting resolution by the Court of Appeal or the Supreme Court: see paragraph 54 above.

(i) Tortious Liability after Murphy

67. Having reviewed the two streams of authority set out in Part 5 above, my conclusion is that the relationship between (a) the manufacturer of a product or the builder of a building and (b) the immediate client is primarily governed by the contract between those two parties. Long established principles of freedom of contract enable those parties to allocate risk between themselves as they see fit. In the case of consumer contracts, of course, those principles yield to the requirements of UCTA. However, even in the case of a consumer, the contract (as modified by UCTA) is the primary determinant of each party's obligations and remedies.
68. Absent any assumption of responsibility, there do not spring up between the parties duties of care co-extensive with their contractual obligations. The law of tort imposes a different and more limited duty upon the manufacturer or builder. That more limited duty is to take reasonable care to protect the client against suffering personal injury or damage to other property. The law of tort imposes this duty, not only towards the first person to acquire the chattel or the building, but also towards others who foreseeably own or use it.
69. The analysis in the preceding paragraph fits with, indeed is dictated by, the House of Lords' decision in Donoghue v Stevenson, the House of Lords decision in Murphy and May J's decision in Nitrigin. Although Nitrigin is a first instance decision, it commands respect because of the force of the reasoning in the judgment. Also it should be noted that the trial judge in Nitrigin was a specialist in this field as well as being the then editor of Keating on Building Contracts.

(ii) Assumption of Responsibility

70. The next question to consider is when and how a builder may acquire tortious liabilities through the doctrine of assumption of responsibility. This doctrine is a separate and broader basis for tortious liability, which has its origins in Hedley Byrne. It embraces liability for economic loss as well as the more familiar heads of recoverable damage in negligence.
71. In Hedley Byrne it was held that bankers would have been liable for economic loss caused by giving a negligent reference, but for an express disclaimer of responsibility. The House of Lords based this hypothetical finding of liability upon a special relationship between the parties flowing from an assumption of responsibility: see the speeches of Lord Reid at 483, Lord Morris at 494-5, Lord Hodson at 514 and Lord Devlin at 529.
72. During the heroic age of the law of negligence, which I would define as the 1970's and 1980's, the concept of assumption of responsibility receded as other more expansive bases were developed for negligence liability. However, this concept resumed its primacy in the 1990's. To take one example, this was the basis of the solicitors' liability to disappointed beneficiaries in White v Jones [1995] 2 AC 207. To take another example, assumption of responsibility was the basis of a company director's liability for negligent advice in a company brochure in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830.
73. In Henderson Lord Goff said this about Hedley Byrne at page 178:

"The case has always been regarded as important in that it established that, in certain circumstances, a duty of care may exist in respect of words as well as deeds, and further that liability may arise in negligence in respect of pure economic loss which is not parasitic upon physical damage. But, perhaps more important for the future development of the law, and certainly more relevant for the purposes of the present case, is the principle upon which the decision was founded."

Lord Goff then went on to identify the governing principle of Hedley Byrne as assumption of responsibility.

74. Henderson is now taken as the leading authority on concurrent liability in professional negligence. In my view, the conceptual basis upon which the concurrent liability of professional persons in tort to their clients now rests is assumption of responsibility. That is, for example, the underlying rationale of the engineers' liability to their clients in Pirelli. It is also the basis of the duty of care owed by the architects to their client in Bellefield (No.2). It is also the basis of the engineers' tortious liability to their clients in Mirant-Asia. See paragraph 395: "Arup assumed a responsibility for economic loss".
75. It is perhaps understandable that professional persons are taken to assume responsibility for economic loss to their clients. Typically, they give advice, prepare reports, draw up accounts, produce plans and so forth. They expect their clients and possibly others to act in reliance upon their work product, often with financial or economic consequences.
76. When one moves beyond the realm of professional retainers, it by no means follows that every contracting party assumes responsibilities (in the Hedley Byrne sense) to the other parties co-extensive with the contractual obligations. Such an analysis would be nonsensical. Contractual and tortious duties have different origins and different functions. Contractual obligations spring from the consent of the parties and the common law principle that contracts should be enforced. Tortious duties are imposed by law, as a matter of policy, in specific situations. Sometimes a particular set of facts may give rise to identical contractual and tortious duties, but self-evidently that is not always the case.

(iii) The Relationship between Contract and Tort after Henderson

77. There has been no elaborate debate during the hearing of this appeal about the basic principles of contract and tort or how they interrelate. However, Lord Goff's discussion of concurrent liability at pages 184 - 194 of Henderson sits there in the bundle of authorities and is relied upon by counsel. This is a passage which requires and repays careful study. Lord Goff is not saying that every contractual obligation to do something carries with it a parallel tortious duty to the same effect. He is simply saying that the existence of a contract does not prevent a tortious duty from arising.
78. In his discussion of comparative law, Lord Goff identifies that in some legal systems (e.g. French law) a contract between the parties positively precludes a tortious duty from arising, whereas in other legal systems (e.g. German law) a contract does not have that drastic consequence. However, Lord Goff does not suggest, and it is not the case, that under German law contracting parties have duties in tort or delict replicating their contractual obligations. For a fuller discussion of the differing approaches to concurrent liability, see the review of French and German law (set against the background of Roman law) in Tortious Liability for Unintentional Harm in the Common Law and the Civil Law by Lawson and Markesinis (Cambridge University Press, 1982). For a more detailed review of German law, see The German Law of Torts by Markesinis & Unberath (Hart Publishing, 2002) and The German Law of Contract by Markesinis, Unberath & Johnston (Hart Publishing, 2006).
79. It seems to me that the distinction between contract and tort/delict is essentially the same in both civil law and common law. It was originally articulated by Roman jurists (see Gaius, Justinian's Institutes, 3.88) and it remains the case that (a) contracts and (b) the law of tort are separate sources of obligations. Contractual obligations are negotiated by the parties and then enforced by law because the performance of contracts is vital to the functioning of society. Tortious duties are imposed by law (without any need for agreement by the parties) because society demands certain standards of conduct. There is no reason why the law of tort should impose duties which are identical to the obligations negotiated by the parties. I see nothing in Lord Goff's speech which is inimical to this analysis. On the contrary, Lord Goff observes at 194A "the tortious duty is imposed by the general law, and the contractual duty is attributable to the will of the parties".
80. The essential points which Lord Goff is making in his detailed discussion at pages 184-194 of Henderson may be distilled as follows:

(i) When A assumes responsibility to B in the Hedley Byrne sense, A comes under a tortious duty to B, which may extend to protecting B against economic loss.

(ii) The existence of a contract between A and B does not prevent such a duty from arising.

(iii) In contracts of professional retainer, there is commonly an assumption of responsibility which generates a duty of care to protect the client against economic loss.

(iv) Application of the above Principles to Building Contracts

81. Building contracts come in all shapes and sizes from the simple house building contract to the suite of JCT, NEC or FIDIC contracts. The law does not automatically impose upon every contractor or sub-contractor tortious duties of care co-extensive with the contractual terms and carrying liability for economic loss. Such an approach would involve wholesale subordination of the law of tort to the law of contract.
82. If the matter were free from authority, I would incline to the view that the only tortious obligations imposed by law in the context of a building contract are those referred to in paragraph 68 above. I accept, however, that such an approach is too restrictive. It is also necessary to look at the relationship and the dealings between the parties, in order to ascertain whether the contractor or sub-contractor "assumed responsibility" to its counter-parties, so as to give rise to Hedley Byrne duties.
83. In the present case I see nothing to suggest that the defendant "assumed responsibility" to the claimant in the Hedley Byrne sense. The parties entered into a normal contract whereby the defendant would complete the construction of a house for the claimant to an agreed specification and the claimant would pay the purchase price. The defendant's warranties of quality were set out and the claimant's remedies in the event of breach of warranty were also set out. The parties were not in a professional relationship whereby, for example, the claimant was paying the defendant to give advice or to prepare reports or plans upon which the claimant would act.
84. Even if the agreement did not contain clauses 8 and 10 of the building conditions, I would be disinclined to find that the defendant owed to the claimant the duty of care which is alleged in this case. To my mind, however, clauses 8 and 10 of the building conditions put the matter beyond doubt. Those clauses limit the defendant's liability for building defects to the first two years, after which different provision is made for dealing with defects. For the reasons set out in Part 6 above, those two clauses satisfy the test of reasonableness in UCTA. It would be inconsistent with the whole scheme of this contract, if the law were to impose upon the defendant duties of care in tort far exceeding the defendant's contractual liabilities. Finally, clause 10 of the building conditions is relevant in another way. The parties expressly agreed that the defendant's only liability to the claimant should be that arising from the NHBC agreement. The parties were thereby expressly agreeing to exclude any liability in negligence which might otherwise arise.
85. The claimant contends, in reliance upon Rutter v Palmer [1922] 2 KB 87 and Smith v South Wales Switchgear Co. Ltd. [1978] 1 WLR 165, that clause 10 is not sufficiently clear to exclude liability in negligence. I do not accept that contention. In my view the only sensible interpretation of clause 10 is that the parties are agreeing to exclude any liability in negligence.
86. At this point in the analysis it is necessary to revert to UCTA. The House of Lords held in Smith v Bush that, before a term such as this can operate to prevent a duty of care in tort arising, it is necessary to consider the impact of UCTA. If a defect in the house were to cause personal injury, then section 2(1) of UCTA would prevent any exclusion of tortious liability. However, if a defect in the house simply generates economic loss, namely the cost of repair, then I see no reason why clause 10 of the building conditions should not exclude any tortious liability for that loss which might otherwise arise. For broadly the same reasons as set out in Part 6 above, I think that an exclusion clause with those consequences satisfies the requirement of reasonableness. The reasoning of the Court of Appeal in McCullagh v Lane Fox and Partners [1996] 1 EGLR 35 provides further support for this conclusion. See the judgment of Hobhouse LJ (with whom Nourse LJ and Sir Christopher Slade agreed) at pages 45 to 46.
87. Let me now draw the threads together. The rights and remedies of the parties to this case were set out in a written contract, the terms of which are clear and simple. That contract provided the claimant with extensive (but not total) protection against defects. The contract represents a perfectly sensible allocation of risk between the parties. At the time of contracting, both parties were represented by solicitors and they must have known where they stood.
88. It is a matter of great misfortune that a latent defect in the claimant's house emerged 12 ½ years after completion and that this defect was outside the scope of the NHBC agreement. That, however, is a consequence of the contractual allocation of risk between the parties. In my judgment it is not possible for the claimant to invoke the law of tort in order to impose liabilities upon the defendant which are inconsistent with the contract.
89. My answer to the question posed in Part 7 of this judgment is no.
Part 8. Conclusion
90. For the reasons set out in Parts 6 and 7 above, in my view the judge reached the correct decision on the first preliminary issue. I would therefore dismiss this appeal.

Lord Justice Stanley Burnton

91. I am grateful to Jackson LJ for his full and comprehensive statement of the facts and his exposition of the authorities. I entirely agree with his analysis and with his conclusions.
92. In my judgment, it must now be regarded as settled law that the builder/vendor of a building does not by reason of his contract to construct or to complete the building assume any liability in the tort of negligence in relation to defects in the building giving rise to purely economic loss. The same applies to a builder who is not the vendor, and to the seller or manufacturer of a chattel. The decision of the House of Lords in Anns v Merton LBC, like its earlier decision in Junior Books Ltd v Veitchi Co. Ltd [1983] 1 AC 520, must now be regarded as aberrant, indeed as heretical. The law is as stated by Lord Bridge in D & F Estates Ltd v Church Commissioners [1989] AC 177 at 206:

If the hidden defect in the chattel is the cause of personal injury or of damage to property other than the chattel itself, the manufacturer is liable. But if the hidden defect is discovered before any such damage is caused, there is no longer any room for the application of the Donoghue v Stevenson principle. The chattel is now defective in quality, but is no longer dangerous. It may be valueless or it may be capable of economic repair…. If the same principle applies in the field of real property to the liability of the builder of a permanent structure which is dangerously defective, that liability can only arise if the defect remains hidden until the defective structure causes personal injury or damage to property other than the structure itself. If the defect is discovered before any damage is done, the loss sustained by the owner of the structure, who has to repair or demolish it to avoid a potential source of danger to third parties, would seem to be purely economic

93. Thus the crucial distinction is between a person who supplies something which is defective and a person who supplies something (whether a building, goods or a service) which, because of its defects, causes loss or damage to something else. An architect owes a duty of care not in respect of the value of his drawings or specification, but in respect of the building that is to be constructed with them. The person who contracts with an architect cannot sue him in the tort of negligence simply because the plans turn out to be defective and therefore of no value or less value than they should be. The architect will be liable to his client in contract if his plans are worthless. The client can sue in tort (at common law, and apart from the duty imposed by the Defective Premises Act 1972) if he uses the plans and the building constructed with them is defective or causes him injury. The managing agents in Henderson v Merrett Syndicates Ltd owed a duty of care to their Names because they were managing the Names' assets.
94. It is important to note that a person who assumes a contractual duty of care does not thereby assume an identical duty of care in tort to the other contracting party. The duty of care in contract extends to any defect in the building, goods or service supplied under the contract, as well as to loss or damage caused by such a defect to another building or goods. The duty of care in tort, although said to arise from an assumption of liability, is imposed by the law. In cases of purely financial loss, assumption of liability is used both as a means of imposing liability in tort and as a restriction on the persons to whom the duty is owed. The duty of care in tort applies to damage to other property than that supplied, or to personal injury or death, caused by a defect in the property supplied. The provider of a service, such as an accountant or solicitor, owes a duty of care in tort to his client because his negligence may cause loss of the client's assets. I do not think that a client has a cause of action in tort against his negligent accountant or solicitor simply because the accountant's or solicitor's advice is incorrect (and therefore worth less than the fee paid by the client). The client does have a cause of action in tort if the advice is relied upon by the client with the result that his assets are diminished.
95. It follows in my judgment that the first instance decisions to which Jackson LJ refers in paragraph 52 of his judgment in which building contractors were held to have assumed a duty of care in tort in relation to financial loss resulting from defects in the building they constructed, in the absence of damage to other property, were wrongly decided.
96. I have nothing to add to what Jackson LJ has said in relation to the effect of clause 10 of the Agreement and the application of UCTA.

Maurice Kay LJ:

97. I, too, entirely agree with the judgment of Jackson LJ and have nothing to add.