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Cite as: [1996] 1 NZLR 513, [1996] UKPC 56, [1996] 1 All ER 756, 50 Con LR 105, [1996] AC 624, 78 BLR 78

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Invercargill City Council Appellant v. Hamlin Respondent (New Zealand) [1996] UKPC 56 (12 February 1996)

Privy Council Appeal - 1996

Invercargill City Council Appellant

Hamlin Respondent

FROM

THE COURT OF APPEAL OF THE

NEW ZEALAND

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 12th Feburary 1996

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Keith of Kinkel

Lord Browne-Wilkinson

Lord Mustill

Lord Lloyd of Berwick

Sir Michael Hardie Boys

[Delivered by Lord Lloyd of Berwick]

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In May 1972, the plaintiff, Noel Gordon Hamlin, entered into an agreement with a firm of builders whereby they sold him some land at 67, Edinburgh Crescent, Invercargill, and agreed to build him a house. A building inspector employed by the Invercargill City Council carried out a number of inspections in the course of construction, as required by the city byelaws. On 1 June 1972 the inspector approved the foundations. 17 years later the plaintiff called in another builder, who told him that the foundations were defective. In November 1990 the plaintiff commenced proceedings against the council as well as the builders claiming $64,250 as the cost of repairs.

The case came before Williamson J. on 8 June 1992. He held that the builders were in breach of contract, since the foundations were not laid in accordance with the specification. But, as so often happens, the builders were no longer in business. So the plaintiff's prospect of recovering damages depended on his claim in tort against the council. The judge held that the building inspector had been negligent in carrying out his inspection. In his report the inspector had noted 'clay 15 inches siting approved.' But along the eastern wall the foundations were only seven to eight inches deep. According to the expert evidence which the judge accepted the inspector could have discovered without difficulty that the foundations had not been carried down to firm clay.

A number of cracks, and other minor defects, had appeared over the years. But the judge found that a reasonably prudent homeowner would not have suspected the foundations, or discovered the cause of the trouble until 1989, when the plaintiff called in the second builder. It followed that, as New Zealand law then stood, his claim against the council was in time. Since it was admitted, for the purposes of the hearing before the judge, that the council was under a duty of care towards the plaintiff, the judge upheld the plaintiff's claim. He assessed the damages at $53,550.

The council appealed. There were two main issues for determination. Since the concession made in the court below was not binding in the Court of Appeal, the first question was whether the council owed any duty of care to the plaintiff at all. The council argued that the Court of Appeal ought to follow the decisions of the House of Lords in D. & F. Estates Ltd. v. Church Commissioners for England [1989] AC 177 and Murphy v. Brentwood District Council [1991] 1 AC 398.

The second question was whether the plaintiff's claim was time-barred. The council argued that the Court of Appeal ought to follow the decision of the House of Lords in Pirelli General Cable Works Ltd. v. Oscar Faber & Partners [1983] 2 A.C. 1, in other words, that the cause of action accrued when the damage to the house came into existence, and not when it could with reasonable diligence have been discovered. On that view the plaintiff issued his writ too late.

The appeal came before a full court of five judges [1994] 3 N.Z.L.R 513. They answered the first question unanimously in favour of the plaintiff. They answered the second question by a majority in favour of the plaintiff with McKay J. dissenting. Their Lordships would wish to pay tribute to the very high quality of all five judgments.

There can be no doubt that the decision of the Court of Appeal is in accordance with the law as it has been developed by New Zealand courts over the last 20 years. A convenient starting point is Bowen v. Paramount Builders (Hamilton) Ltd. [1975] 2 N.Z.L.R. 546, since it was also a case concerning inadequate foundations. The sole defendant in that case was the builder, and the plaintiff was a purchaser from the original owner. The case was decided shortly after the English decision in Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373. In Dutton's case the local authority was held liable for the negligence of the building inspector on facts very similar to the present case. Speight J., at first instance, declined to follow Dutton's case. But his decision was reversed in the Court of Appeal [1977] 1 N.Z.L.R. 394. The leading judgment was given by Richmond P., who, as it happens, dissented on the facts. But there was no disagreement as to the principle. The case was treated as one involving physical damage to the premises. The court did not find it necessary to deal with the question of 'pure' economic loss, that is to say, economic loss unassociated with physical harm to the structure itself. The point was left open for the future.

In Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234 the plaintiff, a subsequent purchaser, brought proceedings against the council for failing to ensure that the foundations were adequate. The council brought in the builders as third party. By the time the case reached the Court of Appeal, the House of Lords had decided Anns v. Merton London Borough Council [1978] AC 728. Lord Wilberforce said in that case, at p. 758, that it was the duty of the council 'to take reasonable care, no more, no less, to secure that the builder does not cover in foundations which do not comply with byelaw requirements.'

The leading judgment in Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234 was given by Cooke P. It was, he said, at p. 239, current law in New Zealand that a purchaser in the plaintiff's position can recover in tort for economic loss caused by negligence, 'at least when the loss is associated with physical damage.'

In a subsequent and related case brought by the council against their insurers, Cooke P. described the line of authority following on Dutton's case [1972] 1 Q.B. 373 as depending on control: see Mount Albert City Council v. New Zealand Municipalities Co-operative Insurance Co. Ltd. [1983] N.Z.L.R. 190, 196: 'The local authority's control of building in its district has been held to carry a duty to take reasonable care in performing the statutory functions.'

Next there came a group of cases all decided in 1986: Brown v. Heathcote County Council [1986] 1 N.Z.L.R. 76, Stieller v. Porirua City Council [1986] 1 N.Z.L.R. 84, Craig v. East Coast Bays City Council [1986] 1 N.Z.L.R. 99 and Williams v. Mount Eden Borough Council [1986] 1 N.Z.B.L.C. 102, 544. These cases applied the principles stated in Bowen v. Paramount Builders (Hamilton) Ltd. [1975] 2 N.Z.L.R. 546 and Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234 to building defects other than faulty foundations. They are important because they extended the principle to cases where there was no physical damage as such, nor any certainty that there would be. It was enough that the value of the premises had been reduced. Whether it is right to describe such cases as instances of 'pure' economic loss may not matter very much. They do not depend on pure economic loss in the sense of White v. Jones [1995] 2 AC 207 or Henderson v. Merrett Syndicates Ltd. [1995] 2 AC 145. For in the building cases the economic loss is suffered by reason of a defect in a physical object.

Secondly the cases are important because they recognise the element of reliance in establishing a duty of care in economic loss cases. Thus in Williams v. Mount Eden Borough Council [1986] 1 N.Z.B.L.C. 102,544, 102,551 Casey J. said:
"Having had these powers in relation to the construction of buildings conferred on it, the reasonable local authority would no doubt have accepted that they were intended to be exercised for the protection of those members of the public concerned with those buildings, whether as owners, occupiers or users. No doubt it would also have appeared to such an authority that many of them would have no opportunity or expectation of checking or controlling hidden details in its construction to ensure that appropriate standards had been complied with, relating to its physical soundness, its ability to withstand earthquake shocks, and the safety and health of its occupants. Conversely, those members of the public would have been aware that local bodies exercised this kind of control over buildings constructed in their districts; this has been a known fact of at least New Zealand urban life for several generations. The statement by Mrs. Williams that her knowledge of the Mount Eden Borough Council as 'the toughest' and her assumption that everything would be all right, reflects what I am sure all these plaintiffs and most of the community at large would have felt. Work essential to the structural integrity of a building and its earthquake resistance is almost invariably covered in, and in the usual house buying situation, purchasers have to rely on the council doing its job properly under the building controls conferred on it. I am also satisfied that the latter and its officers would have been well aware that such reliance was placed upon it by the community at large, especially in this case where they must have realised the builder was likely to sell the units; and that there was no feasible way any purchaser could have discovered hidden structural defects."

Lastly these cases are important because they mark the point at which Cooke P. felt able to say in Brown v. Heathcote County Council [1986] 1 N.Z.L.R. 76, 79:
"The lineaments of the contemporary New Zealand law of negligence in this and related fields are now, I think, reasonably firmly established by a series of cases; but in the main it is law of comparatively recent growth, largely though by no means exclusively evolved since the appeal in Bowen was allowed in this court. . . ."

The facts of Brown v. Heathcote County Council were that the plaintiffs built a house on a site which, unknown to them, was subject to flooding. They incurred expenditure of $32,000 in raising the level of the floor. They brought an action against the council and the drainage board for negligence. They succeeded against the board before Hardie Boys J. and the Court of Appeal, on the ground that the board should have warned them of the danger of flooding. In the course of his judgment Cooke P., at pp. 80-82, pointed out that the facts bore some resemblance to those in Dennis v. Charnwood Borough Council [1983] Q.B. 409, a decision which had survived Governors of Peabody Donation Fund v. Sir Lindsay Parkinson & Co. Ltd. [1985] AC 210, 243-245. But reconciling the results in particular cases in this field was not, he thought, of the highest priority. He clearly foresaw the time when New Zealand law might 'go its own way' having regard to the special circumstances prevailing in that country.

The board appealed to the Privy Council [1987] 1 N.Z.L.R. 720. The appeal was dismissed. Their Lordships did not find it necessary in that case to consider the many authorities discussed in the courts below. For the appeal turned on a straightforward question whether a sufficient degree of proximity existed between the board and the plaintiffs. Their Lordships answered that question in favour of the plaintiffs. Although the board had not been asked by the council to check the flood levels, they habitually did so. Accordingly they assumed a duty of care under the principle stated in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 465, not only towards the council, but also towards the plaintiffs.

Two years later the position which had by then been reached in New Zealand was recognised by the House of Lords in D. & F. Estates Ltd. v. Church Commissioners for England [1989] AC 177. After referring to Batty v. Metropolitan Property Realisations Ltd. [1978] Q.B. 554, a case which Lord Oliver of Aylmerton analysed as one of pure economic loss, he continued [1989] AC 177, 216:
"As in Anns v. Merton London Borough Council [1978] AC 728, the cause of action was related not to damage actually caused by the negligent act but to the creation of the danger of damage, and the case is therefore direct authority for the recovery of damages in negligence for pure economic loss - a proposition now firmly established in New Zealand: see Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R 234.'
Lord Bridge of Harwich said, at p. 207:
"I should wish to hear fuller argument before reaching any conclusion as to how far the decision of the New Zealand Court of Appeal in Bowen v. Paramount Builders (Hamilton) Ltd. should be followed as a matter of English law. I do not regard Anns v. Merton London Borough Council as resolving that issue."

Their Lordships can turn now to the decision of the Court of Appeal in the instant case, while noting on the way that in Chase v. de Groot [1994] 1 N.Z.L.R. 613, yet another foundations case, Tipping J. followed the many previous decisions of the New Zealand Court of Appeal, in preference to the intervening decision of the House of Lords in Murphy v. Brentwood District Council [1991] 1 AC 398; and in South Pacific Manufacturing Co. Ltd. v. New Zealand Security Consultants & Investigations Ltd. [1992] 2 N.Z.L.R. 282 Cooke P. concluded in agreement with the four other members of the court that the decision in Murphy's case [1991] 1 AC 398 should not lead to any change in the approach to negligence cases in New Zealand.

In the present case, Cooke P. [1994] 3 N.Z.L.R. 513, 519 observed that ' the linked concepts of reliance and control' had underlain the New Zealand case law from Bowen's case [1977] 1 N.Z.L.R. 394 onwards; he also regarded the decision of the Privy Council in Brown v. Heathcote County Council [1987] 1 N.Z.L.R. 720 (to which their Lordships have just referred) as an important authority in favour of the plaintiff's claim in the present case.

Their Lordships need not analyse the other four judgments. They are all founded on what the court regarded as a consistent line of authority starting with Bowen's case [1977] 1 N.Z.L.R. 394 in 1975, and thus stretching back over a period of nearly 20 years.

Miss Bates, for the council, attacks the decision on a number of grounds. Quite apart from the about turn which the House of Lords executed in Murphy's case [1991] 1 AC 398, she submits that the decision represents a departure from the previous line of authority in New Zealand. The previous cases (so it was argued) were all based on a straightforward application of the principle in Donoghue v. Stevenson [1932] AC 562. In the present case the court seems for the first time to have imposed a duty of care on the basis of Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 465. But there was no evidence that the council ever assumed responsibility for economic loss caused by the builders' failure to comply with the building byelaws; nor was there any evidence of any reliance by the plaintiff. Indeed reliance was not even pleaded.

Their Lordships are unable to accept this argument. Hedley Byrne & Co. Ltd. v. Heller & Partners was scarcely mentioned in the court below. Moreover general reliance (as distinct from specific reliance established on the facts of a particular case) has been a feature of this branch of New Zealand law for many years. As early as 1976 Chilwell J. said in Hope v. Manukau City Council (unreported), 2 August 1976:
"There is no direct evidence that the plaintiff relied upon the flat having been built in accordance with the byelaws and regulations. She did not say that she did. But she did say that she saw the plans and specification before she agreed to purchase the flat. . . . I would be prepared to draw the inference as a matter of common sense that the average prudent purchaser of a new residential flat expects that the byelaws and regulations will have been complied with. I would classify this plaintiff as an average purchaser. In our cities there would be few citizens who would be unaware of the necessity for buildings to comply with the byelaws and health regulations and unaware of the control which city councils exercise over building works."
The same point was made by Casey J. 10 years later in Williams v. Mount Eden Borough Council [1986] 1 N.Z.B.L.R. 102,544, 102,551, in a passage which has already been quoted, and by Cooke P. in the South Pacific Manufacturing Co. case [1992] 2 N.Z.L.R. 282, 297. So there was nothing new in the concept of reliance by house buyers generally as an element in the imposition of a duty of care. Cooke P. drew attention in that connection to Housing in New Zealand: Report of the Commission of Inquiry (1971), over which he presided. He made the following comment [1994] 3 N.Z.L.R. 513, 519:
"whatever may be the position in the United Kingdom, homeowners in New Zealand do traditionally rely on local authorities to exercise reasonable care not to allow unstable houses to be built in breach of the byelaws."

But even if (which their Lordships doubt) it were possible to detect in the present case an increased emphasis on reliance when compared with previous cases that is just the sort of change of emphasis which is to be expected in a developing branch of the common law. Were it not for the intervening decisions of the House of Lords in D. & F. Estates Ltd. v. Church Commissioners for England [1989] AC 177 and Murphy v. Brentwood District Council [1991] 1 AC 398, it is unlikely that the present case would ever have reached the Board at all, at any rate on the duty of care point. It is to consider the impact of those decisions on New Zealand law that their Lordships now turn.

Miss Bates's argument can be stated in very simple terms. The decision in Bowen's case [1977] 1 N.Z.L.R. 394 was explicitly based on the English decision in Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373. The authority of the line of cases which followed Bowen's case [1977] 1 N.Z.L.R. 394 was reinforced by the decision of the House of Lords in Anns v. Merton London Borough Council [1978] AC 728. Both those English cases are now known to have been wrongly decided. If English law had not taken a wrong turning in 1972, New Zealand law would never have followed. The present appeal affords an opportunity for the Board, as the final appellate court for New Zealand, to put New Zealand law back on the correct path.

Where the New Zealand Court of Appeal is purporting to apply settled principles of English common law, then it is the function of the Board to ensure that those principles are applied correctly. Hart v. O'Connor [1985] AC 1000 was such a case, and Lord Scarman's observations in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. [1986] AC 80, 108 are to be understood in that light.

But in the present case the judges in the New Zealand Court of Appeal were consciously departing from English case law on the ground that conditions in New Zealand are different. Were they entitled to do so? The answer must surely be 'Yes.' The ability of the common law to adapt itself to the differing circumstances of the countries in which it has taken root, is not a weakness, but one of its great strengths. Were it not so, the common law would not have flourished as it has, with all the common law countries learning from each other. The point was put by Lord Diplock in a very different context in Broome v. Cassell & Co. Ltd. [1972] AC 1027, 1127:
"Other supreme appellate tribunals exercise a similar function in other countries which have inherited the English common law at various times in the past. Despite the unifying effect of that inheritance upon the concept of man's legal duty to his neighbour, it does not follow that the development of the social norms in each of the inheritor countries has been identical or will become so. I do not think that your Lordships should be deflected from your function of developing the common law of England and discarding judge-made rules which have outlived their purpose and are contrary to contemporary concepts of penal justice in England, by the consideration that other courts in other countries do not yet regard an identical development as appropriate to the particular society in which they perform a corresponding function."
By the same token, the Court of Appeal of New Zealand should not be deflected from developing the common law of New Zealand (nor the Board from affirming their decisions) by the consideration that the House of Lords in D. & F. Estates Ltd. v. Church Commissioners for England [1989] AC 177 and Murphy v. Brentwood District Council [1991] 1 AC 398 have not regarded an identical development as appropriate in the English setting.

The particular branch of the law of negligence with which the present appeal is concerned is especially unsuited for the imposition of a single monolithic solution. There are a number of reasons why this is so. The first and most obvious reason is that there is already a marked divergence of view among other common law jurisdictions.

In Canada it is well established that a municipality may be liable for economic loss caused by the negligence of a building inspector. Thus in City of Kamloops v. Nielsen (1984) 10 D.L.R. (4th) 641, the facts of which were very similar to the present case, the plaintiff, a subsequent purchaser, sued the municipality for failing to prevent his house being built with defective foundations in breach of a local byelaw. He also sued the builder. He succeeded against both defendants. The Kamloops case was decided before Murphy's case [1991] 1 AC 398. But in a subsequent case, a majority of the Supreme Court followed the Kamloops case, 10 D.L.R. (4th) 641, and declined to follow Murphy's case [1991] 1 AC 398: see Canadian National Railway Co. v. Norsk Pacific Steamship Co. Ltd. (1992) 91 D.L.R. (4th) 289. McLachlin J. said, at p. 365:
"The fact is that situations arise, other than those falling within the old exclusionary rule, where it is manifestly fair and just that recovery of economic loss be permitted. Faced with these situations, courts will strain to allow recovery, provided they are satisfied that the case will not open the door to a plethora of undeserving claims. They will refuse to accept injustice merely for the sake of the doctrinal tidiness which is the motivating spirit of Murphy. This is in the best tradition of the law of negligence, the history of which exhibits a sturdy refusal to be confined by arbitrary forms and rules where justice indicates otherwise. It is the tradition to which this court has adhered in suggesting in Kamloops that the search should not be for a universal rule but for the elaboration of categories where recovery of economic loss is justifiable on a case-by-case basis."
A little later she said, at p. 371:
"I conclude that, from a doctrinal point of view, this court should continue on the course chartered in Kamloops rather than reverting to the narrow exclusionary rule as the House of Lords did in Murphy."
The same approach was reaffirmed unanimously in a recent decision of the Supreme Court: see Winnipeg Condominium Corporation No. 36 v. Bird Construction Co. (1995) 121 D.L.R. (4th) 193.

In Australia, the High Court at first declined to hold local authorities liable for economic loss suffered by reason of houses being built with defective foundations: see Council of the Shire of Sutherland v. Heyman (1985) 157 C.L.R. 424. A lengthy passage from Brennan J.'s judgment in that case was quoted with approval by Lord Keith of Kinkel in Murphy's case [1991] 1 AC 398, 467-468. But 10 years later Brennan J. found himself in a minority of one when the High Court changed tack. In Bryan v. Maloney (1995) 69 A.L.J.R. 375 it was held that a negligent builder was liable for economic loss suffered by a subsequent purchaser. Mason C.J. referred to the D. & F. Estates case [1989] AC 177 and Murphy's case [1991] 1 AC 398 and continued, 69 A.L.J.R. 375, 383:
"It is, however, apparent that, in each case, their Lordships considered that a negligent builder's liability under the law of negligence did not extend to compensating either the first or a subsequent owner for economic loss sustained when the inadequacy of the footings of a building first becomes manifest by reason of consequent damage to the fabric of the building. Their Lordships' view in that regard seems to us, however, to have rested upon a narrower view of the scope of the modern law of negligence and a more rigid compartmentalisation of contract and tort than is acceptable under the law of this country."

Their Lordships cite these judgments in other common law jurisdictions not to cast any doubt on Murphy's case [1991] 1 AC 398, but rather to illustrate the point that in this branch of the law more than one view is possible: there is no single correct answer. In Bryan v. Maloney, 69 A.L.J.R. 375 the majority decision was based on the twin concepts of assumption of responsibility and reliance by the subsequent purchaser. If that be a possible and indeed respectable view, it cannot be said that the decision of the Court of Appeal in the present case, based as it was on the same or very similar twin concepts, was reached by a process of faulty reasoning, or that the decision was based on some misconception: see Australian Consolidated Press Ltd. v. Uren [1969] 1 AC 590, 644.

In truth, the explanation for divergent views in different common law jurisdictions (or within different jurisdictions of the United States of America) is not far to seek. The decision whether to hold a local authority liable for the negligence of a building inspector is bound to be based at least in part on policy considerations. As Mason C.J. said in Bryan v. Maloney, 69 A.L.J.R. 375, 377:
"Inevitably, the policy considerations which are legitimately taken into account in determining whether sufficient proximity exists in a novel category will be influenced by the court's assessment of community standards and demands."

In a succession of cases in New Zealand over the last 20 years it has been decided that community standards and expectations demand the imposition of a duty of care on local authorities and builders alike to ensure compliance with local byelaws. New Zealand judges are in a much better position to decide on such matters than the Board. Whether circumstances are in fact so very different in England and New Zealand may not matter greatly. What matters is the perception. Both Richardson and McKay JJ. [1994] 3 N.Z.L.R. 513, 528, 546 in their judgments in the court below stress that to change New Zealand law so as to make it comply with Murphy's case [1991] 1 AC 398 would have ' significant community implications' and would require a 'major attitudinal shift.' It would be rash for the Board to ignore those views.

In one important respect circumstances prevailing in England at the time of Murphy's case and those prevailing in New Zealand are indeed very different. Their Lordships have in mind the statutory background. In Murphy's case the House of Lords attached great weight to the passing of the Defective Premises Act 1972. Thus Lord Mackay of Clashfern L.C. said, at p. 457:
"Faced with the choice I am of the opinion that it is relevant to take into account that Parliament has made provisions in the Defective Premises Act 1972 imposing on builders and others undertaking work in the provision of dwellings obligations relating to the quality of their work and the fitness for habitation of the dwelling. For this House in its judicial capacity to create a large new area of responsibility on local authorities in respect of defective buildings would in my opinion not be a proper exercise of judicial power."
See also per Lord Keith of Kinkel, at p. 472, Lord Oliver of Aylmerton, at p. 491, and Lord Jauncey of Tullichettle, at p. 498.

By contrast there is no legislation corresponding to the Defective Premises Act 1972 in New Zealand. Instead there was an extended period of research starting with the Commission of Inquiry into Housing in 1971, and including the Review of Planning and Building Controls published in 1983, which resulted eventually in the Building Act 1991. That Act was passed a year and a half after the decision in Murphy's case. There is nothing in the Act to abrogate or amend the existing common law, as developed by New Zealand judges, so as to bring it into line with Murphy's case. On the contrary, a number of provisions in the Act clearly envisage that private law claims for damages against local authorities will continue to be made as before. Thus section 90 provides:
"Civil proceedings against building certifiers. Civil proceedings against a building certifier in respect of the exercise by the building certifier of the building certifier's statutory function in issuing a building certificate or a code compliance certificate are to be brought in tort and not in contract."
Similarly section 91 provides:
"Limitation defences. (1) Except to the extent provided in subsection (2) of this section, the provisions of the Limitation Act 1950 apply to civil proceedings against any person where those proceedings arise from - (a) the construction, alteration, demolition, or removal of any building; or (b) the exercise of any function under this Act or any previous enactment relating to the construction, alteration, demolition, or removal of that building. (2) Civil proceedings may not be brought against any person 10 years or more after the date of the act or omission on which the proceedings are based. (3) For the purposes of subsection (2) of this section if - (a) civil proceedings are brought against a territorial authority, a building certifier, or the authority; and (b) the proceedings arise out of the issue of a building consent, a building certificate, a code compliance certificate, or an authority determination - the date of the act or omission is the date of issue of the consent or certificate or determination. . . ."

It is neither here nor there that the Building Act 1991 was not in force at the time of the inspection of the foundations in the present case. The question is whether New Zealand law should now be changed so as to bring it into line with Murphy's case. If the New Zealand Parliament has not chosen to do so, as a matter of policy, it would hardly be appropriate for their Lordships to do so by judicial decision.

It follows that on the first question their Lordships are content to adopt the reasoning of the unanimous judgments of the Court of Appeal.

The negligent act or omission of the building inspector in approving the foundations occurred on 1 June 1972. The first cracks in the masonry veneer, and in the north wall of the kitchen, appeared in 1974. By 1979 a crack in the eastern wall had developed to such an extent that a brick was loose. In the early 1980s the plaintiff noticed some cracks in the foundation wall. Yet proceedings were not issued until November 1990.

The facts as found by the judge thus raise in an acute form the question when the plaintiff's cause of action accrued. If the cause of action arose at the time of the negligent act or omission, or when the first cracks appeared, then it is obvious that the plaintiff's claim in tort against the council would be time-barred. But if the cause of action did not accrue until the plaintiff was advised in 1989 that the foundations were defective, and if, as the judge found, a reasonably prudent homeowner would not have discovered the cause of the cracks any earlier, then the proceedings were in time. Which view is correct?

This is an important question of principle which has been much debated in recent years in different common law jurisdictions, in a number of different contexts. Their Lordships propose to confine their advice to the particular context of latent defects in buildings.

In New Zealand the law has been relatively clear and straightforward since at least the decision of the Court of Appeal in Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234. That was the case in which, as already mentioned, Cooke J. said that by the current law of New Zealand a plaintiff could recover in tort for economic loss 'at least when the loss is associated with physical damage' Cooke J. continued, at p. 239:
"Such a cause of action must arise, we think, either when the damage occurs or when the defect becomes apparent or manifest. The latter appears to be the more reasonable solution. It is powerfully supported by what Lord Reid said about the common law in Cartledge v. E. Jopling & Sons Ltd. [1963] A.C. 758, 772 . . ."

Ten years later, in Askin v. Knox [1989] 1 N.Z.L.R. 248 the plaintiff brought an action against a builder and the local authority, alleging negligence in laying and inspecting the foundations. He failed to prove negligence on the facts. But Cooke P., giving the judgment of a five judge court, said that, with regard to limitation, judges in New Zealand should continue to follow the guidance given by the Court of Appeal in Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234. He foresaw the time when the matter might have to be reconsidered in the light of the intervening decision of the House of Lords in Pirelli General Cable Works Ltd. v. Oscar Faber & Partners [1983] 2 A.C. 1. He commented [1989] 1 N.Z.L.R. 248, 255:
"it does not follow that the reasoning in Pirelli will be irresistible. It might still be possible to maintain the approach that a cause of action arises when the defect becomes apparent or ought to have been discovered, that being the time when the effect of the negligence (whether classified as physical or economic) is suffered or experienced by the owner of the building."
He went on to urge Parliament to consider introducing a 'longstop' limitation period such as the absolute limit of 15 years from the date of the negligent act or omission contained in the (English) Latent Damage Act 1986. Parliament acted swiftly on this suggestion: see the Building Act 1991, section 91(2), already cited.

The foreseen opportunity for reviewing the Pirelli case [1983] 2 A.C. 1 arose in the present case. Williamson J. correctly regarded himself as bound by Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234 and Askin v. Knox [1989] 1 N.Z.L.R. 248. In the Court of Appeal [1994] 3 N.Z.L.R. 513 Cooke P., Casey and Gault JJ. reaffirmed the New Zealand approach on limitation, and pointed out some of the disadvantages of following the Pirelli case [1983] 2 A.C. 1. Not only does that decision mean that a cause of action may become time-barred before any defect has become apparent (it was this obvious injustice which led the Supreme Court of Canada to reject the Pirelli decision in the Kamloops case, 10 D.L.R. (4th) 641), but the reasoning in the Pirelli case was also suspect, in so far as it was based on certain observations in the earlier decision of the House of Lords in Cartledge v. E. Jopling & Sons Ltd. [1963] A.C. 758.

In Cartledge v. E. Jopling & Sons Ltd. (which concerned an action for personal injuries) Lord Reid had been minded to hold that a cause of action for personal injuries ought not to accrue until the injured person has discovered or could reasonably have discovered the injury. 'The common law' he said, at p. 772, 'ought never to produce a wholly unreasonable result . . .' But Lord Reid felt constrained by section 26 of the Limitation Act 1939 (corresponding to section 28 of the New Zealand Limitation Act 1950) to reach just such an unreasonable result. By providing in section 26 for the postponement of the limitation period in the particular cases of fraud, mistake and concealment, Parliament must have intended that knowledge of the injury or damage should be irrelevant in all other cases.

The majority in the court below considered that this did not follow. The inclusion of three specific instances did not necessarily exclude the general law. As for the injustice inherent in the Pirelli approach, this was swiftly cured, so far as English law was concerned, by the Latent Damage Act 1986. Cooke P. concluded [1994] 3 N.Z.L.R. 513, 523:
"the view that in building negligence cases any cause of action must accrue on the occurrence of damage to the building itself has been either wholly or largely abandoned in England by judicial decision, quite apart from the limitation changes made by the Latent Damage Act. To introduce now the outmoded English position into New Zealand law would seem a paradoxical and peculiarly unsatisfactory step."
Richardson J. agreed with the majority on the limitation point.

McKay J., at p. 544, while acknowledging that Lord Reid's speech in Cartledge v. E. Jopling & Sons Ltd. [1963] A.C. 758 contains a non sequitur, nevertheless regarded the reasoning in that case and in the Pirellicase [1983] 2 A.C. 1 as compelling. A cause of action has always, he said, been taken to accrue when all the facts necessary to establish the cause of action are in existence. In the case of defective foundations that must mean when the damage occurs whether or not the damage could reasonably have been discovered. On the facts, McKay J. regarded the cracks in the walls and in the foundation as more than minimal damage. Accordingly the claim was in his view time-barred.

Compared with New Zealand the course of English authority has run less smooth. In Cartledge v. E. Jopling & Sons Ltd. [1963] A.C. 758 the plaintiffs were workmen who had contracted pneumoconiosis at work. It was held by the House of Lords that their causes of action were already time-barred before they could have known that they had suffered any personal injury. The House called for urgent remedial legislation. But the Limitation Act 1963, passed later the same year, was confined to actions for personal injuries. It did not apply to property damage. Accordingly when the Court of Appeal decided Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373 in 1972, Lord Denning M.R., relying on a dictum of Diplock L.J. in Bagot v. Stevens Scanlan & Co. Ltd. [1966] 1 Q.B. 197, 203 (a case concerning defective drains), said [1972] 1 Q.B. 373, 396 that: 'The damage was done when the foundations were badly constructed.'

But four years later in Sparham-Souter v. Town and Country Developments (Essex) Ltd. [1976] Q.B. 858 Lord Denning M.R. recanted. The Court of Appeal held that where a house is built with defective foundations the cause of action does not accrue until the defect becomes apparent or ought reasonably to have become apparent. Geoffrey Lane L.J. distinguished Cartledge v. E. Jopling & Sons Ltd. [1963] A.C. 758 in the following passage [1976] Q.B. 858, 880:
"There is no proper analogy between this situation' - i.e. the situation in Sparham-Souter's case - 'and the type of situation exemplified in Cartledge v. E. Jopling & Sons Ltd. where a plaintiff due to the negligence of the defendants suffers physical bodily injury which at the outset and for many years thereafter may be clinically unobservable. In those circumstances clearly damage is done to the plaintiff and the cause of action accrues from the moment of the first injury albeit undetected and undetectable. That is not so where the negligence has caused unobservable damage not to the plaintiff's body but to his house. He can get rid of his house before any damage is suffered. Not so with his body."

For the seven years following Sparham-Souter's case [1976] Q.B. 858, English law and New Zealand law went hand-in-hand (on the limitation point). Unfortunately Sparham-Souter's case was then overruled by the House of Lords in the Pirelli case [1983] 2 A.C. 1, thereby, presumably, restoring the view expressed by Lord Denning M.R. in Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373, until that decision, too, was overruled on the duty of care point in Murphy's case [1991] 1 AC 398.

Their Lordships refer to the Pirelli case [1983] 2 A.C. 1 as an unfortunate decision not only because that is how the House itself regarded the decision - Lord Fraser of Tullybelton, at p. 19, described the result as unreasonable and contrary to principle - but also because it has been subjected to a barrage of judicial and academic criticism ever since: see, by way of example, Michael A. Jones, 'Defective Premises and Subsequent Purchases - A Comment' (1984) 100 L.Q.R. 413; I. N. Duncan Wallace, ' Negligence and Defective Buildings: Confusion Confounded?' (1989) 105 L.Q.R. 46 and Todd, The Law of Torts in New Zealand (1991), p. 912. Their Lordships do not find it necessary to review these criticisms in any detail, or to enter into the question what Lord Fraser of Tullybelton may have had in mind when he referred to buildings which are 'doomed from the start:' see Ketteman v. Hansel Properties Ltd. [1987] A.C. 189, 207, per Lord Brandon of Oakbrook. Instead they will quote a passage from an article written shortly after the Pirelli case [1983] 2 A.C. 1 but before Murphy's case [1991] 1 AC 398, since it leads on directly to the ground on which the limitation point must now be decided:
'There is undoubtedly a superficial attraction in the argument which found favour with all five Lords of Appeal in Pirelli's case. If the nature of the damage suffered is regarded as a physical loss, it does indeed look as if the principle in Cartledge v. E. Jopling & Sons Ltd. should apply, on the basis that the damage is there but is unknown and, it may be, unknowable. But if the damage is recognised as economic the whole picture changes. It is thought that a failure to appreciate this point undermines the whole thrust of the argument in Pirelli's case:' Stephen Todd, 'Latent Defects in Property and the Limitation Act: A Defence of the 'Discoverability' Test' (1983) 10 N.Z.U.L.R. 311, 316.
This passage is a remarkable anticipation of the reasoning of the House of Lords in Murphy's case [1991] 1 AC 398.

In Murphy's case [1991] 1 AC 398, 466 Lord Keith of Kinkel said: 'In my opinion it must now be recognised that, although the damage in Anns [1978] AC 728 was characterised as physical damage by Lord Wilberforce, it was purely economic loss.' Lord Keith went on, at pp. 467-468, to quote with approval a lengthy passage from the judgment of Deane J. in Sutherland Shire Council v. Heyman, 157 C.L.R. 424, 503-505:
'Nor is the respondents' claim in the present case for ordinary physical damage to themselves or their property. Their claim, as now crystallised, is not in respect of damage to the fabric of the house or to other property caused by collapse or subsidence of the house as a result of the inadequate foundations. It is for the loss or damage represented by the actual inadequacy of the foundations, that is to say, it is for the cost of remedying a structural defect in their property which already existed at the time when they acquired it . . . It is arguable that any such loss or injury should be seen as being sustained at the time of acquisition when, because of ignorance of the inadequacy of the foundations, a higher price is paid (or a higher rent is agreed to be paid) than is warranted by the intrinsic worth of the freehold or leasehold estate that is being acquired. Militating against that approach is the consideration that, for so long as the inadequacy of the foundations is neither known nor manifest, no identifiable loss has come home: if the purchaser or tenant sells the freehold or leasehold estate within that time, he or she will sustain no loss by reason of the inadequacy of the foundations. The alternative, and in my view preferable, approach is that any loss or injury involved in the actual inadequacy of the foundations is sustained only at the time when that inadequacy is first known or manifest. It is only then that the actual diminution in the market value of the premises occurs. On either approach, however, any loss involved in the actual inadequacy of the foundations by a person who acquires an interest in the premises after the building has been completed is merely economic in its nature."
Once it is appreciated that the loss in respect of which the plaintiff in the present case is suing is loss to his pocket, and not for physical damage to the house or foundations, then most, if not all the difficulties surrounding the limitation question fall away. The plaintiff's loss occurs when the market value of the house is depreciated by reason of the defective foundations, and not before. If he resells the house at full value before the defect is discovered, he has suffered no loss. Thus in the common case the occurrence of the loss and the discovery of the loss will coincide.

But the plaintiff cannot postpone the start of the limitation period by shutting his eyes to the obvious. In Dennis v. Charnwood Borough Council [1983] Q.B. 409, 420, a case decided in the Court of Appeal before the Pirelli case reached the House of Lords, Templeman L.J. said that time would begin to run in favour of a local authority:
"if the building suffers damage or an event occurs which reveals the breach of duty by the local authority or which would cause a prudent owner-occupier to make investigations which, if properly carried out, would reveal the breach of duty by that local authority."
In other words, the cause of action accrues when the cracks become so bad, or the defects so obvious, that any reasonable homeowner would call in an expert. Since the defects would then be obvious to a potential buyer, or his expert, that marks the moment when the market value of the building is depreciated, and therefore the moment when the economic loss occurs. Their Lordships do not think it is possible to define the moment more accurately. The measure of the loss will then be the cost of repairs, if it is reasonable to repair, or the depreciation in the market value if it is not: see Ruxley Electronics and Construction Ltd. v. Forsyth [1996] 1 A.C. 344.

This approach avoids almost all the practical and theoretical difficulties to which the academic commentators have drawn attention, and which led to the rejection of the Pirelli decision [1983] 2 A.C. 1 by the Supreme Court of Canada in the Kamloops case, 10 D.L.R. (4th) 641. The approach is consistent with the underlying principle that a cause of action accrues when, but not before, all the elements necessary to support the plaintiff's claim are in existence. For in the case of a latent defect in a building the element of loss or damage which is necessary to support a claim for economic loss in tort does not exist so long as the market value of the house is unaffected. Whether or not it is right to describe an undiscoverable crack as damage, it clearly cannot affect the value of the building on the market. The existence of such a crack is thus irrelevant to the cause of action. It follows that the judge applied the right test in law.

Their Lordships repeat that their advice on the limitation point is confined to the problem created by latent defects in buildings. They abstain, as did Cooke P., from considering whether the 'reasonable discoverability' test should be of more general application in the law of tort.

It is regrettable that there should be any divergence between English and New Zealand law on a point of fundamental principle. Whether the Pirelli case [1983] 2 A.C. 1 should still be regarded as good law in England is not for their Lordships to say. What is clear is that it is not good law in New Zealand.

There is no ground for disturbing the judge's conclusions on the facts, as to which there are in any event concurrent findings.

Finally their Lordships would wish to pay tribute to the excellence of all three arguments at the bar and are particularly grateful for the learned and comprehensive written submissions furnished by Miss French, to which they are much indebted.

Their Lordships will humbly advise Her Majesty that the appeal should be dismissed. By agreement, there will be no order as to costs.