The barring of actions after lapse of time seems always to produce a sour taste. There is an element of arbitrariness about it. A claimant should act diligently in presenting its claim, and it is obviously essential to prevent thoroughly stale claims being preserved. But often, in construction matters particularly, latent damage is difficult to recognise and crucial decisions have to be made in the courts as to when the damage became discoverable even though it was not actually discovered. English law on the subject has been criticised in academic circles, and Canada and New Zealand have chosen to depart from it. (See box on page 19 for the basic principles relating to loss or damage occurring in the construction and repair of property.)

The unanswered questions in English law were again the subject of consideration in the Court of Appeal recently when clear guidance on certain aspects of the operation of the Limitation Act 1980 was absent, even against the background of a trio of decisions of the House of Lords and one of the Privy Council.

Uncomfortable issues

The leading authority

The leading case relating to limitation issues in building construction cases is Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983], in which the House of Lords decided that a building owner’s cause of action against their consulting engineer for negligent design accrued for limitation purposes when physical damage to the building first occurred. In that case, the defendants were the engineers who designed a factory chimney that was built in 1969. By April 1970, cracks appeared at the top of the chimney that were not discovered until November 1977 when extensive remedial works had to be carried out. In October 1978 proceedings were begun for negligence. The question to be answered was when the cause of action in tort accrued.

It was held that the cause of action accrued in spring 1970, when the cracks near the top of the chimney must have come into existence. In that case, therefore, the action was time-barred. There was no scope in the law for extension of time to take account of when the damage would reasonably have become discoverable. The decision was confirmed in another decision of the House of Lords in Ketteman v Hansel Properties [1987]. It would seem to follow that the law was clear that the cause of action in tort accrued at the time when the damage occurred.

As a result of the decision in Pirelli, the Law Commission recommended a revision of the Limitation Act 1980 to extend the period of limitation to take account of the problem of discoverability. The situation in Pirelli was acknowledged to be unjust. This led to the passing of the Latent Damage Act 1986, which allowed for the additional time limit of three years from the date of discoverability.

Economic loss requires a special proximity

It was not long after that that the House of Lords considered the liability of local authorities for approving the defective design or construction of buildings. In Murphy v Brentwood DC [1991] the claimant sued the local authority for the diminution in the market value of his house, which had been built on defective foundations, and the plans for which had been approved by the local authority. It was held, as a matter of policy and overruling the previous decision in Anns v London Borough of Merton [1978], that economic loss suffered from the commission of a tort could not be recovered in the absence of a special relationship of proximity. Such a special relationship exists where the loss arises in tort (eg negligence) from the implementation of a contract between the parties, or where the negligence arises in the course of a duty assumed by the defendant towards the claimant even though there is no contract between them (see Hedley Byrne & Co Ltd v Heller & Partners [1964]).

In Murphy there were no limitation issues but Pirelli was referred to; the reference inferred that where the loss arose out of a contractual obligation to give professional advice, the duty extended to take reasonable care not to cause economic loss to the client by the advice given. Thus a claim for economic loss would lie in negligence also, and there would seem to be a good cause of action at that stage, without having to wait for some damage to occur.

So when does economic loss accrue?

It is clear that where a careless builder is liable for damage that results, they are responsible in damages for the cost of repair, if repair is appropriate, or for diminution in the value of the building if it is not. In the case of negligent design or advice, physical damage may not yet have accrued, but it is open to argument that, when the advice is acted upon, diminution in the value of the building is suffered even if it is not then recognised, and the cause of action accrues. The issue of the running of limitation periods therefore arises.

Does this in some way lead to the decision in Pirelli being reconsidered as wrongly decided, or overruled or impinged upon by Murphy? There is a clear special relationship of proximity with the professional adviser so that economic loss is capable of being recovered, but when is the action to recover it time-barred?

Does the limitation period in tort run from the time at which the diminution in value of the building is suffered by acting on the negligent advice so that there is a defective building (even though the defect is not as yet recognised), or when the physical damage first manifests itself?

Concern among Law Lords

The Pirelli decision has come in for some heavy criticism from academics and, as stated, has caused departures from it in Canada and New Zealand. The Privy Council had the opportunity to review Pirelli when dealing with an appeal from New Zealand in Invercargill City Council v Hamlin [1996]. This involved a claim against a local authority for negligent inspection of physical damage (the decision in Murphy has not been followed there). The Privy Council described the decision in Pirelli as unfortunate and noted judicial and academic criticism with apparent approval.

In dealing with the New Zealand case, it held that, where the claimant was suing for financial (economic) loss and not for physical damage, the problem of when the limitation period begins to run would largely be solved if the loss was to be treated as occurring only when the defect is discovered; before that time, the claimant has suffered no loss.

Of course, the claimant could not shut their eyes to the obvious, and the limitation period would start to run when the damage became so bad that any reasonable person would call in an expert. The point of discovery of the defect would mark the time at which the market value of the property would be depreciated; logic dictated that the market value would not in fact have depreciated on account of the defect before the time that the defect became discoverable. The measure of damages would be the cost of repair if it would be reasonable to repair it or, if not, the depreciation in market value. This approach would be consistent with the underlying principle that the cause of action accrues when, but not before, all elements necessary to support the claim are in existence.

That was the law of New Zealand. However, although the Law Lords cast doubt on Pirelli as being good law, they were not empowered to pronounce on it in the Privy Council.

The Court of Appeal has recently considered these limitation issues without feeling able to resolve them.

Abbott v Will Gannon & Smith Ltd [2005]

A rehearsal of the issues

This case raised all the issues described above. It involved a claim for £20,000 against a firm of structural engineers that dealt with the design work for remedying the defects in a large bay window of a hotel. The firm was engaged by an oral contract, but it imported an implied term that the design work would be carried out with reasonable care and skill.

The design work was done in May 1995. The building work was carried out by the builder in March 1997. In late 1999 the claimants first noted some movement in the structure by the appearance of cracking. Remedial works had to be carried out, and in September 2003 the claim was made against the engineers.

It was common ground that the claim in contract was time-barred, but the County Court dealt with the preliminary issue of whether the claim in tort had survived the passage of time. The case was on all fours with the facts of Pirelli and the only difference was that, in the meantime, the Latent Damage Act had put in place the additional time limit of three years from the date of discoverability. The claimants contended that the damage had occurred shortly before they had noticed the cracking in 1999, in which case the commencement of the proceedings within the six-year ensuing limitation period was not time-barred.

The defendant engineers argued that the claim against them was for economic loss; plainly there was a special relationship of proximity, but they contended that the loss of market value for the negligent design accrued when their work was acted upon by the work that was completed early in 1997.

They argued that the issue of proceedings in September 2003 came after the expiry of the limitation period, which had commenced from completion of the works when the economic loss was incurred. There should be no postponement until the damage became discoverable, as that was the time that the building became defective because of the negligent design.

The legal issue, therefore, was whether the decision in Murphy meant that, if the defective design had been discoverable before the damage occurred, it could be held that the cause of action had arisen at that stage without having to wait for damage to occur.

The decision on the preliminary issue

The district judge made a declaration that ‘if the cracks first appeared within six years of the issue of proceedings, the claim is not statute-barred’. He did not make any finding of fact as this was a preliminary issue. The defendants appealed for a ruling on the preliminary issue.

The Court of Appeal found itself in a quandary. It could not determine exactly where the law lay. It asked itself the following questions:

• Where the claimant sues in tort for damage to property, does this extend to damage (economic loss) to the building itself before the defect is discovered?
• What is the position where there is a special relationship and there is the duty to take care not to cause economic loss?
• When does such economic loss occur in a case such as this, and does the duty not to cause physical damage to property constitute a separate cause of action for limitation purposes?

The Court of Appeal was bound to give a decision, but felt that a determination of these issues could only definitively be made by the House of Lords. The simple answer was that the Court was bound by the decision in Pirelli, and Murphy did not overrule or disapprove the decision in Pirelli as such. The decision in Invercargill of the Privy Council had no status in such a context. In that situation, the ruling of the district judge (to the effect that if the cracks first appeared within six years of the issue of proceedings, the claim is not statute-barred) should be upheld.

However, if the Court of Appeal were not bound by Pirelli, it would accept the criticism of the Pirelli decision and the analysis made by the Privy Council in Invercargill, which would remove nearly all the practical and theoretical difficulties that the decision in Pirelli could bring about. By that analysis applied in this case, the discovery of the damage and the loss would coincide and the cause of action would have accrued in 1999, so the claim would not have been statute-barred.

The result of the appeal, it seems, depends on the finding of fact that will be made when the substantive issues are tried in the County Court. Meanwhile, the fundamental legal issues relating to the limitation matters possibly involved remain unresolved.

Comment

This claim is for £20,000. It has involved heavy litigation costs already. It seems unlikely to be destined for the House of Lords, where the amount of the claim would pale into insignificance against the legal costs of appeal. The rehearsal of the difficulties around Pirelli is most useful and perhaps the analysis will be used in some future dispute that is of sufficient substance to take to the House of Lords for determination. Only there can Pirelli either be confirmed, adjusted or disapproved. © Property Law Journal