12 NON-CONTRACT LIABILITY

Negligence

The concept of negligence and duty has been discussed in earlier chapters, particularly in a construction setting, and encompasses just one of various forms of non-contract liability.

In Anns v Merton LBC,¹ the local council in 1962 approved building plans for a block of flats and construction was completed that year. Then, in 1970, structural movements led to the walls cracking and other damage. Two years later the lessees commenced proceedings against the council, alleging negligence in failing to inspect the building walls properly to ensure that the foundations were built to the appropriate depth as shown on the approved plans. Upon hearing the council’s appeal concerning whether the actions were statute-barred, the House of Lords agreed to consider whether the council was under a duty of care. The court held that under the Public Health Act 1936 the council had a power, as opposed to a duty, to inspect building work to ensure compliance with the bylaws, and that the failure to carry out inspections would not render the council liable unless two things were proved: (1) that it had failed to properly exercise its discretion not to make an inspection; and (2) that it failed to exercise reasonable care to ensure compliance with the bylaws. It was further held that where such inspections were carried out, the council retained a discretion as to the manner in which such inspections were performed and if such discretion was not bona fide exercised, the council might be liable in negligence for failure to take reasonable care.

Indeed, this was the applicable law in the UK for about ten years but then, in 1989, the House of Lords took a different direction in D & F Estates Ltd v Church Commissioners for England.² In this case the Church Commissioners owned a block of flats, which had been constructed between 1963 and 1965. D & F leased one of the flats for 98 years commencing on 25 March 1963 and took possession at that time. Then, in 1980, part of the plaster from the ceiling of one of the bedrooms fell to the floor, which was found to have been caused by faulty work by the plastering subcontractor. The trial court held that the original contractor, Wates, had acted reasonably in subcontracting the plastering work and in selecting the subcontractor, but had failed adequately to supervise the work. The court accordingly awarded damages to D & F for the cost of remedial work undertaken and for the estimated cost of future remedial works, as well as damages in respect of loss of rent while the future remedial works were carried out. The court also awarded £500 each to the plaintiffs in respect of loss of amenity during the period in which they were occupying the flat while remedial works were done.

However, the Court of Appeal reversed the judge’s decision, primarily because the original contractor, Wates, employed competent subcontractors to carry out the plastering work and as such owed no further duty of care to the plaintiffs in relation to the execution of the work by the subcontractors. The Court of Appeal also held that Wates was not liable for damages in tort in respect of the cost of the future remedial work not yet carried out, since it represented pure economic loss. The plaintiffs appealed and the House of Lords dismissed the appeal taking the position that the cost of replacing the defective plaster itself, either as carried out in 1980 or as intended to be carried out in future, was not an item of damage for which the original builders could possibly be held liable in negligence. To make them liable would be to impose upon them, for the benefit of those with whom they had no contractual relationship, an obligation of providing a warranty as to the quality of the plaster in regard to materials, workmanship and fitness for purpose. Further, it was held that Wates, as the original contractor, was also not vicariously liable for the negligence of its subcontractor nor did it owe a duty to future lessees and occupiers of the building to take reasonable care that it contained no hidden defects to persons or property and, finally, that it was not under any duty to supervise the work of its subcontractors to ensure that the subcontracted work was not negligently performed so as to cause such latent defects. Of particular interest is what Lord Bridge of Harwich wrote and his summation³ of the existing case law:

“I do not intend to embark on the daunting task of reviewing the wealth of other … authority which bears, directly or indirectly, on the question whether the cost of making good defective plaster in the instant case is irrecoverable as economic loss, which seems to me to be the most important question for determination in the present appeal. My abstention may seem pusillanimous, but it stems from a recognition that the authorities, as it seems to me, speak with such an uncertain voice that, no matter how searching the analysis to which they are subject, they yield no clear and conclusive answer. It is more profitable, I believe, to examine the issue in the light of first principles.

However, certain authorities are of prime importance and must be considered. The decision of your Lordships’ House in Junior Books Ltd v Veitchi Co Ltd (1982) has been analysed in many subsequent decisions of the Court of Appeal. I do not intend to embark on a further such analysis. The consensus of judicial opinion, with which I concur, seems to be that the decision of the majority is so far dependent upon the unique, albeit non-contractual relationship between the pursuer and the defender in that case and the unique scope of the duty of care owed by the defender to the pursuer arising from that relationship that the decision cannot be regarded as laying down any principle of general application in the law of tort or delict. The dissenting speech of Lord Brandon of Oakbrook on the other hand enunciates with cogency and clarity principles of fundamental importance which are clearly applicable to determine the scope of the duty of care owed by one party to another in the absence, as in the instant case, of either any contractual relationship or any such uniquely proximate relationship as that on which the decision of the majority in Junior Books was founded. Lord Brandon said:

‘My Lords, it appears to me clear beyond doubt that, there being no contractual relationship between the respondents and the appellants in the present case, the foundation, and the only foundation, for the existence of a duty of care owed by the defenders to the pursuers, is the principle laid down in the decision of your Lordships’ House in Donoghue v Stevenson (1932). The actual decision in that case related only to the duty owed by a manufacturer of goods to their ultimate user or consumer, and can be summarised in this way: a person who manufactures goods which he intends to be used or consumed by others, is under a duty to exercise such reasonable care in their manufacture as to ensure that they can be used or consumed in the manner intended without causing physical damage to persons or their property.

While that was the actual decision in Donoghue v Stevenson, it was based on a much wider principle embodied in passages in the speech of Lord Atkin, which have been quoted so often that I do not find it necessary to quote them again here. Put shortly, that wider principle is that, when a person can or ought to appreciate that a careless act or omission on his part may result in physical injury to other persons or their property, he owes a duty to all such persons to exercise reasonable care to avoid such careless act or omission.

It is, however, of fundamental importance to observe that the duty of care laid down in Donoghue v Stevenson was based on the existence of a danger of physical injury to persons or their property. That this is so, is clear from the observations made by Lord Atkin with regard to the statements of law of Brett MR in Heaven v Pender (1883). It has further, until the present case, never been doubted, so far as I know, that the relevant property for the purpose of the wider principle on which the decision in Donoghue v Stevenson was based, was property other than the very property which gave rise to the danger of physical damage concerned’.”

Later, Lord Brandon, having referred to the well-known two-stage test of the existence of a duty of care propounded by Lord Wilberforce in Anns, asked himself, at the second stage, “whether there are any considerations which ought, inter alia, to limit the scope of the duty which exists”. He continued:

“To that second question I would answer that there are two important considerations which ought to limit the scope of the duty of care which it is common ground was owed by the appellants to the respondents on the assumed facts of the present case. The first consideration is that, in Donoghue v Stevenson itself and in all the numerous cases in which the principle of that decision has been applied to different but analogous factual situations, it has always been either stated expressly, or taken for granted, that an essential ingredient in the cause of action relied on was the existence of danger, or the threat of danger, of physical damage to persons or their property, excluding for this purpose the very piece of property from the defective condition of which such danger, or threat of danger, arises. To dispense with that essential ingredient in a cause of action of the kind concerned in the present case would, in my view, involve a radical departure from long-established authority.

The second consideration is that there is no sound policy reason for substituting the wider scope of the duty of care put forward for the respondents for the more restricted scope of such duty put forward by the appellants. The effect of accepting the respondents’ contention with regard to the scope of the duty of care involved would be, in substance, to create, as between two persons who are not in any contractual relationship with each other, obligations of one of those two persons to the other which are only really appropriate as between persons who do have such a relationship between them.

In the case of a manufacturer or distributor of goods, the position would be that he warranted to the ultimate user or consumer of such goods that they were as well designed, as merchantable and as fit for their contemplated purpose as the exercise of reasonable care could make them. In the case of sub-contractors such as those concerned in the present case, the position would be that they warranted to the building owner that the flooring, when laid, would be as well designed, as free from defects of any kind and as fit for its contemplated purpose as the exercise of reasonable care could make it. In my view, the imposition of warranties of this kind on one person in favour of another, when there is no contractual relationship between them, is contrary to any sound policy requirement.

It is, I think, just worthwhile to consider the difficulties which would arise if the wider scope of the duty of care put forward by the respondents were accepted. In any case where complaint was made by an ultimate consumer that a product made by some persons with whom he himself had no contract was defective, by what standard or standards of quality would the question of defectiveness fall to be decided? In the case of goods bought from a retailer, it could hardly be the standard prescribed by the contract between the retailer and the wholesaler, or between the wholesaler and the distributor, or between the distributor and the manufacturer, for the terms of such contract would not even be known to the ultimate buyer. In the case of subcontractors such as the appellants in the present case, it could hardly be the standard prescribed by the contract between the sub-contractors and the main contractors, for, although the building owner would probably be aware of those terms, he could not, since he was not a party to such contract, rely on any standard or standards prescribed in it. It follows that the question by what standard or standards alleged defects in a product complained of by its ultimate user or consumer are to be judged remains entirely at large and cannot be given any just or satisfactory answer.’

The reasoning in these passages receives powerful support from the unanimous decision of the Supreme Court of the United States of America in East River Steamship Corp v Transamerica Delaval Inc (1986). Charterers of supertankers claimed damages from turbine manufacturers resulting from alleged design and manufacturing defects which caused the supertankers to malfunction while on the high seas. The court held inter alia, that:

‘whether stated in negligence or strict liability, no products-liability claim lies in admiralty when a commercial party alleges injury only to the product itself resulting in purely economic loss’

This appears to undermine the earlier American authorities referred to by Richmond P in the New Zealand case of Bowen v Paramount Builders (Hamilton) Ltd (1977). The opinion of Lord Brandon of Oakbrook in Junior Books Ltd v Veitchi Co Ltd (1982) and that expressed by the Supreme Court of the United States of America are entirely in line with the majority decision of the Supreme Court of Canada in Rivtow Marine Ltd v Washington Iron Works (1973) that the damages recoverable from the manufacturer by the hirers of a crane which was found to have a defect which made it unsafe to use did not include the cost of repairing the defect.

These principles are easy enough to comprehend and probably not difficult to apply when the defect complained of is in a chattel supplied complete by a single manufacturer. 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 (1932) principle. The chattel is now defective in quality, is no longer dangerous. It may be valueless or it may be capable of economic repair. In either case the economic loss is recoverable in contract by a buyer or hirer of the chattel entitled to the benefit of a relevant warranty of quality, but is not recoverable in tort by a remote buyer or hirer of the chattel.

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. Thus, if I acquire a property with a dangerously defective garden wall which is attributable to the bad workmanship of the original builder, it is difficult to see any basis in principle on which I can sustain an action in tort against the builder for the cost of either repairing or demolishing the wall. No physical damage has been caused. All that has happened is that the defect in the wall has been discovered in time to prevent damage occurring. I do not find it necessary for the purpose of deciding the present appeal to express any concluded view as to how far, if at all, the ratio decidendi of Anns v Merton London Borough (1977) involves a departure from this principle establishing a new cause of action in negligence against a builder when the only damage alleged to have been suffered by the plaintiff is the discovery of a defect in the very structure which the builder erected.

My example of the garden wall, however, is that of a very simple structure. I can see that more difficult questions may arise in relation to a more complex structure like a dwelling-house. One view would be that such a structure should be treated in law as a single indivisible unit. On this basis, if the unit becomes a potential source of danger when a hitherto hidden defect in construction manifests itself, the builder, as in the case of the garden wall, should not in principle be liable for the cost of remedying the defect. It is for this reason that I now question the result, as against the builder, of the decision in Batty v Metropolitan Property Realization Ltd (1978).

However, I can see that it may well be arguable that in the case of complex structures, as indeed possibly in the case of complex chattels, one element of the structure should be regarded for the purpose of the application of the principles under discussion as distinct from another element, so that damage to one part of the structure caused by a hidden defect in another part may qualify to be treated as damage to ‘other property’, and whether the argument should prevail may depend on the circumstances of the case. It would be unwise and it is unnecessary for the purpose of deciding the present appeal to attempt to offer authoritative solutions to these difficult problems in the abstract. 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 (1977) should be followed as a matter of English law. I do not regard Anns v Merton London Borough (1977) as resolving that issue.

In the instant case the only hidden defect was in the plaster. The only item pleaded as damage to other property was ‘cost of cleaning carpets and other possessions damaged or dirtied by falling plaster; £50’. Once it appeared that the plaster was loose, any danger of personal injury or of further injury to other property could have been simply avoided by the timely removal of the defective plaster. The only function of plaster on walls and ceilings, unless it is itself elaborately decorative, is to serve as a smooth surface on which to place decorative paper or paint. Whatever case there may be for treating a defect in some part of the structure of a building as causing damage to ‘other property’ when some other part of the building is injuriously affected, as for example cracking in walls caused by defective foundations, it would seem to me entirely artificial to treat the plaster as distinct from the decorative surface placed upon it. Even if it were so treated, the only damage to ‘other property’ caused by the defective plaster would be the loss of value of the existing decorations occasioned by the necessity to remove loose plaster which was in danger of falling. When the loose plaster in [the flat] was first discovered in 1980, the flat was in any event being redecorated.

It seems to me clear that the cost of replacing the defective plaster itself, either as carried out in 1980 or as intended to be carried out in future, was not an item of damage for which the builder of [the flats] could possibly be made liable in negligence under the principle of Donoghue v Stevenson or any legitimate development of that principle. To make him so liable would be to impose upon him for the benefit of those with whom he had no contractual relationship the obligation of one who warranted the quality of the plaster as regards materials, workmanship and fitness for purpose. I am glad to reach the conclusion that this is not the law, if only for the reason that a conclusion to the opposite effect would mean that the courts, in developing the common law, had gone much farther than the legislature were prepared to go in 1972, after comprehensive examination of the subject by the Law Commission, in making builders liable for defects in the quality of their work to all who subsequently acquire interests in buildings they have erected. The statutory duty imposed by the Act of 1972 was confined to dwelling-houses and limited to defects appearing within six years. The common law duty, if it existed, could not be so confined or so limited. I cannot help feeling that consumer protection is an area of law where legislation is much better left to the legislators.

It follows from these conclusions that, even if Wates themselves had been responsible for the plaster-work in [the flat], the damages recoverable from them by D & F Estates would have been a trivial sum and [the plaintiffs] could have established no claim for damages for disturbance. But, as already indicated, the Court of Appeal’s primary ground for allowing Wates’ appeal was that they had properly employed competent sub-contractors to do the plaster work for whose negligence they were not liable, and it is to this issue that I must now turn. The submission in support of the appeal was put in three ways which amount, as it seems to me, to three alternative formulations of what is, in essence, the same proposition of law. Expressed in summary form the three formulations are (i) that Wates were vicariously liable for the negligence of their subcontractor; (ii) that Wates as main contractors responsible for building [the flats] owed a duty to future lessees and occupiers of flats to take reasonable care that the building should contain no hidden defects of the kind which might cause injury to persons or property and that this duty could not be delegated; (iii) that Wates as main contractors owed a duty of care to future lessees and occupiers of flats to supervise their sub-contractors to ensure that the sub-contracted work was not negligently performed so as to cause such defects.

It is trite law that the employer of an independent contractor is, in general, not liable for the negligence or other torts committed by the contractor in the course of the execution of the work. To this general rule there are certain well-established exceptions or apparent exceptions. Without enumerating them it is sufficient to say that it was accepted by [counsel on behalf of the appellants] that the instant case could not be accommodated without any of the recognised and established categories by which the exceptions are classified. But it has been rightly said that the so-called exceptions ‘are not true exceptions (at least so far as the theoretical nature of the employer’s liability is concerned) for they are dependent upon a finding that the employer is, himself, in breach of some duty which he personally owes to the plaintiff. The liability is thus not truly a vicarious liability and is to be distinguished from the vicarious liability of a master for his servant’.

Herein lies [counsel’s] real difficulty. If Wates are to be held liable for the negligent workmanship of their sub-contractors (assumed for this purpose to result in dangerously defective work) it must first be shown that in the circumstances they had assumed a personal duty to all the world to ensure that [the flats] should be free of dangerous effects. This was the assumption on which the judge proceeded when he said: ‘The duty of care itself is of course not delegable.’ Whence does this non-delegable duty arise? [Counsel] submits that it is a duty undertaken by any main contractor in the building industry who contracts to erect an entire building. I cannot agree because I cannot recognise any legal principle to which such an assumption of duty can be related.

Just as I may employ a building contractor to build me a house, so may the building contractor, subject to the terms of my contract with him, in turn employ another to undertake part of the work. If the mere fact of employing a contractor to undertake building work automatically involved the assumption by the employer of a duty of care to any person who may be injured by a dangerous defect in the work caused by the negligence of the contractor, this would obviously lead to absurd results. If the fact of employing a contractor does not involve the assumption of any such duty by the employer, then one who has himself contracted to erect a building assumes no such liability when he employs an apparently competent independent sub-contractor to carry out part of the work for him. The main contractor may, in the interests of the proper discharge for his own contractual obligations, exercise a greater or lesser degree of supervision over the work done by the sub-contractor. If in the course of supervision, the main contractor in fact comes to know that the sub-contractor’s work is being done in a defective and foreseeably dangerous way and if he condones that negligence on the part of the subcontractor, he will no doubt make himself potentially liable for the consequences as a joint tortfeasor. But the judge made no finding against Wates of actual knowledge and his finding that they ‘ought to have known’ what the manufacturer’s instructions were depended on and was vitiated by his earlier misdirection that Wates owed a duty of care to future lessees of [the] flats in relation to their subcontractor’s work.

[He] relied on the decision of Judge Edgar Fay QC in Queensway Discount Warehouses v Graylaw Properties Ltd (1982) and on the decision of Judge Sir William Stabb QC in Cynat Products Ltd v Landbuild (Investment and Property) Ltd (1984). In so far as the former decision relied on any general principle of law that a main contractor is liable to a third party who suffers damage from the negligently defective work done by his sub-contractor, I can only say, as already indicated, that I can find no basis in law to support any such principle. The relevant issue in the latter case, as in Batty v Metropolitan Property Realizations Ltd (1978) in relation to the liability of the developer defendants, was whether the defendants’ admitted contractual liability was matched by a parallel liability in tort. In both cases the issue was of importance only as bearing upon the liability of insurers to indemnify the defendants. I do not find authorities directed to that question of any assistance in determining the scope of the duty of care which one person owes to another entirely independently of any contractual relationship on the basis of the Donoghue v Stevenson (1932) principle.

More important is the decision of the New Zealand Court of Appeal in Mount Albert Borough Council v Johnson (1979). This was another case of the purchaser of a flat suffering damage due to the subsidence of a building erected on inadequate foundations. One of the issues was whether the plaintiff was entitled to recover damages against the development company which had employed independent contractors to erect the building. Delivering the judgment of Somers J and himself Cooke J said:

‘In the instant type of case a development company acquires land, subdivides it and has homes built on the lots for sale to members of the general public. The company’s interest is primarily a business one. For that purpose it has buildings put up which are intended to house people for many years and it makes extensive and abiding changes in the landscape. It is not a case of a landowner having a house built for his own occupation initially – as to which we would say nothing except that Lord Wilberforce’s two-stage approach to duties of care in Anns may prove of guidance on questions of non-delegable duty also. There appears to be no authority directly in point on the duty of such a development company. We would hold that it is a duty to see that proper care and skill are exercised in the building of the houses and that it cannot be avoided by delegation to an independent contractor.’

As a matter of social policy this conclusion may be entirely admirable. Indeed, it corresponds almost precisely to the policy underlying the Law Commission’s recommendations in para 26 of the report ‘Civil Liability of Vendors and Lessors for Defective Premises’ (Law Com No 40) to which I have already referred and which was implemented by section 1(1) and (4) of the 1972 Act. As a matter of legal principle, however, I can discover no basis on which it is open to the court to embody this policy in the law without the assistance of the legislature and it is again, in my opinion, a dangerous course for the common law to embark upon the adoption of novel policies which it sees as instruments of social justice but to which, unlike the legislature, it is unable to set carefully defined limitations.

The conclusion I reach is that Wates were under no liability to the plaintiffs for damage attributable to the negligence of their plastering sub-contractor in failing to follow the instructions of the manufacturer of the plaster they were using, but that in any event such damage could not have included the cost of renewing the plaster.”

The principles discussed in this case were further amplified two years later in the previously discussed House of Lords case, Murphy v Brentwood District Council.⁴ In 1970, Murphy bought one of a pair of houses built on a concrete raft foundation on an in-fill site. Unfortunately, the raft proved to be defective, causing differential settlement. Murphy, being unable to repair the defect, sold the house and suffered a £35,000 loss. This led him to commence proceedings against Brentwood District Council for their negligent approval of the plans, claiming that there had been an imminent risk to health and safety from fractured gas and oil pipes. The House of Lords held that the loss suffered was economic loss and the council was not liable in tort for negligent application of the building regulations where resulting defects had not caused physical injury. Lord Oliver wrote:

“I have found it impossible to reconcile the liability of the builder propounded in Anns with any previously accepted principles of the tort of negligence and I am able to see no circumstances from which there can be deduced a relationship of proximity such as to render the builder liable in tort for pure pecuniary damage sustained by a derivative owner with whom he has no contractual or other relationship.”

Based upon this, as the builder did not owe such a duty, thus the local authority could not owe such a duty either.⁵

In Murphy Lord Oliver went on to explain that economic loss would not be recoverable in negligence where the loss was too remote or where it would be impossible to contain liability within acceptable bounds,⁶ and he wrote:

“The critical question … is not the nature of the damage in itself, whether physical or pecuniary, but whether the scope of the duty of care in the circumstances of the case is such as to embrace damage of the kind which the plaintiff claims to have sustained … The essential question which has to be asked in every case, given that damage which is the essential ingredient of the action has occurred, is whether the relationship between the plaintiff and the defendant is such – or, to use the favoured expression, whether it is of sufficient “proximity” – that it imposes upon the latter a duty to take care to avoid or prevent that loss which has in fact been sustained.”

Lord Keith of Kinkel also reviewed the pre-existing cases of Hedley Byrne & Co Ltd v Heller & Partners Ltd, Junior Books Ltd v Veitchi Co Ltd, Anns v Merton LBC, and D & F Estates Ltd v Church Commissioners for England, as well as others, and wrote:

“Consideration of the nature of the loss suffered in this category of cases is closely tied up with the question of when the cause of action arises. Lord Wilberforce in Anns (1978) regarded it as arising when the state of the building is such that there is present an imminent danger to the health or safety of persons occupying it. That state of affairs may exist when there is no actual physical damage to the building itself, though Lord Wilberforce had earlier referred to the relevant damage being material physical damage. So his meaning may have been that there must be a concurrence of material physical damage and also present or imminent danger to the health or safety of occupants. On that view there would be no cause of action where the building had suffered no damage (or possibly, having regard to the word ‘material’, only very slight damage) but a structural survey had revealed an underlying defect, presenting imminent danger. Such a discovery would inevitably cause a fall in the value of the building, resulting in economic loss to the owner. That such is the nature of the loss is made clear in cases where the owner abandons the building as incapable of being put in a safe condition (as in Batty), or where he chooses to sell it at the lower value rather than undertake remedial works. In Pirelli General Cable Works Ltd v Oscar Faber & Partners (1983) it was held that the cause of action in tort against consulting engineers who had negligently approved a defective design for a chimney arose when damage to the chimney caused by the defective design first occurred, not when the damage was discovered or with reasonable diligence might have been discovered. The defendants there had in relation to the design been in contractual relations with the plaintiffs, but it was common ground that a claim in contract was time-barred. If the plaintiffs had happened to discover the defect before any damage had occurred there would seem to be no good reason for holding that they would not have had a cause of action in tort at that stage, without having to wait until some damage had occurred. They would have suffered economic loss through having a defective chimney upon which they required to expend money for the purpose of removing the defect. It would seem that in a case such as Pirelli where the tortious liability arose out of a contractual relationship with professional people, the duty extended to take reasonable care not to cause economic loss to the client by the advice given. The plaintiffs built the chimney as they did in reliance on that advice. The case would accordingly fall within the principle of Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964). I regard Junior Books Ltd v Veitchi Co Ltd (1983) as being an application of that principle.

In my opinion it must now be recognised that, although the damage in Anns was characterised as physical damage by Lord Wilberforce, it was purely economic loss.

In D & F Estates Ltd v Church Commissioners for England (1989) both Lord Bridge of Harwich and Lord Oliver of Aylmerton expressed themselves as having difficulty in reconciling the decision in Anns with pre-existing principle and as being uncertain as to the nature and scope of such new principle as it introduced. Lord Bridge suggested that in the case of a complex structure such as a building, one element of the structure might be regarded for Donoghue v Stevenson purposes as distinct from another element, so that damage to one part of the structure caused by a hidden defect in another part might qualify to be treated as damage to ‘other property’. I think that it would be unrealistic to take this view as regards a building the whole of which had been erected and equipped by the same contractor. In that situation the whole package provided by the contractor would, in my opinion, fall to be regarded as one unit rendered unsound as such by a defect in the particular part. On the other hand where, for example, the electric wiring had been installed by a sub-contractor and due to a defect caused by lack of care a fire occurred which destroyed the building, it might not be stretching ordinary principles too far to hold the electrical sub-contractor liable for the damage. If in the East River case the defective turbine had caused the loss of the ship, the manufacturer of it could consistently with normal principles, I would think, properly have been held liable for that loss. But even if Lord Bridge’s theory were to be held acceptable, it would not seem to extend to the founding of liability upon a local authority, considering that the purposes of the Act of 1936 are concerned with averting danger to health and safety, not danger or damage to property. Further, it would not cover the situation which might arise through discovery, before any damage had occurred, of a defect likely to give rise to damage in the future.

Liability under the Anns decision is postulated upon the existence of a present or imminent danger to health or safety. But considering that the loss involved in incurring expenditure to avert the danger is pure economic loss, there would seem to be no logic in confining the remedy to cases where such danger exists. There is likewise no logic in confining it to cases where some damage (perhaps comparatively slight) has been caused to the building, but refusing it where the existence of the danger has come to light in some other way, for example through a structural survey which happens to have been carried out, or where the danger inherent in some particular component or material has been revealed through failure in some other building. Then there is the question whether the remedy is available where the defect is rectified, not in order to avert danger to an inhabitant occupier himself, but in order to enable an occupier, who may be a corporation, to continue to occupy the building through its employees without putting those employees at risk.

In my opinion it is clear that Anns did not proceed upon any basis of established principle, but introduced a new species of liability governed by a principle indeterminate in character but having the potentiality of covering a wide range of situations, involving chattels as well as real property, in which it had never hitherto been thought that the law of negligence had any proper place.

In my opinion there can be no doubt that Anns has for long been widely regarded as an unsatisfactory decision. In relation to the scope of the duty owed by a local authority it proceeded upon what must, with due respect to its source, be regarded as a somewhat superficial examination of principle and there has been extreme difficulty, highlighted most recently by the speeches in D & F Estates, in ascertaining upon exactly what basis of principle it did proceed. I think it must now be recognised that it did not proceed on any basis of principle at all, but constituted a remarkable example of judicial legislation. It has engendered a vast spate of litigation, and each of the cases in the field which have reached this House has been distinguished. Others have been distinguished in the Court of Appeal. The result has been to keep the effect of the decision within reasonable bounds, but that has been achieved only by applying strictly the words of Lord Wilberforce and by refusing to accept the logical implications of the decision itself. These logical implications show that the case properly considered has potentiality for collision with long-established principles regarding liability in the tort of negligence for economic loss. There can be no doubt that to depart from the decision would re-establish a degree of certainty in this field of law which it has done a remarkable amount to upset.”

It should be noted that while referring to the decision in Junior Books Ltd v Veitchi Co Ltd,⁷ Lord Bridge of Harwich expressed the view that there could be situations where “even in the absence of contract, there is a special relationship of proximity between builder and building owner which is sufficiently akin to contract to introduce the element of reliance so that the scope of the duty of care owed by the builder to the owner is wide enough to embrace purely economic loss”.

The House of Lords reviewed the decisions in Anns and Murphy in Department of the Environment v Thomas Bates and Sons Ltd and others.⁸ Here, the Department of the Environment was the underlessee of the upper nine storeys of an 11-storey office block built by Bates in 1970–71. Ten years later, in 1981–82, The Department of the Environment discovered that low-strength concrete had been used in the supporting pillars of the building and, although they could support the building’s existing load, they could not support its design load. As a result the Department of the Environment carried out remedial works and commenced proceedings against Bates for the costs incurred. The issue was whether a builder is liable in tort for the cost of making a building suitable for its intended purpose. It was held that the costs were not recoverable from the builder in tort as there was no damage to the building and no threat to health and safety. Here, the House of Lords was faced with a review of the decision in Anns and applied the holding in Murphy v Brentwood. Lord Keith pointed out the distinctions and wrote:

“… The foundation of the plaintiffs’ case is Anns v Merton London Borough Council (1978). That decision was concerned directly only with the liability in negligence of a local authority in respect of its functions in regard to securing compliance with building byelaws and regulations. The position of the builder as regards liability towards a remote purchaser of a building which suffered from defects due to carelessness in construction was touched on very briefly. However, it has since been generally accepted that similar principles govern the liability both of the local authority and of the builder.

It has been held by this House in Murphy v Brentwood District Council that Anns was wrongly decided and should be departed from, by reason of the erroneous views there expressed as to the scope of any duty of care owed to purchasers of houses by local authorities when exercising the powers conferred upon them for the purpose of securing compliance with building regulations. The process of reasoning by which the House reached its conclusion necessarily included close examination of the position of the builder who was primarily responsible, through lack of care in the construction process, for the presence of defects in the building. It was the unanimous view that, while the builder would be liable under the principle of Donoghue v Stevenson (1932) in the event of the defect, before it had been discovered, causing physical injury to persons or damage to property other than the building itself, there was no sound basis in principle for holding him liable for the pure economic loss suffered by a purchaser who discovered the defect, however such discovery might come about, and required to expend money in order to make the building safe and suitable for its intended purpose.

In the present case it is clear that the loss suffered by the plaintiffs is pure economic loss. At the time the plaintiffs carried out the remedial work on the concrete pillars the building was not unsafe by reason of the defective construction of these pillars. It did, however, suffer from a defect of quality which made the plaintiffs’ lease less valuable than it would otherwise have been, in respect that the building could not be loaded up to its design capacity unless any occupier who wished so to load it had incurred the expenditure necessary for the strengthening of the pillars. It was wholly uncertain whether during the currency of their lease the plaintiffs themselves would ever be likely to require to load the building up to its design capacity, but a purchaser from them might well have wanted to do so. Such a purchaser, faced with the need to strengthen the pillars, would obviously have paid less for the lease than if they had been sound. This underlines the purely economic character of the plaintiffs’ loss. To hold in favour of the plaintiffs would involve a very significant extension of the doctrine of Anns so as to cover the situation where there existed no damage to the building and no imminent danger to personal safety or health. If Anns were correctly decided, such an extension could reasonably be regarded as entirely logical. The undesirability of such an extension, for the reasons stated in Murphy v Brentwood District Council, formed an important part of the grounds which led to the conclusion that Anns was not correctly decided. That conclusion must lead inevitably to the result that the plaintiffs’ claim fails. I would dismiss the appeal.”

It should be noted that the views taken by the House of Lords are not universally held. A particularly good example of this is the approach taken in Canada. There, the view was that, as to municipal tort liability, Anns was correct and the Supreme Court of Canada quickly adopted the principles of the Anns case in The City of Kamploops v Nielsen,⁹ which was decided in 1984. Generally, the rule became that there was no private negligence duty owed by governments to take care in making their “policy” decisions, but such a duty may be owed in their “operational” activities. Mr Justice Linden of the Federal Court of Appeal, noted:¹⁰

“This development might prompt one to observe, paradoxically, that the rule that ‘the King can do no wrong’ has been changed to ‘the King can do only little wrongs’, the big wrongs still being immune from ordinary tort liability. Mr Justice Linden also makes the point that the scope of government liability in the United States is narrower than it is in Canada, as it is based on a formulation which expressly excludes discretionary decisions, something that is not found in Canadian statutes.”¹¹

In Canada, while it was noted that the House of Lords had taken a step back from Anns in Murphy v Brentwood District Council, this trend was not followed by the Supreme Court of Canada, which resolutely went forward to define the rules to be applied in distinguishing between policy and operational decisions, and as a result, government tortious liability.