SOCIETY OF CONSTRUCTION LAW

PURE ECONOMIC LOSS FOR DEFECTIVE BUILDINGS AFTER

HENDERSON v MERRETT SYNDICATES:
WHEN IS A BUILDING CONTRACT NOT AN ORDINARY
BUILDING CONTRACT?

Michael J. Barlow

A paper based on the Second Prize winning entry in the SCL Hudson Prize competition,
presented to the Society of Construction Law at a meeting in London on 4th April 2000

Michael J Barlow MA(Hons) LLB DipLP LLM is a Senior Solicitor with MacRoberts,
Solicitors, Edinburgh, specializing in non-contentious construction law

MARCH 2001
Introduction

"Let me take the analogy of the common case of an ordinary building contract,
under which main contractors contract with the building owner for the construction
of the relevant building and the main contractor sub-contracts with sub-contractors
or suppliers ..... If the sub-contracted work or materials do not in the result
conform to the required standard, it will not ordinarily be open to the building
owner to sue the sub-contractor or supplier direct ..... For there is generally no
assumption of responsibility by the sub-contractor or supplier direct to the building
owner, the parties having so structured their relationship that it is inconsistent with
any such assumption of responsibility."

Lord Goff in Henderson v. Merrett Syndicates Limited1

Following the well-known cases of D & F. Estates2 and Murphy v. Brentwood District Council,3
building owners have faced an almost insurmountable obstacle when seeking to recover, in
negligence, the costs of repairing defects in their buildings from the contractors and sub-
contractors whose negligent acts or omissions caused those defects. The costs of repairing
defective buildings have been treated by the courts as pure economic losses4 which cannot
generally be recovered in delict,5 except where the Hedley Byrne6 doctrine of negligent
misrepresentation could be invoked or where an especially close relationship between the parties
could be established.7 In the above quotation from the recent case of Henderson v. Merrett
Syndicates Limited, Lord Goff appears to sound the death knell for future delictual claims by
building owners against contractors and sub-contractors for negligently-performed work.

It is however far from clear that liability in negligence for defective buildings will simply die
away. On the contrary, for the reasons set out below, Henderson v. Merrett Syndicates Limited
may actually encourage parties involved in the construction industry to attempt recovery of pure
economic loss in negligence.

The aim of this study is to identify the ways in which building contractors and sub-contractors
might be liable in negligence for pure economic losses arising from defective buildings, despite

1
Henderson and Others v. Merrett Syndicates Limited and Others [1994] 3 All ER 506 per Lord Goff at
534.
2
D & F. Estates Limited & Others v. The Church Commissioners for England and Others [1989] AC 177;
41 BLR 12.
3
[1990] 2 All ER 908.
4
Pure economic loss can be defined as financial loss that arises in the absence of personal injury to persons
or physical damage to property, apart from damage to the defective property itself. For present purposes,
the costs of repairing a negligently-constructed building, as opposed to the cost of repairing physical
damage caused to other property by that defective building, are pure economic losses.
5
This study is written from the perspective of Scots law and Scots terminology is therefore employed, e.g.
reference is made to delict rather than tort. It is however considered that many of the views expressed in
this study are capable of wider application, owing to the very high degree of similarity between the Scots
and English laws of negligence in this field.
6
Hedley Byrne & Company Limited v. Heller & Partners Limited [1964] AC 465; [1963] 2 All ER 575,
HL.
7
As was held to be the case in Junior Books v. The Veitchi Company Limited 1982 SC (HL) 244; 1982
SLT 492.

2
D. & F. Estates, Murphy and the dicta of Lord Goff in Henderson.8 Since most construction
projects involve a number of parties linked together by a web of contracts, it is necessary to
consider the impact of those contracts on the existence of a duty of care to prevent pure economic
loss.

It will be argued that the decision in Henderson lends support to delictual claims that are made by
one party against another party who is indirectly linked to the first party by a contractual chain,
for example where an Employer seeks to recover pure economic loss from a Sub-contractor. The
search is therefore likely to continue for a sufficiently “special” relationship for liability for pure
economic loss to arise. In short, pursuers will attempt to demonstrate that the building contracts
with which they are involved are more than just the “ordinary building contracts” described by
Lord Goff in Henderson.

Overview of the Development of the Duty of Care in Pure Economic Loss Scenarios

The development of the law concerning pure economic loss has been discussed at length
elsewhere9 and for the purposes of this study only a brief overview is considered necessary.10

The law traditionally adopted a restrictive approach to pure economic loss. For some time
following the famous case of Donoghue v. Stevenson,11 it was thought that pure economic losses
were unrecoverable in delict. Then, in 1964, the decision in Hedley Byrne v. Heller12 permitted
the recovery, in principle, of pure economic loss where a negligent misrepresentation had been
made by bankers regarding the financial standing of a company that subsequently went into
liquidation. Although Hedley Byrne was initially treated as being limited to instances of
negligent misrepresentation, it was later to be invoked as the underlying basis for a duty of care to
prevent pure economic loss in much wider circumstances.13

In 1972, the Court of Appeal held in Dutton14 that a local authority was liable in negligence to the
second owner of a house for failing to take reasonable care to see that the foundations were
constructed in accordance with building byelaws. In 1978, in Anns,15 it was held that a local
authority might be liable in negligence for the pure economic losses suffered by long lessees of
maisonettes after the authority negligently failed to discover that the foundations were
inadequate. In 1982, it was decided in Junior Books16 that a nominated sub-contractor might be
liable in delict for the pure economic loss suffered by the building owner in replacing defective
flooring.

8
This study focuses on the potential liability of building contractors and sub-contractors. Accordingly, it is
not intended to deal directly with the possible liabilities of the various designers and other professionals
who may be involved in construction projects, nor with negligent misrepresentation.
9
See for example Thomson (1994); Keating on Building Contracts (1995), chapter 7; Hudson’s Building
and Engineering Contracts (1995), section 12.
10
The existence of a duty of care of the relevant scope is an essential pre-condition of delictual liability for
pure economic loss. Since the concept of the duty of care is used by courts as a threshold device to allow
or deny claims in principle, it is the duty of care upon which this study will focus.
11
1932 SC (HL) 31.
12
op. cit. at footnote 6.
13
See for example Junior Books, Henderson v. Merrett Syndicates and White v. Jones, discussed below.
14
Dutton v. Bognor Regis UDC [1972] 1 QB 373.
15
Anns v. London Merton Borough Council [1978] AC 728.
16
Junior Books v. The Veitchi Co. Limited, op. cit. at footnote 7.

3
In D. & F. Estates,17 however, the earlier case of Anns was doubted and the decision in Junior
Books was treated as limited to its own facts. The House of Lords rejected a claim by tenants
against contractors arising from defective plasterwork. Subsequently, in a historic seven-judge
decision, the House of Lords in Murphy18 overruled Dutton and Anns. The plaintiff had suffered
a reduction in the value of his house owing to defective foundations and sued the local authority
for negligently approving the design. The House of Lords rejected the claim for pure economic
loss on the ground that to allow recovery would lead to an exceedingly wide category of claims
relating to defective buildings or moveable goods, effectively introducing product liability and
transmissible warranties of quality into the law of negligence. Only where a “special relationship
of proximity” existed between the parties could liability in pure economic loss arise.

The approach taken in D. & F. Estates and Murphy remains the starting point of any discussion
of pure economic loss in the construction context today, although the law on the duty of care has
continued to evolve.19 In Marc Rich,20 it was held that for a duty of care to arise, in addition to
the established requirements of foreseeability and proximity, it had to be fair, just and reasonable
for liability to be imposed.21 Hedley Byrne was then revitalised,22 being invoked as the
underlying basis of liability for pure economic loss. In Henderson and White v. Jones,23 the
traditional language concerning the need for “reliance” gave way to the wider concept of a
“voluntary assumption of responsibility” by the defender.

Despite the recent developments in the law and the new emphasis on the “assumption of
responsibility”, in practical terms the position now is generally considered to be the same as in
Murphy, i.e. no duty of care will arise except where a sufficiently special relationship exists
between the parties. This remains the case even though the Murphy approach has not been
universally accepted throughout the Commonwealth.24

The Impact of Henderson v. Merrett Syndicates

The requirement for a “special relationship” has traditionally been a difficult hurdle to overcome
in the construction industry, since the contractual structure has been treated as a factor that
negatives delictual liability between building owners and sub-contractors.25 Given that the search
17
D. & F. Estates Limited and Others v. The Church Commissioners for England and Others, op. cit. at
footnote 2.
18
Murphy v. Brentwood District Council, op. cit. at footnote 3.
19
Notably in Caparo Industries plc v. Dickman [1990] 1 All ER 568; Spring v. Guardian Assurance plc
[1994] 3 All ER 129, HL; Henderson and Others v. Merrett Syndicates Limited and Others [1994] 3 All ER
506; Marc Rich & Co v. Bishop Rock Marine Co. Limited and Others [1995] 3 All ER 307; and White v.
Jones [1995] 1 All ER 691.
20
Marc Rich & Co v. Bishop Rock Marine Co. Limited and Others, op. cit.
21
These requirements apply to all cases of negligence, irrespective of the nature of the harm suffered by the
injured party - although as demonstrated by the case of BT v. Thomson [1999] BLR 35, in cases of
straightforward physical damage, it will normally be fair, just and reasonable for liability to be based
primarily on the traditional Donoghue v. Stevenson neighbourhood principle (for which see 1932 SC (HL)
31 per Lord Atkin at 44).
22
Notably in Henderson v. Merrett Syndicates and White v. Jones.
23
op. cit.
24
Notably in Canada: Winnipeg Condominium No. 36 v. Bird Construction Company (1995) 121 DLR
(4th) 193; Australia: Bryan v. Maloney (1995) 69 ALJR 375; and New Zealand: Invercargill City Council v.
Hamlin [1996] 1 All ER 756; (1995) 11 Const. LJ 285.
25
See for example Simaan General Contracting Co. v. Pilkington Glass Limited (No. 2) [1988] 1 All ER
791, where Bingham LJ stated (at 803), “I do not … see any basis on which [the nominated suppliers]
could be said to have assumed a direct responsibility for the quality of the goods to [the building owners];

4
for the “special relationship” has proved so elusive in the context of construction industry, are
Lord Goff's comments in Henderson just another nail in the coffin of pure economic loss
originally constructed by D & F Estates and Murphy?

It is submitted that the decision in Henderson has precisely the opposite effect.

Firstly, Lord Goff said only that liability would not ordinarily arise, and that there was generally
no assumption of responsibility by the sub-contractor. As Cartwright observes, “This approach is
significant. It is not saying that there is as a matter of principle no liability for the building
owner’s economic loss caused by negligent acts. Instead, all turns on whether the duty is
consistent with the contractual structure, as a matter of fact.”26

Secondly, the crucial result in Henderson was that the House of Lords found the sub-agents (as
well as the agents) liable directly to the principals for negligently-inflicted pure economic losses -
despite the sub-agents’ argument that they had structured their contractual relationships so as to
exclude any duty of care to the indirect names.27 The Henderson case therefore lends support to
delictual claims made by one party against another party who is indirectly linked to the first party
by a contractual chain. Henderson therefore reinforces Junior Books, despite Lord Goff’s rather
dismissive reference to that case.28 What light, then, is shed by Henderson on the circumstances
in which a defender may now be liable for negligently-inflicted pure economic loss suffered by a
pursuer further up the contractual chain?

In contrast to Junior Books, which clearly explained the specific factors that gave rise to a special
relationship of proximity,29 the reasons for holding the sub-agents in Henderson liable to the
principals are at best obscure. In a passage which Thomson generously describes as “curious”,30
Lord Goff explains that the contractual chain in Henderson was “most unusual”.31 No convincing
explanation is given as to why the contractual chain was so unusual. Lord Goff did say that,

“... the present case presents the unusual feature that claims against managing
agents, whether by the members' agents under the sub-agency agreement or by
indirect names in tort, will in both cases have the purpose, immediate or ultimate,
of obtaining compensation for the indirect names.”32 (Emphasis added)

With respect, this scenario hardly seems unusual. One could argue that many claims made by
contractors against their sub-contractors have “the purpose, immediate or ultimate” of obtaining

such a responsibility is, I think, inconsistent with the structure of the contract the parties have chosen to
make.”
26
Cartwright, John “Liability in Negligence: New Directions or Old?” (1997) 13 Construction Law Journal
P.157 at P.163.
27
In Henderson (at 533) the sub-agents sought to rely on Simaan General Contracting Co. v. Pilkington
Glass Limited (No. 2), op. cit.
28
Lord Goff remarked that “some difficulty has been created by the decision of your Lordships' House in
Junior Books Limited v. The Veitchi Co Limited”. He did however consider it unnecessary to reconsider
Junior Books for the purposes of the Henderson appeal: [1994] 3 All ER 506 at 535. It does remain
questionable whether on the facts of Junior Books, a special relationship of proximity truly existed. It may
be that the House of Lords succumbed too easily to the proximity test, as was suggested by Lord Goff in
Maloco v. Littlewoods Organisation Limited: 1987 SLT 425, as noted by Stewart (1998), p.78.
29
1982 SLT 492 per Lord Roskill at 501.
30
Thomson, “ Delictual Liability for Pure Economic Loss: Recent Developments”, (1995) SLT 139 at 144.
31
[1994] 3 All ER 506 per Lord Goff at 534.
32
[1994] 3 All ER 506 per Lord Goff at 534.

5
compensation for the Employer, since such claims are often a way of passing liability down the
contractual chain.

It is recognised that Lord Goff considered that, “ It cannot ... be inferred from the present case
that other sub-agents will be held directly liable to the agent's principal in tort”.33 But in the
absence of a proper explanation as to why the circumstances in Henderson were so unusual, the
decision in Henderson can only encourage parties involved in the construction industry to attempt
recovery of pure economic loss.

The prospects of a renewed search for an assumption of responsibility may have been boosted
further still by the House of Lords’ decision in White v. Jones,34 in which disappointed
beneficiaries successfully sued a solicitor who had delayed in preparing a new will for a testator,
with the result that the testator died before the new will could be executed. This decision was
arrived at despite the court’s implicit recognition that in such cases, there might be no
“concomitant reliance” by the beneficiaries, who might be entirely unaware of the testator’s
intentions.35 Of particular note is the judgement of Lord Browne-Wilkinson, who placed much
importance on the fact that it was considered fair, just and reasonable to impose liability.36 It can
be argued that by failing to require “concomitant reliance”, White v. Jones was “A Byrne Too
Far”.37 For present purposes, the strong emphasis in White v. Jones on the need to do practical
justice could be employed to allow the requirements for a “special relationship” to be more easily
satisfied in any particular case.

If, then, the House of Lords has re-opened the possibility of pure economic loss claims in delict,
in what circumstances might a duty of care arise in the context of defective buildings? Or, in the
words of Lord Goff,38 what circumstances will mean that a particular relationship is not just an
“ordinary building contract”, but a somewhat closer relationship in which the defender may be
held liable for the pursuer’s pure economic losses?

In order to help identify the circumstances in which a delictual claim might succeed, it is
necessary to consider the issue of concurrent liability in contract and delict. Most construction
projects involve a contractual chain of some description, whether a traditional Employer/Main
Contractor/Sub-Contractor chain, or a succession of contracts such as where the building is built
for a developer and subsequently leased to commercial tenants. The impact of those contracts on
any duty of care must be considered, since the parties may have structured their relationship in a

33
[1994] 3 All ER 506 at 534.
34
op. cit. at footnote 19.
35
In the particular circumstances of White v. Jones, the disappointed beneficiaries were family members
who had been involved in instructing the solicitor, thus giving rise to proximity. The decision did however
proceed on the basis of the “general case” where no personal contact had taken place between the solicitor
and the intended beneficiaries: [1995] 1 All ER 691 per Lord Mustill at 722. (Hodgson notes that the
reference in All ER to personal “contract” is erroneous, and that the report in WLR refers correctly to
personal “contact”: Hodgson, “Hedley Byrne - A New Sacred Cow?”, Nottingham Law Journal, Volume 4,
Part 1, 1995.)
36
Lord Browne-Wilkinson stated that, “To my mind it would be unacceptable if, because of some technical
rules of law, the wishes and expectations of testators and beneficiaries generally could be defeated by the
negligent actions of solicitors without there being any redress.” [1995] 1 All ER 691 at 718.
37
This phrase is used by Hodgson (1995), op. cit. at p.12.
38
Lord Goff in Henderson v. Merrett Syndicates op. cit. at 534.

6
manner that is inconsistent with an assumption of responsibility.39 Concurrent liability in delict
and contract is discussed below.

Concurrent Liability in Contract and Delict

Concurrent liability can be defined as the situation where a defender is liable both in contract and
in delict for the same matter, whether or not to the same pursuer. The act or omission giving rise
to liability must constitute both a breach of contract and a breach of a delictual duty of care.

Traditionally, the courts were reluctant to hold that concurrent liability for pure economic losses
could arise, preferring parties to pursue claims in contract rather than in negligence.40 As one
New Zealand judge rather colourfully remarked, “if the parties have chosen a contractual bed
they should ordinarily be expected to lie in it alone, without the seductive company of tort”.41

In Henderson v. Merrett Syndicates, however, the House of Lords moved away from the
restrictive approach adopted in a number of earlier cases. The decision in Midland Bank Trust
Company Limited42 was seen by Lord Goff as particularly important. In that case, following a
full examination of the case law, Oliver J. had held that a solicitor could be liable to his client
both in contract and in negligence. Oliver J. did not see why the principle in Hedley Byrne
should not apply merely because the relationship of dependence and reliance was a contractual
relationship rather than a gratuitous assumption of responsibility.43 This reasoning was expressly
approved by Lord Goff in Henderson, who concluded that,

“Approached as a matter of principle … it is right to attribute to [an] assumption

of responsibility, together with its concomitant reliance, a tortious liability, and
then to inquire whether or not that liability is excluded by the contract because
the latter is inconsistent with it”.44 (emphasis added)

Lord Browne-Wilkinson arrived at a very similar conclusion.45 Accordingly, the current position
is that concurrent liability for pure economic loss is permitted, provided that allowing delictual
claims would not be “inconsistent” with the contract.

The test of whether or not a contract is “inconsistent” with an assumption of responsibility does
however provide only limited practical assistance when trying to determine whether a particular
defender may be liable for pure economic loss.

This is partly because the decision in Henderson is relatively recent, so the courts have had little
opportunity to apply Lord Goff’s test for concurrent liability. Furthermore, as noted earlier, the
decision in Henderson is itself a source of uncertainty because the court allowed claims by

39
As set out in (for example) Bingham LJ in Simaan General Contracting Co. v. Pilkington Glass Limited
(No. 2) op. cit. at footnote 25, p. 803, and Lord Goff in Henderson and Others v. Merrett Syndicates
Limited and Others, op. cit. at 534.
40
See for example Bean v. Wade (1885) 2 TLR 157; Groom v. Crocker [1938] 2 All ER 394 and Tai Hing
Cotton Mill Limited v. Liu Chong Bank Limited [1985] 2 All ER 947 per Lord Scarman at 957.
41
Simms Jones Limited v. Protochem Trading New Zealand Limited [1993] 3 NZLR 369 per Tipping, J. at
381 (in the context of product liability) quoted in Burrows, "Solving the Problem of Concurrent Liability",
Current Legal Problems 1998, p. 103.
42
Midland Bank Trust Company Limited v. Hett Stubbs & Kemp (a firm) [1978] 3 All ER 571.
43
[1978] 3 All ER 571 at 591.
44
[1994] 3 All ER 506 at 532.
45
[1994] 3 All ER 506 per Lord Browne-Wilkinson at 544.

7
principals against sub-agents in an insurance underwriting setting, whilst indicating that an almost
identical contractual structure in the form of an “ordinary building contract” would rule out
concurrent liability.

Clearly, therefore, in order to identify the circumstances in which a duty of care to prevent pure
economic loss may arise, it is necessary to consider the contractual factors that may impact on
concurrent liability. For convenience, these can be divided into two categories – firstly, the
contractual structure, and secondly, the content of the contracts.

Contractual Structure

For current purposes, what is of primary interest in the Henderson decision is the potential
liability in negligence of A, who has entered into a contract with B, to a third party, C, who is not
a party to the contract between A and B. C may either have a separate contract with B, as part of
an existing contractual chain, or may have no direct contractual relationship with either party.
Each scenario will be examined in turn below.

(a) Existing Contractual Chains

The controversial case of Junior Books, discussed earlier in this study, is perhaps the best-known
case of delictual liability in the context of an existing contractual chain – ironically because
recovery was allowed instead of being refused.

On the other hand, Simaan General Contracting Co.46 and Scott Lithgow v. GEC Electrical
Products Limited47 provide illustrations of the rejection of concurrent liability owing to the
contractual structures involved. In Simaan, Bingham LJ considered the contractual structure was
inconsistent with an assumption of responsibility by a sub-contractor for the quality of the goods.
Similarly, in Scott Lithgow, Lord Clyde rejected claims in delict against sub-contractors for the
pure economic losses arising from the sub-contractors’ defective wiring, emphasising that the
parties had adopted a contractual chain, separated by a main contractor, which pointed away from
a duty of care.

Given the existence of apparently conflicting views on the impact of a contractual chain on
concurrent liability, it is relevant to ask whether, in general, the contractual chain increases the
distance between parties or instead brings them closer together. In other words, in a contractual
chain, are parties at arms' length, or hand in hand? The answer to this important question,
however, seems to depend on one's personal view of the proverbial container as being either half-
full or half-empty.

In Junior Books, for example, the fact that The Veitchi Co. Limited was a Nominated Sub-
Contractor was thought by the House of Lords to be an important factor in favour of proximity.
Lord Roskill considered that the parties were “in almost as close a commercial relationship … as
it is possible to envisage short of privity of contract”.48 Even Lord Brandon, who dissented from
the decision of the majority, stated that,

46
Simaan General Contracting Co. v. Pilkington Glass Limited (No. 2), op. cit. at footnote 25.
47
1992 SLT 244. See also Comex Houlder Diving Limited v. Colne Fishing Co Limited (No 2) 1992 SLT
89 per Lord Prosser.
48
1982 SLT 492 at 499.

8
 “ it is difficult to imagine a greater degree of proximity, in the absence of a direct
contractual relationship, than that which, under the modern type of building
contract, exists between a building owner and a sub-contractor nominated by him
or his architect.”49

Other commentators, however, took the opposite view. Duncan Wallace, for example, saw the
Employer/Nominated Sub-Contractor structure in Junior Books as an indication that the parties
had used the contractual structure to deliberately distance themselves from each other:

“… the use of the nomination procedures in a construction context is a clear

indication of the owner's desire to distance himself from the sub-contractor, once
selected, and so avoid any responsibility to the main contractor for a sub-
contractor's faulty performance of his obligations, or conversely any direct
liabilities of the owner to the sub-contractor.”50

Duncan Wallace's view of the nominated sub-contracting structure as a means of distancing the
parties also gained support from the later case of Muirhead v. Industrial Tank Specialities
Limited.51

What is conspicuous by its absence, however, is a clear statement in any of the relevant cases
about the impact on proximity of contractual chains in general. The question is simply left open.
All that can be said with certainty is that the existence of a contractual chain is “a relevant
consideration” in ascertaining whether or not delictual liability may arise.52 The precise effect of
the “contractual context” on the delictual duty would seem to depend on the particular facts of
each case, whatever that may mean. It may be that what really matters here is simply policy,
where courts will try to do practical justice without offending against the floodgates principle.53

Before moving on to consider the effect of the content of contracts on concurrent liability, it is
appropriate to consider the impact of a contractual chain where, instead of all of the links being
formed as part of a single process (e.g. during the construction phase of a project), the links were
formed separately (e.g. where claims are made by subsequent owners or tenants). This issue is
examined below.

(b) Subsequent Contracts

In certain instances, some of the contracts linking the parties connected with a defective building
may have been entered into after the negligent acts were committed.54 The case law shows that
claims by building owners have not fared well. In D. & F. Estates, for example, the House of
Lords held that no duty of care arose since the facts did not support the existence of a sufficiently

49
ibid. at 504. Whilst Lord Brandon considered that sufficient proximity existed, he argued that recovery
should be denied on policy grounds.
50
Duncan Wallace (1991), op cit. at 242.
51
In the Muirhead case, Goff LJ (as he then was) stated that the analysis in Junior Books in relation to
nominated sub-contracting was “difficult to reconcile with the factual situation in that case, in which the
parties had deliberately structured their contractual relationship in order to achieve the result that (apart
from any special arrangements) there would be no direct liability inter se”. [1986] QB 507 at 528.
52
Per Lord Clyde in Scott Lithgow v. GEC Electrical Products Limited op. cit. at 253.
53
i.e. the risk of “liability in an indeterminate amount for an indeterminate time to an indeterminate class”
(per Cardozo CJ in Ultramares Corporation v. Touche (1931) 255 NY 170 at 179).
54
e.g. where a developer builds an office block with the intention of leasing it to commercial tenants
immediately after completion.

9
proximate relationship.55 A recent Scottish example of a pure economic loss claim in the context
of a contractual chain where links were not formed as part of a single process is Strathford East
Kilbride Limited.56 In that case, it was held that architects did not owe subsequent tenants a duty
of care to prevent pure economic losses arising out of structural defects in the premises.57

Despite cases such as D. & F. Estates and Strathford East Kilbride Limited, the question does
arise as to whether a contractor might be held to have assumed responsibility to a purchaser or
tenant if the particular facts of case so permitted. This might occur where, for example, a main
contractor had been made fully aware, prior to entering into the Building Contract, that when the
building was complete it would be sold to a known purchaser or let to a known tenant. It is
submitted that following Henderson and White v. Jones, this possibility can no longer be ruled
out. It may be just a matter of time before subsequent purchasers or tenants succeed in arguing
that in the particular circumstances of the contractual chain concerned, a contractor had assumed
responsibility for their economic interests.

Having considered the possible impact of contractual structures on concurrent liability, it is

appropriate to turn to the contractual terms themselves.

Content of the Contracts

In addition to the impact of contractual structures on concurrent liability, the content of the
contracts is also important.58 Accordingly, in ascertaining whether concurrent liability may arise,
it is necessary to examine the relevant contracts to establish whether a delictual remedy is
permissible. There is however little guidance in the case law as to what sort of contractual terms
will exclude concurrent liability in delict, apart from the obvious example of express exclusion
clauses. As Burrows noted,

“Where there is an express exclusion clause, the acceptance and application of

this principle is straightforward and understood. Much more problematic, and
central to the concurrent liability dilemma, is whether the parties to the contract
have impliedly excluded liability in tort ...”. 59

These matters are considered below.

(a) Implied Exclusion of Delictual Liability

The case law provides little assistance on the implied exclusion of delictual liability, other than
general statements about “inconsistency” between the contract and the existence of delictual
remedies. One example of an implied exclusion of liability is the case of Greater Nottingham
Cooperative Society Limited,60 where a building owner sued a piling sub-contractor in tort even
though the sub-contractor had granted a collateral warranty in favour of the owner. Whilst the
warranty contained undertakings as to the design of the Sub-Contract Works and the selection of

55
41 BLR 12 per Lord Bridge at 25.
56
Strathford East Kilbride Limited v. H.L.M. Design Limited 1999 SLT 122.
57
See in particular Lord MacLean’s judgement at 124.
58
See for example Lord Browne-Wilkinson in Henderson and Others v. Merrett Syndicates Limited and
Others, op. cit. at 544.
59
Burrows, "Solving the Problem of Concurrent Liability", Current Legal Problems 1998, p. 111.
60
Greater Nottingham Cooperative Society Limited v. Cementation Piling and Foundations Limited and
Others [1988] 2 All ER 971.

10
materials and goods, no undertakings existed regarding the manner in which the work was to be
executed. The owner’s claim in tort related to the negligent manner in which the piling scheme
had been executed by the sub-contractor. The Court of Appeal rejected the claim, emphasising
that because the collateral warranty was silent as to the manner in which the work was executed,
the parties must have intended that no liability should arise.61 The Greater Nottingham case
shows that a court might consider that a defender ought not to be liable in negligence for a matter
for which he had deliberately assumed no liability in contract.62

Another way in which the parties might be taken to have impliedly excluded liability in delict is
where the parties have entered into standard form contracts whose terms imply an allocation of
risk established throughout the industry, accompanied by suitable insurance arrangements. This
approach was taken in the Marc Rich case. In a claim for loss of cargo, Lord Steyn concluded
that the recognition of a duty of care would be unfair, unjust and unreasonable because it would
inter alia be inconsistent with the bargain between the shipowners and cargo owners based on an
internationally agreed contractual structure.63 Similarly, in the construction context, in Norwich
City Council it was held that the JCT 63 Building Contract implied an exclusion of tortious
liability for physical damage caused by sub-contractors. 64 Whilst these cases concerned physical
loss or damage,65 it is submitted that the courts will be reluctant to disturb established commercial
arrangements based on standard forms of contract.

In general, however, in the absence of a significant body of post-Henderson case law on the
implied exclusion of delictual liability, it is difficult to define with any precision what the
parameters of implied exclusions of liability may be. The position on express exclusion clauses is
somewhat clearer, and is considered below.

(b) Express Exclusion Clauses

Owing to the very nature of delictual claims for pure economic loss, there will not usually be a
contract directly connecting the pursuer and the defender in which an exclusion clause could be
contained. Instead, there may be an exclusion clause in the Sub-contract between the Contractor
and the Sub-contractor, or in the main contract between the Employer and the Contractor.

Given the restrictive approach usually adopted by the courts towards pure economic loss, it is
unlikely that contractual exclusion clauses can be outflanked by claims in negligence.66 It would
clearly be unfair to a sub-contractor if the basic conditions on which the sub-contractor had

61
See the judgement of Purchas LJ, [1988] 2 All ER 971 at 984.
62
This is considered to be the case even though some parts of the judgement in the Greater Nottingham
case were based on a restrictive view of concurrent liability that has now been superseded by Henderson v.
Merrett Syndicates.
63
[1995] 3 All ER 307 at 332.
64
Norwich City Council v. Harvey [1989] 1 WLR 828. See also on this topic Aberdeen Harbour Board v.
Heating Enterprises (Aberdeen) Limited 1990 SLT 416 and Scottish Special Housing Association v.
Wimpey Construction UK Limited [1986] AC 57. With regard to the Norwich case, the subsequent case of
British Telecommunications plc v. James Thomson and Sons (Engineers) Limited demonstrated that such
an exclusion was not implicit in the more recent JCT 80 form of Building Contract in relation to physical
loss or damage: see [1999] BLR 35.
65
The loss in Marc Rich has sometimes been described as economic, but the loss was clearly physical,
involving the loss of cargo at sea.
66
Provided, perhaps, that the terms of the exclusion clause are sufficiently wide to exclude liability in
negligence. Exclusion clauses may also be challenged under the Unfair Contract Terms Act 1977 or at
common law.

11
originally agreed to do the work were simply ignored. As Bingham LJ stated in Simaan General
Contracting Co., “... if the duty [in tort] is unaffected by the conditions on which the seller
supplied the goods, it is in my mind unfair to him and makes a mockery of contractual
negotiation”.67

An exclusion clause contained in a main contract, which purports not only to restrict the liability
of the contracting party but also the liability of sub-contractors, will probably protect the sub-
contractor from delictual claims by the building owner.68 Where a sub-contractor attempts to rely
on an exclusion clause contained in the main contract, the benefit of the exclusion clause must
however be transferred to the sub-contractor. In Scots law, there are potential difficulties under
the doctrine of jus quaesitum tertio with the notion that exclusion clauses can effectively confer a
benefit on third parties.69 Nevertheless, it is considered that conferring immunity on a sub-
contractor is clearly a benefit which can probably be described as a “right” for the purposes of
jus quaesitum tertio.70 The position in English law is not directly comparable owing to the
emphasis on privity of contract, but this will change if the Contracts (Rights of Third Parties)
Bill71 is enacted.72

Recovery under Contract

Before concluding, no discussion of liability for defective buildings would be complete without
recognising the importance of the recent cases of St Martins,73 Darlington Borough Council74 and
Panatown.75 Notably, in St Martins,76 it was held that where a building owner had assigned the

67
Simaan General Contracting Co. v. Pilkington Glass Limited (No. 2) op. cit. at 782. Similarly, in the
subsequent case of Muirhead v. Industrial Tank Specialities Limited, op. cit., it was held that the plaintiff
customer was bound by a clause in the contract between the manufacturer and the supplier that limited the
manufacturer's liability: [1986] QB 507.
68
See for example the view of Duncan Wallace (1991), op cit. at 242. Even in Junior Books, which has
often been criticised for cutting across a contractual structure, the possible effect of such a clause was
recognised by Lord Roskill: 1982 SLT (HL) 492 at 501.
69
The right in a jus quaesitum tertio is usually to receive a positive performance, as opposed to an
exemption of liability. For example, in Hill Samuel & Co. Limited v. Laing 1989 SC 301 at 318, Lord
Justice-Clerk Ross doubted whether jus quaesitum tertio could be applied to exemption clauses. Also, the
doctrine involves the concept of irrevocability and requirements such as delivery (Carmichael v.
Carmichael's Executrix 1920 SC (HL) 195). See the Stair Memorial Encyclopaedia, Volume 15
“Obligations”, Paragraph 846.
70
For example, in Aberdeen Harbour Board v. Heating Enterprises (Aberdeen) Limited 1990 SLT 416, the
court recognised that an exclusion clause in a contract could benefit a third party, provided that was the
intention of the contracting parties. See also the Stair Memorial Encyclopaedia, op. cit., Paragraph 846.
71
For a useful summary of the Bill’s provisions, see Wrzesien, “The End of the Line for Privity of
Contract”, Construction Law, Volume 10, Issue 3, April 1999, pp. 21-23.
72
It is the writer’s understanding that the Joint Contracts Tribunal intends to exclude the application of the
Bill, if enacted, from the JCT family of contracts. This would clearly have a significant practical impact on
the Bill’s application to the construction industry, though the extent (if any) to which this decision would
affect the exclusion of sub-contractors’ liability is not yet apparent.
73
Linden Gardens Trust Limited v. Lenesta Sludge Disposals Limited and St Martins Property Corporation
Limited v. Sir Robert McAlpine Limited [1994] 1 AC 85.
74
Darlington Borough Council v. Wiltshier Northern Limited [1995] 1 WLR 68.
75
Alfred McAlpine Limited v. Panatown Limited (1998) Const. L.J. 267. This case has been appealed to
the House of Lords but at the time of writing, the decision has not yet been issued.
76
Recovery was permitted in St Martins but not in Linden Gardens, since in Linden Gardens the assignor
was not a party to the action and the assignees were unable to recover owing to the contractual prohibition
on assignment.

12
building contract to an assignee, the assignor could recover from the contractor the repair costs
incurred by the assignee, since it was in the contemplation of the parties when they entered into
the building contract that ownership of the building would pass from the developer to third
parties, so the assignor would need to sue on the assignee’s behalf. The decisions in these three
cases were based on contract law and a detailed discussion of the judgements would accordingly
be beyond the scope of this study.77 Nevertheless, these cases demonstrate that the courts are
increasingly willing to adopt innovative legal solutions to allow claims against negligent builders
by subsequent owners.

Summary

In sum, it has been argued that despite D. & F. Estates, Murphy and the views expressed by Lord
Goff in Henderson concerning the “ordinary building contract”, the decision in Henderson is
likely to lead to a renewed search for a special relationship between the building owner and the
negligent contractor or sub-contractor. Far from supporting the rejection of future claims for pure
economic loss, Henderson actively encourages claims in negligence because the judgments fail to
provide a convincing explanation as to why the contractual relationships were so unusual as to
justify the imposition of liability. Henderson also reinforces the earlier case of Junior Books,
raising the prospect that building owners will resurrect that case in support of their claims. In
order to help identify the circumstances in which delictual liability might arise in the context of
construction projects, the law on concurrent liability in contract and delict has been examined. It
has been noted that the test for concurrent liability set out in Henderson is of a very general
nature, so that the impact of a contract on the duty of care is difficult to assess with any precision.
The possible effect of differing contractual structures has been examined, both for existing
contractual chains and for contractual chains that develop over a more prolonged period. It has
been concluded that in both situations, claims in negligence for pure economic loss may well
succeed against a background of contractual chains, depending on the particular circumstances
involved. The potential impact of the contractual terms themselves has also been considered.
Whilst the position on implied exclusions of delictual liability is not yet clear, given the relatively
recent nature of the decision in Henderson, it is considered that express exclusions of liability
ought generally to be effective. Finally, the significance of the St Martins, Darlington Borough
Council and Panatown cases was noted since they demonstrate the courts’ willingness to adopt
innovative solutions to allow claims by subsequent owners against negligent builders.

Conclusions

In conclusion, almost ten years after the decision in Murphy v. Brentwood District Council, the
law on pure economic loss has still not settled. Whilst it is difficult to see how the main thrust of
Murphy could be reversed in the absence of intervention by the legislature, the decision in
Henderson v. Merrett Syndicates will provide new impetus to the search by hopeful pursuers for
relationships that will be deemed sufficiently “special” for an assumption of responsibility to
arise on the part of building contractors or sub-contractors. The problem will be to determine the
impact on the duty of care of the complex chains of contracts that are characteristic of
construction projects. The law on concurrent liability has not yet developed to a point where
truly accurate predictions can be made about the impact of such contracts in any particular set of
circumstances. With reference to the question posed in the title of this study, “When is a building
contract not an ordinary building contract?”, the answer must at this stage be the rather unhelpful

77
For a more detailed discussion of these cases, see Duncan Wallace (1993) 109 LQR 82, (1994) 110 LQR
42 and (1999) 15 Const. L.J. 245.

13
response: “We must wait and see.” But following Henderson, we can expect the courts to provide
us with more comprehensive answers shortly.

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