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Liability for losses following a downturn

The recent Court of Appeal decision in John Grimes Partnership Ltd v Gubbins provides a further twist in a long line of case law dealing with remoteness of damage in commercial cases. In considering this decision. Robert Calnan looks at the implications for construction professionals and their insurers.

John Grimes v Gubbins

The Court of Appeal decision in John Grimes v Gubbins is the most recent twist to a long line of case law dealing with remoteness of damage in commercial cases. In Grimes, the Defendant engineer was held liable for losses arising out of a downturn in the property market.

The Achilleas

This decision raised issues of contrast alongside The Achilleas ([2008] UKHL 48), the shipping matter which had previously been considered to place restrictions on the extent of recovery of losses caused by changes in market conditions, or other factors which made the loss unforeseeable.

In The Achilleas, the Defendant charterer returned a ship three days after its charter had expired. The Claimant ship-owner had agreed to charter the ship at a higher rate but as a result of the late delivery and severe volatility in market rates was only able to charge a lower rate, so claimed from the charterer the difference between the two rates, over the course of the whole subsequent charter.

The House of Lords held that the claimed loss could not have been in the reasonable contemplation of the parties. This took account of the general understanding in the shipping market that liability was restricted to the difference between the market rate and the charter rate for the overrun period, rather than for the whole charter.

Grimes – the facts

In Grimes, the Defendant engineer was instructed to design a road serving a series of residential properties in Cornwall. It was expressly agreed, albeit only orally, that the Defendant would complete its work by March 2007. The Defendant did not complete the work and in April 2008 a further engineer was instructed instead. The work was eventually completed in June 2008, a delay of some 15 months.

The Claimant claimed £398,000 in damages, representing the reduction in value of the housing units attributable to the Defendant’s delay, caused by a fall in property values of 14% in the intervening months.

At first instance, it was found that the Defendant had breached its contract, that the delay was caused by this breach and that the reduction in value of the properties was the result of the delay. The Court of Appeal was asked to consider whether this loss was too remote to be recoverable.

The Defendant argued, as in The Achilleas, that in determining the foreseeability of loss, it is necessary to decide whether the Defendant has accepted responsibility for that type of loss at the time of contract. As there were relatively few positive authorities for holding professionals responsible for falls in the property market, it was evident that the Defendant had not accepted this responsibility.

The Defendant also cited SAAMCO (South Australia Asset Management Corporation v York Montague Ltd.; Banque Bruxelles v Eagle Star Insurance Co. Ltd. [1997] AC 191)) stating that there was no duty on the Defendant to protect the respondent against losses due to falls in the market, as it was not retained to advise on whether or not the development should proceed.

The Claimant, in contrast, relied on the traditional position in Hadley v Baxendale and The Heron II, that a loss is foreseeable if a reasonable person in the position of the Defendant would have realised that the kind of loss in question was one not unlikely to result from his breach of the contract. Whilst it was possible to depart from this ‘standard approach’, where the nature of the contract and the commercial background indicated that the Defendant had not assumed responsibility for such a type of loss (as had happened in The Achilleas), this was not such a case.

The decision

The Court of Appeal ruled in favour of the Claimant, affirming Hadley v Baxendale and holding that the losses resulting from changes to the property market were reasonably foreseeable to the Defendant at the time of the contract; in fact the Defendant was aware of the Claimant’s intentions towards the development and that its value would be affected by changes in the property market.

The Court of Appeal pointedly affirmed the decisions in Siemens v Supershield Ltd ([2010] EWCA Civ 7) and Pindell v Air Asia ([2011] 2 All ER (Comm) 396), where it was held that the decision in The Achilleas had not effected a major change in the approach to the recoverability of damages for breach of contract. The Achilleas was authority that there may be cases where the standard approach would not reflect the intention reasonably to be imputed to the parties; an otherwise unremarkable property transaction was not one of these exceptions. There was no evidence that there was some general understanding in the property world that an engineer would not be taken to have assumed responsibility for losses arising from movement in the property market.

The Court of Appeal also referred in passing to the decision in SAAMCO, noting that it was not concerned with delay as in the present case, as the breach of contract was the giving of a negligently high valuation. The discussion of the valuer’s duty therefore provided little guidance to the Court. The Court also noted that Lord Hoffmann’s judgement in SAAMCO implicitly accepted the conclusion of the New Zealand case of McElroy Milne v Commercial Electronics Ltd. ([1993] 1 N.Z.L.R. 39), that a solicitor whose negligence caused a two year delay in the sale of a building was liable for the difference between the market value of the property at completion and the sale price two years later.

Finally, at the end of his assenting judgement, Lord Justice Tomlinson noted that losses caused by particularly volatile markets might not be axiomatically irrecoverable, as he had previously ruled in Pindell, although it was left for another Judge to make a firm ruling on this point. This may provide the next point of contention in this recently unsettled area of law.

Conclusions

On the face of it, the conclusion to be drawn from the decision in Grimes is that engineers, architects, contractors and other construction professionals may be assumed to be aware of the possibility of falls in the value of properties caused by their delay, and thus may be held liable for such losses. Absent from the judgment was consideration of the corollary of the decision: should a professional be given credit for any rises in market value occurring during any period of delay for which it may be responsible.

This decision will not provide immediate succour to construction professionals (or their PI Insurers) defending delay claims, and acts as a reminder of the importance of meeting contractual deadlines. The Defendant was held to be liable for a loss of nearly £400,000, despite its limited retainer (for around £15,000). Construction professionals may find it less easy to argue that they have not assumed responsibility for losses arising from movement in the property market in the absence of some particular characteristic of their project which demands different treatment. However, the decision must be viewed in the context of its specific facts.

There are some obvious distinctions that arise between the Grimes scenario and other common claims situations: first, Grimes dealt with a residential project which was essentially unremarkable. More complex projects and, in particular, larger commercial projects are by their nature so complicated that professionals working on one aspect may have no real understanding of the actual effects of any delay (or the prospects for moderately priced acceleration) and certainly cannot be imputed to have knowledge regarding the finances of the entire project. Second, the Claimant developer was a farmer, not a “professional party” who would otherwise have the knowledge and experience immediately to take proactive steps to claw back any delay. Third, the delay of some 15 months was so extensive that the Defendant could not claim that a fall in the property market was not in his reasonable contemplation, which could presumably not possibly be the case if the delay was only a few weeks or months. Finally, the Judge in Grimes emphasised the fact that the Defendant had actual knowledge of the Claimant’s intentions for the development, which will certainly not be the case in every project.

Further, the loss in Grimes was pure diminution in value. In larger commercial projects claims may well be made for the cost of financing and other variables affected by delay, or claims for loss of profit. There is nothing in the judgement in Grimes that suggests that such losses would have been in the contemplation of the parties at the time of contract. From an evidential point of view, it will be difficult to prove that a contracting party was aware of a project’s financial arrangements unless it was specifically involved in that part of the transaction, and it would be deeply contentious to argue that such knowledge should be imputed to the contracting party. Interestingly, at first instance the claimant raised an alternative basis of claim, citing Earl’s Terrace Properties v Nilsson Design [2004] EWHC 136 TCC and arguing that it was entitled to losses arising from its capital being held up for the period of delay, but the first instance Judge noted that this was not eventually argued in any detail and so did not rule on the issue.

Nevertheless, for the avoidance of doubt professionals working on any property development should consider express contractual exclusions for these types of losses, especially given the on-going instability in the property market, or if this is not possible, limits or caps on liability. In more complex projects, where delay may be caused by a combination of different contractors and designers, net contribution clauses can also serve to limit losses.

Contact

For further information contact Robert Calnan, Solicitor on +44 (0)20 7220 5217 or email robert.calnan@dwffishburns.co.uk

By Robert Calnan

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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