Tortious Liability for pure economic loss
Sainsbury's Supermarkets Ltd v Condek Holdings Ltd & Ors  EWHC 2016 (TCC)
Claims against sub-contractors in tort for economic loss are notoriously difficult to advance. Robert Calnan consider a recent TCC judgment which confirms that claimants who fail to consider fully whether the sub-contractors being sued in fact owe them a duty of care in tort are liable to have their claims struck out, with indemnity costs to follow.
The Claimant supermarket group (“Sainsbury’s”) engaged Condek, a company which designed novel ‘flat pack’ car parks, to design a car park for a store in Cheam. Problems with the car park ensued and Sainsbury’s sued Condek alleging defective design.
Condek was a shell company, however, with minimal assets and was quickly declared insolvent. Sainsbury’s, in an attempt to achieve some sort of recovery, added two further Defendants to the litigation:
Mr Andres Pashouros, the designer of the flat pack system, who had traded through Condek, and
Capita Symonds Limited (“CSL”), who had taken over the assets of NRM, a firm of engineers who had verified Condek’s design.
Interestingly, NRM was still trading, but no attempt was made to join them as a party.
Both Mr Pashouros and CSL applied, on separate grounds, to have the claims against them struck out and for summary judgment. The standard to be applied by the Court was that the claims had “no real prospect of succeeding”.
Sainsbury’s argued Mr Pashouros, as the brains behind the Condek system, had taken on personal responsibility for its design in this instance.
The Judge, Mr Justice Stuart-Smith, however, referred to the judgement of Lord Steyn in Williams v Natural Life Ltd  1 WLR 830, noting that:
Where a trader incorporates a company to which he transfers his business, personal liability under the extended Hedley Byrne principle will not be established in the absence of a special relationship between the erstwhile trader who is alleged to be a tortfeasor in his personal capacity and the Claimant. In other words, there must have been an assumption of responsibility such as to create a special relationship between the Claimant and the director or employee himself”
No evidence provided by Sainsbury’s indicated the existence of any such special relationship; indeed the relevant contractual documents and correspondence were all signed by Mr Pashouros on behalf of Condek. Mr Pashouros always acted in a manner consistent with him being a director of Condek, and there was no reasonable prospect of further evidence being uncovered in disclosure which would displace this.
In dealing with the claim against CSL, there were three issues at stake; first did NRM owe a duty of care in tort to Sainsbury’s; second, if NRM had incurred a liability to Sainsbury’s, was this capable of being transferred to CSL; and, finally, did any such liability actually pass to CSL following the purchase of NRM.
The Judge found that NRM owed no duty of care to Sainsbury’s; citing Lord Goff in Henderson v Merritt Syndicates  2 AC 145 he noted that
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”
and further that the principle (which referred to contractors specifically) similarly applied to professionals such as NRM. Again there was insufficient evidence to suggest the existence of a special relationship between NRM and Sainsbury’s; the mere fact that NRM’s report on the Condek design was annexed to Condek’s tender did not show that any reliance was placed on NRM’s report by Sainsbury’s.
In any event, the Judge went on to note that it was axiomatic that “a personal liability in tort cannot be transferred so as to relieve the original tortfeasor of liability and to impose the original tortfeasor's liability upon another person instead.” Further, there was nothing in the sale and purchase agreement between NRM and CSL which acted to transfer liabilities that NRM had incurred in tort to third parties; there was merely a requirement for CSL to indemnify NRM against such claims.
All in all, it was not a great day for Sainsbury’s, as the claims against both Defendants were struck out. Sainsbury’s was left with (no doubt arguable) claims against Condek and its holding company, from which it would never be able to recover any substantial sums. Its pleadings were described as inadequate in relation to breach, causation, loss and damage.
Further, Sainsbury’s was required to pay both Defendants’ costs, and on an indemnity basis from the dates at which it should have been clear to Sainsbury’s that both claims were doomed to fail. Sainsbury’s failure to comply with the relevant Pre-Action Protocol before issuing a claim against CSL was also given short shrift, and contributed to the costs award.
From the perspective of an employer on a large construction project, the judgment does not provide much assistance; however it should be clear that where a project depends on specific design input, the employer should seek direct contractual arrangements with, or suitable collateral warranties from, the relevant parties and persons providing such design services (or obtain such rights pursuant to the Contracts (Rights of Third Parties) Act 1999). It should go without saying, but any employer should be seeking that all contractors and consultants have sufficient professional indemnity cover to deal with long tail claims (and are obliged to maintain such cover).
A contractor or consultant, however, can take comfort in the fact that Courts are wary to impose tortious duties of care where no similar contractual duty applies. Particularly for those companies who are based around a single employee or group of employees, it is encouraging to know that the Courts will not seek to pierce the corporate veil to insist on individual responsibility. Similarly, consultants seeking to consolidate and grow their businesses should not be unduly concerned that acquisitions’ prior errors will come back to bite their new owners (subject to the terms of any such acquisition).
Finally, from a costs perspective, two points are brought into sharp relief: First, where a claim develops over a period of time, Claimants are required to reassess the viability of their claims each time new information is provided by the Defendants, as failure to recognise a hopeless claim will likely sound in indemnity costs; and second, as if it needs to be repeated, failure to comply with the relevant Pre-Action Protocols without good reason will be criticised and again may result in indemnity costs.
For further information please contact Robert Calnan, Solicitor on 020 7220 5217.
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.