Law For Business.

Law For Business 15/02/01

Outcome 2 Chris Lundie

Assessment – Part 2

The Maxwell’s could raise a claim against the council for being vicariously liable for the employee’s actions (Jonathan Wright’s). They could claim under Professional Negligence stating that they both suffered a pecuniary loss (pure economic loss - structural repairs estimated £14,000 + extra travelling to work at 150 miles a day) as a direct result of Jonathan’s negligent misstatement. In order to do this Stephen and Lesley would need to prove the following: -

Show that there was a duty of care owed to them by the council. Regarding negligence there is only one standard of care and that is to take reasonable care in the circumstances.

They must then prove that there was a breach of the duty of care owed to them, and through the young surveyor’s negligence they suffered a financial loss, and that the council is vicariously liable for the loss.

An employer is liable for the wrongful acts or omissions of an employee provided the act is done within the scope of employment. In this case Jonathan prepared a valuation report as instructed, for the council and this would therefore be regarded as being within the scope of employment. Referring to the case Lister v Romford Ice and Cold Storage Co (1957) AC 555 then if Stephen & Lesley’s case were to be successful in claiming from the council for loss sustained, the council could then bring an action against Jonathan to recover the sum paid to Stephen and Lesley.

The original position of Scots Law was that there could only be liability for negligent misstatement, which caused financial loss, if the parties were in a contractual relationship. Stephen and Lesley were clearly in contract (mortgage) with the council as they signed a written contract with an additional valuation fee. The basis of a duty to take care in the circumstances in this case would be based under ‘reliance’ as in the Hedley Byrne & Co v Heller & Partners (1964) AC 465. Reliance on the information by the pursuer is not enough in itself to create a duty: the party supplying the information must also know or should have realised that the other party is relying upon his skill and judgement. They could argue that Jonathan a reasonable person, knowing that his skill and judgement were being relied upon (to Stephen & Lesley – to whom he has no contractual relationship) has 3 options open to him:

he does not give his opinion or advice, or
he gives an answer with a clear qualification that he accepts no responsibility for it but he has to remember that such a disclaimer will possibly be subject to the Unfair Terms Act 1977, or
he gives an answer without qualification and then must remember that the following principles of Hedley Byrne he has accepted responsibility for it and owes the party who receives this advice and relies on it to take reasonable care in giving an accurate answer.

The HB principles can be used to ...

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he does not give his opinion or advice, or
he gives an answer with a clear qualification that he accepts no responsibility for it but he has to remember that such a disclaimer will possibly be subject to the Unfair Terms Act 1977, or
he gives an answer without qualification and then must remember that the following principles of Hedley Byrne he has accepted responsibility for it and owes the party who receives this advice and relies on it to take reasonable care in giving an accurate answer.

The HB principles can be used to establish that a surveyor owes a duty of care to the purchaser of property regarding the contents of report requested by a building society (in this case the council).

Stephen & Lesley could also argue that the structural defects should have been noticed by the ‘young surveyor’ three years ago as the ‘senior surveyor’ described the house as now uninhabitable and it is very unlikely that such defects could only be observed in the house within the last 3 years.

Finally Stephen & Lesley would need to prove they suffered a pure economic loss as a result of Jonathan’s professional negligence (travel expenses incurred as a result). Pure economic is a loss that can be measured in money terms and arises from the negligent act without personal injury to the pursuer or damage to property. Stephen and Lesley could also state that, as results of professional negligence they suffered - £14,000 in structural repairs were required to the house.

In the Junior Books case v Veitchi & Co 1982 SLT 492, a duty of care was owed by a contractor to the owner of building with a defect where there was no contract between the owner and the contractor. Veitchi & Co were flooring specialist flooring subcontractors. They had a contract with the main contractor to lay a floor but had no contract with Junior Books (JB) who had employed the main contractor. Two years after it had been laid the floor developed cracks and had to be re-laid. It was defective but not dangerous. JB sued Veitchi for negligence and for damages for the financial loss which they had suffered (cost of new floor + cost of moving machinery + cost of wages). The damage was financial loss – purely economic. The House of Lords stated that the Hedley Byrne principles could be used in this case, where a negligent act had caused pure economic loss and that a duty of care could arise where there was a sufficient relationship of proximity between the wrongdoer and the person who suffered the damage. In deciding that there was sufficient proximity they listed the following facts: Veitchi were nominated subcontractors; they were specialist floor contractors; they knew what products were required by JB and they were entirely responsible for the composition and construction of the floor. Veitchi must have known that JB were relying on their skill and experience) and must have known that if they did the work negligently then at some time JB would have to relay the floor. Although this decision has not been overturned it has never been followed and seems to be a special one decided on its own facts.

The decision in Anns v Merton Borough Council [1978] AC 728 has now been overturned. Very simply, the case decided that the local authority owed a duty of care in carrying out its building control functions to occupiers of buildings for the cost of remedying a dangerous defect in a building. If the defect in the building becomes apparent before any loss of injury or damage then the loss is purely economic.

The case which clearly overturns the above decision is Murphy v Brentwood district Council [1990] 2 All ER 908. Murphy purchased a newly built house, which had been constructed on an ill-fated construction site on a concrete raft foundation. The plans regarding the foundation were submitted to the Local Authority. The Authority referred the plans to consulting engineers for checking and, on their recommendation, approval was granted. It was not until 11 years later that it became apparent that the foundations were defective. Murphy sold the house subject to the defect and obtained £35,000 less than its market value would have been had it been in perfect condition. This was purely economic loss because the damage suffered by the owner was neither material nor physical. The defect was in quality; the value of the building had been reduced. Such economic loss is recoverable under contract but not in the absence of a special relationship of proximity, recoverable in tort or delict. The House of Lords held that the Council had owed no duty of care to the plaintiff when it had approved the plans to avoid causing pure economic loss. The decision overturned the decision in Anns and all the subsequent decisions based on Anns.

The case emphasises that pure economic loss is generally irrecoverable. Exceptionally, it will be recoverable, if it is negligent misstatement or where the relationship is akin to contract as in Junior Books, but there was no special relationship’ between Murphy and the local Authority.

Thus if Stephen and Lesley were to claim for economic loss they would need to prove to the House of Lords hat there was a special relationship i.e. sufficient proximity between themselves and the council as in Hedley Byrne case or in extreme the Junior Books case. The loss would have been simply recoverable had there been physical damage or injury to the pursuers (Stephen and Lesley) but that was not the case in this instance (defect was in quality as in Murphy case).

“No responsibility whatsoever can be accepted by the council for the value or condition of the property by reason of such valuation”. The council could argue that as a result of the disclaimer notice shown on the contract before Stephen and Lesley signed agreeing to the terms of the mortgage application, this would represent a ‘free choice’. Referring to the Hedley Byrne & Co v Heller & Partners (1964) AC 465 the defendant’s disclaimer protected them from liability.

For Stephen and Lesley’s case to have a greater chance in being successful in claiming for pure economic loss against the council the disclaimer would have to be described/stated after the contract was made, as in the case Martin v Bell Ingram 1986 SLT 575.

However, such a disclaimer is now subject to the Unfair Contract Terms Act 1977, which now applies in Scotland to non-contractual notices. In Smith v Eric Bush (1989) 2 WRL 790 the House of Lords held that such disclaimers could not exclude the liability of surveyors for negligent reports as under the UTCA 1977 it would not be fair or reasonable for a building society (council in this case) or a surveyor to impose on a purchaser the risk of losses resulting from the incompetence of the surveyor.