This case involved an engineer’s liability for employers’ reputation.
Background
In a recent case involving a Structural Engineer’s (URS) liability for structural defects, the court was asked to consider:
- preliminary issues concerning the scope of the defendant’s duty; and
- the recoverability of the claimant developer's alleged losses and remoteness.
Some 14 years after contracting URS, building developers (BDG) found serious defects in the development that presented a health and safety risk. BDG allege that URS were negligent in their design and sought to recover the costs of:
- investigation;
- remedial works; and
- damages for reputational loss.
Whilst the Judgment, in this case, applies existing law, it is one of the first examples of the Court applying the approach advocated in Khan v Meadows and Manchester Building Society. (It must be noted that the facts here were assumed and the decision was on a preliminary issue.)
Decision
The High Court confirmed that the six-stage approach is the correct approach to take. Although Manchester Building Society might be called a "professional advice" case, the Judge confirmed that ‘its ratio is applicable to negligence more generally, and not limited to professional advice cases’.
It was held that the purpose of the Defendant’s duties in this case extended to the alleged losses arising from the costs to the Claimant of the investigation and remedial works, but not to damages for reputational loss. The court struck out the part of the claim relating to reputational damage, but permitted the other pleaded losses to proceed to trial. They approached the six-stage test as follows:
‘Actionability’ (or, was the harm (loss, injury and damage) which was the subject matter of the claim actionable in negligence?)
The court found that, for conventional damages, it was actionable. A structural engineering designer is not, however, under a duty to avoid or prevent damage to the reputation of a developer. This would be an ‘unwarranted extension’ of the scope of duty, it being practically impossible to quantify in advance the potential extent of such a liability.
‘Scope of Duty’ (or, what are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care?)
The risk of harm to the Claimant was the risk of economic loss that would be caused by the construction of a building using a negligent design. The fact that a Defendant owed a duty to take reasonable care in carrying out its activities did not mean though that the duty extended to every kind of harm suffered.
(Stage 3 and 4: Breach of duty was assumed and factual causation was not suitable for preliminary determination.)
‘Duty Nexus’ (or, is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant's duty of care as analysed at stage 2 above?)
The Court made note of the overlap between this stage and the second stage, and confirmed that it may well not be required as a separate step in all professional negligence cases. However, the Judge thought that the question was appropriate in a design case. The question is whether the harm suffered fell within the ‘type of harm’ encompassed by the Defendant’s duty of care. For the conventional losses, there was a sufficient nexus between the harm for which the Claimant sought damages and the subject matter of URS duty of care as the structural designer. There was not sufficient nexus for reputational damage, as that could not be characterised as "relevant loss”.
‘Responsibility’ (or, was a particular element of the harm for which the claimant sought damages irrecoverable because it was too remote, or because there was a different effective cause (including novus actus interveniens) in relation to it, or because the claimant had mitigated their loss or had failed to avoid loss which they could reasonably have been expected to avoid?)
Costs of remedying a structurally inadequate building were characterised as being within the contemplation of the parties at the time of contracting and were not too remote. Although at the time of finding and remedying the damage BDW no longer owned the building, it was found that there was no requirement for them to have been served with a third-party claim. There was also no contingency required in order for a cause of action to be completed.
It is interesting to see how the Court used the six-stage test to consider the issue of reputational damage. The key points raised are:
- Structural designers are not under a duty to avoid or prevent damage to the reputation of a developer. It would be difficult to quantify in advance what the potential extent of such a liability would be, which ‘would have a detrimental impact upon a professional adviser's ability to obtain suitable professional negligence insurance.’
- Consideration of the scope of duty does not require analysis of the subjective motivation of the claiming party in incurring the losses or expenses. The Court criticised the Defendant on numerous occasions for the subjective approach taken in their defence – they argued that all remedial works were driven by the Claimants reputational concerns, a subjective view rather than objective. URS had argued that the costs of remedial works were incurred in order ‘to mitigate an altogether different type of damage: Reputational Loss’. The Judge confirmed that, to characterise all the losses as reputational harm seeks to ‘insert the Claimant's subjective motivation into consideration of the type of loss arising’.
This subjective approach by the Defendant was also criticised in the consideration of the duty nexus question. URS submitted that the harm BDW seeks damages for had arisen where there was no legal liability for the cost of the repair works. The Defendant was criticised for confusing the subjective motivation on part of the Claimant choosing to perform remedial works, with the ‘type of harm’ suffered. The Court has now suggested a different way of expressing the duty nexus question: "does the harm suffered fall within the category, type or element of harm that is encompassed by the defendant's duty of care?” This seems to be an easy retreat into earlier tests used on scope of duty and may not find favour with the higher courts.
All in all, this is an informative first run out of the six-stage test which shows that although there may be some teething problems, for instance with the “nexus” test, the process works relatively well. Let’s see if further cases bring clarification or muddy the waters…
