Setting the boundaries – can a homeowner claim for economic loss caused by defective housebuilding?

Owners of newly built homes frequently find construction defects in their buildings, but sometimes those defects are ‘latent’ and do not transpire until some time after the purchase. They are likely to have purchased their new home from a developer under a contract of sale of land which, although it will contain warranties about the standard of construction of the building, is typically subject to a six year limitation period. If the limitation period for a claim in contract has expired they may have no contractual remedy by the time the defect comes to light. In such a scenario can the homeowner instead bring a claim against the developer (if it is still solvent), or the actual builder, in negligence?

Lord Bridge’s “Exception” in Murphy v Brentwood

The case of Murphy v Brentwood [1991] UKHL 2 is well-known within the construction industry. Mr Murphy sued Brentwood District Council for negligently approving the design for the construction of concrete raft foundations for a house. The designs included insufficient steel reinforcement and this was overlooked and, as a result, cracks in the house and its foundations were discovered 11 years after construction. However, no-one had been injured, nor was any other property damaged; only the house itself was defective. Murphy later sold the house for a price £35,000 lower than the market value would have been if the foundations had been built correctly. In the absence of any surviving contractual remedy against the developer, Murphy sued the Council on the basis of an alleged duty of care by its building control team, seeking to recover his £35,000 loss (a “pure economic loss”).

In his 1991 decision, Lord Bridge in the House of Lords held that where a defect, “becomes apparent before any injury or damage has been caused, the loss sustained by the building owner is purely economic.” These economic losses are, “recoverable if they flow from breach of a relevant contractual duty, but… in the absence of a special relationship of proximity they are not recoverable in tort“. As no personal injury or damage to property had been caused and the relationship between the Council and Murphy did not satisfy the ‘special relationship of proximity’ test, Murphy was unable to recover his loss from the Council. 

However, in obiter, Lord Bridge’s went on to propose the following exception to this rule:         

“…if a building stands so close to the boundary of the building owner’s land that after discovery of the dangerous defect it remains a potential source of injury to persons or property on neighbouring land or on the highway, the building owner ought, in principle, to be entitled to recover in tort from the negligent builder the cost of obviating the danger, whether by repair or by demolition, so far as that cost is necessarily incurred in order to protect himself from potential liability to third parties“.

Therefore, in a situation where the defect could lead to personal injury or damage to property on neighbouring land (or a highway), can the homeowner successfully claim against the housebuilder in negligence (for a breach of a duty of care owed to the homeowner)?

Reconsidering Murphy

Lord Bridge’s proposed exception in Murphy was revisited in the recent case of Thomas and another v Taylor Wimpey Developments Ltd and others [2019] EWHC 1134 (TCC). In this case, Mr and Mrs Thomas brought claims against the housebuilder in respect of defective log retaining walls in the rear gardens of their new-build home. The homeowners brought the claim on the basis of common law negligence (relying on Lord Bridge’s exception in Murphy to allege that the builder owed them a duty of care in relation to these defects), as well as under section 1 of the Defective Premises Act 1972 for defective construction and, separately, for misrepresentation. Claims were also brought against the insurer of the homes under an NHBC new home warranty policy and against the solicitor who represented them when purchasing their homes. The scope of this note addresses only the claim against the builder for common law negligence in light of Lord Bridge’s exception in Murphy. In respect of that claim, the housebuilder denied that it owed any duty of care to the homeowners. HHJ Keyser QC had to deal with 5 preliminary issues, the first of which concerned whether Taylor Wimpey owed Mr and Mrs Thomas a duty of care in negligence.

In coming to his decision, HHJ Keyser QC considered the following precedents:

1. The Court of Appeal decision in  Robinson v PE Jones [2011] EWCA Civ 9,  which considered that the only basis for recovery of economic loss outside a contractual relationship is an “assumption of responsibility” for the homeowner by the builder, described by Lord Bridge in Murphy as a, “special relationship of proximity“; and
2. The High Court decision in George Fischer Holding Ltd v Multi Design Consultants Ltd (1998) 61 Con LR 85, in which HHJ Hicks QC did not apply Lord Bridge’s exception as it was, “minority obiter dictum [non-binding], contrary to the ratio [binding] of the decision of the House“.

Lord Bridge’s exception was inconsistent with the more recent Court of Appeal (‘CA‘) decision in Robinson, as it sought to create a basis for recovery of economic loss on the basis of tort which was not based on an “assumption of responsibility”. The reader may well ask why it is that ‘first purchasers’ (like Mr and Mrs Thomas), do not automatically qualify for the ‘special relationship of proximity’ or an ‘assumption of responsibility’ when they had been in contract with the developer or builder? The clearest explanation why this is not the case can be found at paragraphs 65 – 89 of the CA’s Robinson judgment; basically, where builders and developers are concerned, one cannot assume that just because there was a contract, there was a parallel duty in tort (i.e. negligence), let alone one which could survive the expiry of the contractual limitation period. In this case, HHJ Keyser QC took the view that, “[T]he argument that recovery ought to be permitted because expenditure would be required to obviate the risk to third parties would, logically, imply that, where the risk of injury was only to persons on the premises, the owner ought to be able to recover the cost of moving from the premises“. Such a decision would muddy the waters in this area of law; in particular the decisions in the Murphy and Robinson cases.

On the basis of the above, HHJ Keyser QC rejected the homeowners’ argument, stating that “Lord Bridge’s qualification [exception] in Murphy does not represent the law“. This was because, primarily, Lord Bridge’s exception was set out in the non-binding section of the judgment and was not supported by the binding section or the reasoning behind that binding section of the other Law Lords in the case. Lord Bridge’s exception was largely unsupported by subsequent case law (for example, in the Robinson and George Fischer cases cited above).

HHJ Keyser QC also noted that Lord Bridge’s exception had no compelling policy justification. This is because, in such circumstances, the builder would already have potential liability in contract, under the Defective Premises Act 1972 and in the tort of negligence (in respect of injury to persons/property).

Therefore, HHJ Keyser QC concluded that Lord Bridge’s obiter dictum comments in Murphy v Brentwood [1991] UKHL 2 did not create an exception to the rule prohibiting tortious claims for pure economic loss in certain circumstances. On that basis, he did not need to consider whether the Mr and Mrs Thomas’ claim in negligence had become statute barred, and he went on to hold that claims under the Defective Premises Act 1972 and the Misrepresentation Act 1967 were statute barred since they accrued more than six years before Mr and Mrs Thomas issued proceedings.  

What does this mean for you or your business?

This decision confirms that Lord Bridge’s exception does not represent the position at law in relation to liability of a housebuilder for purely economic loss suffered by a homeowner.

It should be remembered that, where a property owner is required to repair defects to protect against the risk of personal injury or damage to neighbouring property, the owner may be able to bring a claim against the housebuilder under the Defective Premises Act 1972. New homes, as in this case, will also usually be covered under a warranty policy such as that provided by the NHBC. Such warranties typically last ten years and are insisted upon by the Council of Mortgage Lenders. It is unlikely, therefore, that a homeowner would be left to pick up the pieces without recourse. As HHJ Keyser QC noted, there is therefore no policy justification for an additional route of claim for purely economic loss.

From the housebuilder’s perspective, this judgment does not affect the fact that economic losses can still be recovered under the Defective Premises Act 1972, or where losses arise from a breach of a contractual duty, or indeed tortious liability where there is a “special relationship of proximity” with a homeowner (which Robinson suggests will be a rare scenario).

For more information

If you require advice in connection with any construction related query, please contact chris.hoar@michelmores.com or alan.tate@michelmores.com or any other member of the Construction and Engineering Team.