How distinguishing between pure economic loss and physical damage in negligence can be crucial for limitation

The recent judgments in URS Corporation Limited v BDW Trading Ltd [2023] and Vinci Construction UK Ltd v Eastwood and Partners (Consulting Engineers) Ltd [2023] are significant for the construction industry.

Here we focus on issues relating to limitation and the date on which a cause of action accrues in a claim for negligence.

1. When is economic loss recoverable in negligence?

In construction liability claims, actions are usually brought in the tort of negligence as a matter of necessity or as a last resort: either because there is no contractual relationship between the claimant and the defendant, or because the limitation period under contract has expired. This route is often frustrated however by the general rule that where there is no physical damage, a defect in the building is classified as ‘pure economic loss’ and is irrecoverable absent a ‘special relationship’ between claimant and defendant. The ‘special relationship’ requires a sufficient degree of proximity between the two, and for the defendant to be aware what its ‘advice’ (i.e. its construction drawings or designs) will be used for – in other words, a relationship akin to a contract. 

'Defects’ caused by negligence must be distinguished from ‘physical damage’ caused by negligence. If a building, or part of a building is defective, this is classed as being an ‘economic loss’. The building is worth less than it otherwise would have been absent the defect, and the defendant (i.e a design professional) must be found to have owed the claimant a duty of care to protect it from such economic loss, for this to be recoverable from the defendant in tort. ‘Physical damage’ means just that – damage which is visible or otherwise apparent, and even though physical damage will also likely mean the claimant is worse off as a result of that damage, the law does not require this ‘special relationship’ to effect recovery. 

The two cases below illustrate both categories of recoverable loss in negligence, and when the limitation clock starts to run. 

2. URS Corporation Ltd v BDW Trading Ltd [2023]

Background

• The defendant URS is a civil engineering company who provided structural drawings for the construction of two residential developments, which completed in 2008 and 2012 respectively. BDW, the developer, had divested itself of all of its proprietary interests in the individual dwellings (and the developments collectively) by 2015.
• Notwithstanding the fact it no longer owned the properties, BDW carried out investigations of both developments following the Grenfell tragedy in June 2017. In the process of carrying out these investigations in 2019, it discovered significant structural defects in both developments. It is alleged that 27 blocks required structural remedial works which were then carried out by or on behalf of BDW.  It is significant that no physical damage occurred.

The claim by BDW

• BDW then commenced proceedings against URS in negligence on 6 March 2020, being out of time to bring claims under the contract between the two parties by this point. 
• In a hearing on a number of preliminary issues, URS contended that the losses claimed by BDW (to reflect costs of repair) were not within its scope of duty. URS’s case was that it had owed BDW a duty of care to protect its proprietary interests, and to protect it against the risk of loss and claims made by the owners of the individual dwellings. BDW no longer had any interest in the properties, and any claims by third parties would in any event be statute-barred. URS also argued that the damages claimed by BDW were irrecoverable on the basis that any cause of action accrued in 2019 when the defects were discovered, and BDW did not own the properties by that point. At first instance, these arguments were rejected.
• In dismissing the appeal by URS, the Court of Appeal found that URS owed a “standard duty imposed on a design professional [to BDW] which was co-existent with [its] contractual obligations” (the ‘special relationship’). The risk of harm was that the structural design was defective, necessitating remedial works – exactly what had transpired. 
• In considering when the cause of action accrued, the Court of Appeal confirmed the two types of loss which represent actionable damage in negligence: physical damage and pure economic loss.   
  • Where there is physical damage, the tortious cause of action accrues when that damage occurs, regardless of knowledge or discoverability.
  • Where there is no physical damage (as here) the cause of action in tort for economic loss accrues no later than the time of practical completion, when the defective structural design is irrevocably incorporated into the building.

Lord Justice Coulson confirmed that BDW’s cause of action therefore accrued on the completion of each of the buildings as at this point, “the defective and dangerous structural design had been irrevocably incorporated into the buildings as built”. The Court therefore declined to overturn the conclusion at first instance that the cause of action accrued whilst BDW owned the properties.

• The Court of Appeal found it irrelevant that BDW could have raised limitation defences to any third-party buyer claims, as even if BDW could rely on a limitation defence, it was not obliged to do so. 
• As knowledge is not relevant here to the accrual of the cause of action in tort, the fact that by the time the defect was discovered, BDW no longer had a proprietary interest in the property was of no consequence.

The Court of Appeal’s judgment will be highly relevant to the construction industry as a whole (and to professionals generally in certain respects). It has clarified that a developer is owed a duty under s1(1)(a) of the Defective Premises Act 1972. Also, that even in the absence of any claims against it (by the purchasers of the flats), BDW could make a claim against URS for a contribution under the Civil Liability (Contribution) Act 1978. 

3. Vinci Construction UK Ltd v Eastwood and Partners (Consulting Engineers) Ltd [2023] 

Vinci v Eastwood concerned physical damage caused by negligence.

Vinci (a contractor) had been appointed to design and build a warehouse facility. Vinci engaged Eastwood to provide civil and structural engineering services and Snowden to carry out the design, supply and installation of the structural reinforced concrete slab. Snowden engaged GHW to carry out the design of the reinforced concrete slab. 

The original design intent had been to break out and replace the concrete slab. However, during 2012/2013 the design changed to one of limited replacement of areas of the existing slab, and an installation of an unbonded overlay slab on top of the retained slab. Vinci’s case is that by September 2013 the concrete slab in one area was suffering from cracks, sawn edges, crushing of the concrete, and holes were appearing.

Adjudications found that Vinci was liable to the owner of the warehouse in contract for the cost of replacing the reinforced concrete slab. On 9 February 2022, Vinci commenced proceedings against Eastwood and Snowden. On 8 April 2022, Snowden served an Additional Claim on GHW seeking an indemnity and/or contribution. GHW contended in its Defence that the Additional Claim against it was statute-barred. 

Significantly, Snowden and GHW had entered into two standstill agreements.  By the time this decision was handed down, it was common ground that:

• The effect of the standstill agreements was that the 3rd party Claim Form issued on 8 April 2022 was to be treated for limitation purposes as if it were issued on 7 May 2021; and
• any contractual claims by Snowden against GHW were statute-barred. 

As to any claim in tort: GHW argued that the relevant damage for determining the date of accrual of the cause of action was economic loss, in which case the cause of action would accrue by (no later than) the date of practical completion. Snowden argued it was physical damage, in which case the cause of action would accrue when that damage occurred.  

Having considered the recent Court of Appeal decision in URS v BDW (as above), the Technology and Construction Court (TCC) held (on GHW’s strike-out application against Snowden) that the evidence demonstrated that here, there was physical damage - the overlay slab suffered material damage by March/April 2015 at the latest.

In fact however, the TCC concluded that it was immaterial for these purposes (in this dispute) whether the relevant damage was economic loss or physical damage as in either case, any such cause of action accrued prior to May 2015 (so more than 6 years before 7 May 2021). This was based on the date of accrual of any cause of action in negligence being either the date of completion (for economic loss) which was by 2 August 2013, or the date of physical damage which was prior to May 2015.

As a result, the claim in tort was also statute-barred unless, under s14A of the Limitation Act 1980, Snowden could prove that it first had the knowledge required for bringing its action within a period of three years prior to the notional issue date of 7 May 2021. The TCC held that Snowden had a real prospect of succeeding, as whilst it had knowledge of the damage to the concrete slab in 2015, it was arguable that it did not know that the damage was attributable to negligent acts/omissions by the GHW (as required to satisfy the provisions of s14A) until over three years later – the evidence on this point would be a matter for the court at trial.  

Comment

BDW v URS relates to residential properties, affording BDW the opportunity to pursue a claim under s1(1) of the Defective Premises Act 1972 which has a 30 year retrospective limitation period. An extended limitation period does not however currently apply to disputes arising out of works relating to commercial premises and these cases provide a helpful reminder of the importance of a proper characterisation of the loss for claims in negligence, as that will determine the date on which the cause of action accrues. 

If the loss is physical damage (as in Vinci) the cause of action accrues on the date of the damage. If it is rightly a case of ‘pure economic loss’, the cause of action would accrue (in respect of a building) no later than practical completion. These factors may be crucial in protecting the position on limitation, to ensure that an action does not become statute-barred. 

The analysis in any particular scenario may be complex and each dispute will of course turn on its own facts. From a practical perspective, it is always safest to err on the side of caution, working to the earliest possible date that a limitation period may expire to ensure claims do not become time-barred. This is particularly the case for defendants in construction disputes where there is the need to identify and protect third party and contribution claims as early as possible.