Unfair Contract Terms Act

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.