Limitation Periods in Tort: Physical Damage v Economic Loss

In Vinci Construction UK Ltd v (1) Eastwood and Partners (Consulting Engineers) Ltd (2) Snowden Seamless Floors Ltd v GHW Consulting Engineers Ltd [2023] EWHC 1899, the TCC considered an application for reverse summary judgment. In considering the application, the TCC provided some helpful comments on when a cause of action in tort accrues in cases where there has been physical damage or pure economic loss and the application of section 14(A) of the Limitation Act 1980 (the “Act”).

Ian Masser, Sophie-Rose Bowen and Deen Taj discuss the decision and its wider implications below.

The Facts

Princes Ltd (“Princes“), a manufacturer of bottled drinks, appointed Vinci Construction UK Ltd (the “Claimant”) as a design and build contractor to carry out work at its warehouse and distribution facility in Bradford (the “Project”).

The Claimant engaged Eastwood and Partners (Consulting Engineers) Ltd (the “First Defendant”) to provide civil and structural engineering services and Snowden Seamless Floors Ltd (the “Second Defendant”) to carry out the design, supply, and installation of the structural reinforced concrete slabs. On 12 April 2013, the Second Defendant engaged GHW Consulting Engineers Ltd (the “Third Party”) to carry out the design, complete with all calculations and drawings, for the in situ reinforced concrete internal floor slabs. The subcontract between the Second Defendant and the Third Party was not executed as a deed (i.e., it was a simple contract) whereas the contracts between (i) Princes and the Claimant; and (ii) the Claimant and the First and Second Defendants were executed as deeds.

During May and June 2013, the design for the overlay slab for the floor of the low bay warehouse was developed and installation of the slab was complete by 9 July 2013. By September 2013, the floor of the low bay warehouse developed cracking, leaving holes in the overlay slab. Princes removed and replaced the floor in its entirety.

The Proceedings

On 8 February 2022, the Claimant commenced proceedings in the TCC against the First Defendant and the Second Defendant to recover damages of circa £2.5 million in respect of the sums paid out by the Claimant to Prince following successful adjudication proceedings.

On 8 April 2022, the Second Defendant filed and served a Defence to the Claimant’s Particulars of Claim and, at the same time, filed and served an Additional Claim against the Third Party seeking an indemnity and/or contribution in respect of the Claimant’s claim (the “Additional Claim”). Prior to the Additional Claim being issued, the Second Defendant and the Third Party had entered into two Standstill Agreements dated 7 May 2021 and 21 October 2021 (the “Standstill Agreements”).

The Third Party filed and served a Defence on 20 June 2022, denying liability and raising a limitation defence in respect of the Additional Claim. It submitted that:

1. the cause of action in contract was statute-barred since more than six-years has passed since the date of the relevant breach of contract and the date on which the Additional Claim Form was issued on 8 April 2022. Section 5 of the Act provides that an action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued;
2. the cause of action in tort for the overlay slab in question started accruing at the time of installation of the slab by the Second Defendant (i.e., July 2013) and the six-year limitation period under Section 2 of the Act for claims in tort had passed prior to the Additional Claim Form being issued on 8 April 2022. Section 2 of the Act provides that an action in tort shall not be brought more than six years from the date on which the cause of action accrued;
3. under section 14A of the Act, the Second Defendant had both the knowledge required to bring an action for damages and the right to bring such an action by September 2013 or alternatively by April 2014 at the very latest (when it was asked to provide comments on the remedial works proposed for the floor). Therefore, more than three years had elapsed since the starting point for the accrual of a cause of action in tort and the date that the Additional Claim Form was issued on 8 April 2022. Under Section 14A of the Act, the six year limitation period for claims in tort can be extended where the claimant does not have the relevant “knowledge” to bring a claim at the time of the accrual of the cause of action in tort. In such circumstances, the claimant has three years from (i) the date of the knowledge required for bringing an action for damages in respect of the relevant damage, together with (ii) a right to bring such action in tort (subject to an overall longstop period of fifteen years from the date of the accrual of the cause of action); and
4. that the Standstill Agreements entered into, the effect of which was to suspend time for any limitation defence to 21 March 2022, do not assist the Second Defendant because the claims in contract and tort were already statute-barred before the first Standstill Agreement was entered into.

The Application for Summary Judgment

Pursuant to the above, the Third Party applied to the Court for summary judgment on the basis that the Additional Claim had no real prospect of succeeding because it was statute-barred. The Third Party also applied to strike out the Additional Claim under the Civil Liability (Contribution) Act 1978 on the basis that the Second Defendant’s Particulars of Additional Claim provided no valid cause of action against the Third Party (we do not discuss this part of the Third Party’s application in this article).

The Second Defendant opposed the application for summary judgment on the grounds of limitation. It submitted that although its claim in contract was statute-barred, it had a real prospect of succeeding on the claim in tort at trial because the claim is not statute-barred either under Sections 2 or 14A of the Act.

Both parties had contrasting views in relation to whether the relevant damage necessary for the accrual of a cause of action in tort for the purpose of Section 2 of the Act was physical damage or economic loss:

1. The Third Party’s position was that the relevant damage was the economic loss arising from the Second Defendant’s exposure to a claim by the Claimant in respect of the defects in the overlay slab rather than physical damage to the overlay slab itself; and
2. The Second Defendant’s position was that the relevant damage was its liability to the Claimant caused by the cracking to the overlay slab and therefore financial loss arising from physical damage to the slab.

The Second Defendant relied on the decision of the House of Lords in Pirelli General Cable Works Limited v Oscar Faber & Partners [1983] 2 AC 1 (HL) in which the House of Lords (as it then was) decided that a building owner’s cause of action against his consulting engineer for negligent design accrued for limitation purposes when physical damage to the building first occurred.

Furthermore, the parties had differing views as to when the Second Defendant acquired the required knowledge under Section 14(A) of the Act:

1. The Second Defendant submitted that it did not have the knowledge required by Section 14A until the Claimant’s letter of 25 May 2018. Prior to that date, the Second Defendant had understood that the cause of the cracking in the floor was settlement of the sub slab, unconnected with the Third Party’s design; and
2. The Third Party’s position was that the Second Defendant had actual, or constructive, knowledge under Section 14A of the Act that the defects in the overlay slab were attributable to the Third Party’s design significantly in advance of the Claimant’s letter of 25 May 2018.

The Decision

The Court concluded that the Second Defendant’s claims in contract and tort were statue-barred subject to the question of attributability of knowledge under Section 14A of the Act. The Court could, however, not reach a definitive view on the date on which the Second Defendant had actual or constructive knowledge that the alleged defects were attributable to the Third Party and dismissed the Third Party’s application for summary judgment on this basis.

In reaching the decision, Justice O’Farrell provided some commentary on the dates of accrual of the cause of action in tort in circumstances where there has been physical damage or pure economic loss and the application of Section14A of the Act.

Economic Loss v Physical Damage

Justice O’Farrell, relying on the analysis in the recent judgment in URS Corporation Limited v BDW Trading Limited [2023], summarised the legal principles that were applicable in the present case. It should be noted that, in URS Corporation Limited v BDW Trading Limited, the Court held that the date of the accrual of a cause of action in tort against designers of a defective building, in circumstances where the defect caused no immediate physical damage, was the date of practical completion.

1. There are two kinds of loss which are recognised as actionable damage for the tort of negligence, namely, physical damage and economic loss.
2. In a case where there is physical damage, the current state of the law is that the claimant’s cause of action accrues when that physical damage occurs, regardless of the claimant’s knowledge of the physical damage or its discoverability.
3. In a case where there is economic loss, the claimant’s cause of action accrues when the claimant relies on negligent advice or services to its detriment, including incurring a liability (unless such liability is purely contingent, in which case it is not actionable damage until there is measurable loss).
4. In a case where the claimant relies on negligent advice or services and, as a result, the structure contains an inherent design defect which does not immediately cause physical damage, the claimant’s cause of action accrues at the latest on completion of the structure, at which point the claimant has a defective asset and suffers economic loss, regardless of its knowledge of the latent damage.
5. Pirelli remains good law in cases concerning physical damage but, in the light of the above authorities that an inherent design defect in a structure can give rise to pure economic loss, it may require careful consideration.

Justice O’Farrell stated that to know the date of a cause of action, proper characterisation of loss is required. If it is characterised as a physical damage case, the cause of action would accrue on the date of damage; if characterised as an economic loss case, the cause of action would accrue by the date of completion.

Justice O’Farrell held that the evidence in the present case demonstrates that the overlay slab suffered physical damage by March/April 2015. Therefore, regardless of whether the Court adopts the date of completion or the date of physical damage as the date for accrual of a cause of action in tort under Section 2 of the Act, any such cause of action accrued prior to 7 May 2015 (i.e., more than six years prior to the first Standstill Agreement being entered into on 7 May 2021).

Date of knowledge for the purposes of Section 14(A) of the Act

Justice O’Farrell held that the Court was not in a position to reach a concluded view on the date of requisite knowledge under Section 14A of the Act without “conducting a mini trial on the documents” and that the documents do not on their own disclose a clear picture on this issue absent factual and expert evidence. It was held that the appropriate time for considering the evidence on this issue was at trial.

The Court did however make some interesting commentary on the applicability of Section 14(A) of the Act:

1. It emphasised that the burden of proof was on the party raising the limitation defence (i.e., the Third Party in the present case) to demonstrate that a claimant had the requisite knowledge under Section 14(A) of the Act more than three years prior to the material date; and
2. It reaffirmed that the Court should adopt a broad common sense approach when considering the date on which the requisite knowledge was, or could have been, acquired (see Spencer-Ward v Humberts [1995] 1 EGLR 123).

Comment

As set out above, the judgment in Vinci Construction UK Ltd v (1) Eastwood and Partners (Consulting Engineers) Ltd  (2) Snowden Seamless Floors Ltd v GHW Consulting Engineers Ltd reinforces the Court’s views in URS Corporation Limited v BDW Trading Limited (see our case summary here) on the date of accrual for causes of action for claims in tort where there has been no physical damage. The judgment serves as a reminder that parties ought to consider contractual and tortious limitation periods at an early stage and take steps to protect themselves against limitation defences either by issuing protective Court proceedings or entering into Standstill Agreements.

This judgment also reaffirms that a Court may be unwilling to make an order for summary judgment on the basis of limitation and/or grant an application to have limitation tried as a preliminary issue in circumstances where there are contested issues of fact between the parties. Instead, it may reserve such issues for determination at trial. Parties should be alive to the types of issues that a Court may consider appropriate for determination by summary judgment and/or by way of a preliminary issue as these types of applications can be costly and, where unsuccessful, such costs are unlikely to be recoverable.