Date: 28/02/2014 Before: THE HONOURABLE MR JUSTICE STUART-SMITH Between: Co-operative Group Limited.

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1 Neutral Citation Number: [2014] EWHC 530 (TCC) IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION TECHNOLOGY AND CONSTRUCTION COURT Case No: HT and HT Royal Courts of Justice Strand, London, WC2A 2LL Date: 28/02/2014 Before: THE HONOURABLE MR JUSTICE STUART-SMITH Between: Co-operative Group Limited Claimant - and Birse Developments Limited (in Liquidation) -and- Stuarts Industrial Flooring Limited (In Administration) - and Jubb & Partners (a firm) -and- Geofirma Soils Engineering Limited Defendant Third Party Fourth Party Fifth Party Michael Soole Q.C. and Richard Liddell (instructed by Clyde and Co LLP) for BIRSE Katie Powell (instructed by Reynolds Porter Chamberlain LLP) for STUARTS Benjamin Pilling (instructed by Beale and Co) for JUBB Doré Green (instructed by Kennedys Law LLP) for GEOFIRMA Hearing dates: 18 & 19 February I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.... THE HONOURABLE MR JUSTICE STUART-SMITH

2 Mr Justice Stuart-Smith: Introduction 1. The Defendant [ Birse ] was the design and build main contractor for the construction of a large warehouse near Rugby, which has generated two actions now running concurrently. Birse s subcontractors included the Third and Fourth Parties in action HT [ Stuarts specialist industrial flooring subcontractor; and Jubb engineering consultancy services] and the Defendant in action HT [ Geofirma specialist geotechnical design, engineering and contractor services]. The litigation arises because defects are said to have developed in the external hardstanding, the drainage system and the floor slab as a consequence of inadequate design or construction. The Co-Operative Group Ltd [ Co-op ] is the long leaseholder of the premises and is the Claimant in action HT Birse is the Defendant in that action and the Claimant in action HT The structure of the two actions and the reasons why it has come about that there are two actions are not material for present purposes. 2. Co-op commenced proceedings on 14 September 2010, about 12 years after practical completion. Limitation is one of the many issues between the parties. 3. In addition to the main contract and various sub-contracts (of which more later), collateral warranties were given to the original leaseholder [ CRS ] by Birse, Stuarts and Jubb. The Stuarts and Jubb warranties provided that they could be assigned twice without the consent of the warrantor but that thereafter they could only be assigned with consent, which was not to be unreasonably refused. As appears in more detail later, there have been three agreements to assign the warranties and consent was not obtained for the third assignment, which was intended to assign them to Co-op. 4. On application being made by Jubb and Geofirma, the Court directed that preliminary issues should be tried and gave Stuarts and Co-op permission to make submissions at the trial of those issues. In the event, Stuarts made submissions while Co-op maintained a watching brief. The preliminary issues that were directed to be tried were: Issue 1: a) Whether Birse s causes of action in the tort of negligence against Jubb are time barred by virtue of section 2 of the Limitation Act 1980; b) Whether or not the action brought by Birse against Geofirma in the tort of negligence is time barred by virtue of section 2 of the Limitation Act 1980.

3 Issue 2: a) Whether the attempt to assign the benefit of Jubb s warranty to Co-op, without seeking or obtaining Jubb s consent, gave rise to a trust of the benefit of that warranty in favour of Co-op For the reasons set out below, I decide the preliminary issues as follows: a. Issue 1: Birse s causes of action in tort against Jubb and Geofirma are time barred by virtue of section 2 of the Limitation Act 1980; b. Issue 2: the attempt to assign the benefit of Jubb s warranty to Co-op, without seeking or obtaining Jubb s consent, did not give rise to a trust of the benefit of that warranty in favour of Co-op. 6. This judgment follows the following course: Paragraphs Introduction 1-6 The Factual Background 7 Birse s Pleaded Case The case against Jubb The case against Stuarts The case against Geofirma Issue 1: Limitation in Tort The principles to be applied Birse s submissions The damaged asset rule The package of rights rule Ascertainment at trial Notification Lack of knowledge Incremental steps Issue 2: The Assignment to Co-op The principles to be applied Application of these principles to the facts of this case The Factual Background 7. No provision was made for facts to be agreed in advance of the hearing, but the parties have now agreed the assumed facts set out in Annexe A for the purposes of this hearing. 1 Issue 2 does not apply to Geofirma. All three subcontractors participated in the hearing and will be bound by the result.

4 Birse s Pleaded Case 8. Birse pleads its case in tort against Stuarts, Jubb and Geofirma in the same form, which is conventional in rehearsing the nature of Co-op s claim against Birse and Birse s denial of liability to Co-op and then making the claim over in the event that its denial of liability fails. The Case against Jubb 9. The material parts extracted from the Re-amended Particulars of Birse s Additional Claim Against Jubb are set out in Annexe B. 10. I highlight the following features of the pleaded case against Jubb: a. It is clear from Clause 2 of the Appointment and elsewhere that Jubb was expressly made aware of the requirements of Birse s main contract, at least to the extent that they were being sub-contracted to Jubb; b. The scope of Jubb s duty is identified at paragraphs 24.1, 25 and 59. The duty is alleged to have been concurrent and co-extensive with the implied contractual duty in the performance of its express obligations under the Appointment to exercise the care and skill reasonably to be expected of civil and structural consulting engineers possessing the experience and expertise appropriate to perform those obligations in connection with the Development. It is alleged (and for the purposes of these preliminary issues assumed) that the scope of Jubb s duty of care included the protection of Birse from economic loss. Birse alleges that the damage on which its claim in tort is founded is the financial damage it suffers in satisfying any liability to the Claimant which it may be held to have as a result of Jubb s negligence ; c. The central importance of Birse s liability to the Claimant is emphasised by the allegation that breaches by Jubb will have caused the defects which the Claimant alleges and placed [Birse] in breach of its obligations to the Claimant : see [45]. In the same way, each pleaded breach of duty by Jubb alleges that it constitutes a breach of Jubb s duty of care at common law, and will in turn have placed [Birse] in breach of clauses [x,y,z] of [Birse s main contract] and of clauses [a,b,c] of [Birse s] Warranty : see [45.1, 45.2, 45.2B, 45.3, 45.4, 45.5, 45.6, 45.7, 45.7B, 45.8A, 45.11, 45.13]; d. Birse claims that it will have suffered loss in the event that it is held liable to the Claimant; and it claims damages in respect of such loss which are equivalent to an indemnity against all sums which it is held liable to pay to the Claimant and against its own expenditure for the purposes of defending the claim brought by the Claimant: see [46]; e. It alleges that the relevant damage is contingent upon the Defendant s liability to the Claimant and that because that liability has not yet been ascertained time has not yet started to run. In the alternative, it alleges that time began to run when the Claimant s claim against Birse was first made, which it says was in June 2010: see [59.2].

5 The Case against Stuarts 11. The particular allegations of breach giving rise to a claim for damages against Stuarts are different but in substantially the same form as the pleaded allegations against Jubb. In paragraph 38 of its Re-amended Particulars of Claim against Stuarts Birse alleges that Stuarts breaches will have caused the defects which are alleged by the Claimant and will have placed [Birse] in breach of its obligations to the Claimant under [Birse s] Warranty. The particulars of breach under paragraph 38 do not use the formula and will in turn have placed [Birse] in breach of clauses [x,y,z] of [Birse s main contract], but in respect of each allegation Birse pleads that the matters complained of was in turn a breach of clauses [a,b,c] of the Building contract and/or of the implied terms set out [above] and hence a breach of Stuarts duty of care at common law. Birse s claim for damages is identical in form to the claim at paragraph 46 of the Jubb pleading. There is no paragraph on the scope of Stuarts duty equivalent to paragraph 59 of the Jubb pleading. 12. It was not suggested that minor differences in Birse s pleadings make any difference to the overall position and I am unable to detect any difference in substance in the case being advanced on the two pleadings. The Case against Geofirma 13. The pleading against Geofirma is in substantially the same form as that against Stuarts. 14. The following points may be noted: a. Birse pleads that Geofirma s breaches of its duty of care will in turn have placed Birse in breach of the terms of the main building contract and Birse s warranty, which is the formulation adopted in the Jubb pleading; b. Birse pleads that the scope of the duty of care owed by Geofirma to Birse (to exercise reasonable skill and care in performing the design and carrying out the works which it was contractually engaged by Birse to execute so as to avoid causing Birse to suffer economic loss) is such as to enable Birse to recover from Geofirma as damages any reasonably incurred losses which it is liable to pay CGL. The use of the phrase such as to enable Birse to recover is derived from the Judgment of Akenhead J in How Engineering Services Ltd v Southern Insulation (Medway) Limited [2010] EWHC 1878 (TCC) at [32]; c. As to limitation, Birse pleads that the damage in respect of which Birse brings this action, and which was caused by Geofirma s breach of its duty of care at common law, is Birse s financial damage in satisfying any liability which it may be held to have to CGL in respect of the Hardstanding Claim. That damage is contingent upon Birse s liability to CGL and was suffered, at the earliest, when CGL made its claim against Birse. This is similar to paragraph 59.2 of the Jubb pleading. 15. Once again, it was not suggested that minor differences in Birse s pleadings make any difference to the overall position and I am unable to detect any difference in substance in the case being advanced on the various pleadings.

6 Issue 1: Are Birse s causes of action in the tort of negligence against its subcontractors time barred by virtue of section 2 of the Limitation Act 1980? The Principles to be Applied 16. A claim in tort based on negligence is incomplete without proof of damage. Damage in this sense is an abstract concept of being worse off, physically or economically, so that compensation is an appropriate remedy. 2 The phrase actionable damage is typically used in two different contexts. It may be used to describe or define the nature of damage that is capable of satisfying the legal requirements for a complete cause of action in negligence; it may also be used in the context of discussing whether or not what has occurred in fact satisfies the legal requirements for the awarding of compensation, which typically involves questions of remoteness of damage. These two usages are separate and distinct. 17. Adopting the first usage, there are only two kinds of loss which are recognised as actionable damage for the tort of negligence, namely physical damage and pure economic loss. Not all damage will suffice to complete the cause of action: de minimis non curat lex. In the case of physical injury to persons or property the damage must be beyond what can be regarded as negligible or real damage as distinct from purely minimal damage : see Cartledge v Jopling [1963] AC 758, 772, 774. Cartledge also shows that a cause of action may accrue and time may run even though the claimant neither knows nor could know that he has suffered actionable damage, though the potential injustice that may flow from a claimant s lack of knowledge is now addressed by s. 14A of the Limitation Act In cases of physical damage to persons or property, it is normally obvious what damage should be regarded as actionable, but that is not always so as the facts of Rothwell show. There was no doubt that the static pleural plaques that had developed on the lungs of claimants were unwanted physical changes: but the House of Lords held as a matter of legal policy that these physical changes did not constitute actionable damage. 18. Actionable damage is also an abstract concept when what is alleged to have been suffered is pure economic loss ; but the boundaries of the losses that may amount to actionable damage in pure economic loss cases have been subject to less analysis and are less well defined than in cases of physical damage. That may be because the development of the law of negligence relating to the recovery of pure economic loss has developed since the landmark decision of Hedley Byrne v Heller & Co [1964] AC 465 and continues to develop by a series of incremental steps based upon a developing understanding of the types of relationship that may give rise to a duty to take reasonable care to prevent economic loss. In principle, however, the first question to be addressed in determining Issue 1 is what damage was capable of constituting actionable damage in the context of Birse s relationship with its sub-contractors. That is a question of law and may require decisions of legal policy as the extent of liability for pure economic loss continues to develop. 19. Inevitably, the submissions of Counsel concentrated on the leading authorities on limitation in economic loss cases, of which Forster v Outred & Co [1982] 1 WLR 86, Law Society v Sephton & Co [2006] 2 AC 543 and AXA Insurance Ltd v Akther 2 Rothwell v Chemical & Insulating Co Ltd and anr [2008] 1 AC 281 at [7]

7 & Darby [2010] 1 WLR 1662 are the most important. But before turning to them, I find it helpful to take a step back and to consider the principles affecting the issue of remoteness in pure economic loss cases. Although the submissions of Counsel have not been based on questions of remoteness, the statements of principle in relation to that issue may cast light on the question that directly falls for decision now. 20. In Caparo Industries v Dickman [1990] 2 AC 605, the purpose for which the auditors had provided their report was held to be determinative of the conclusion that they had not owed any duty of care to the plaintiffs in respect of the purchase of shares which had caused them to lose money. At Lord Bridge emphasised the importance of the fact that the person giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. 21. This approach was taken further by Lord Hoffmann in South Australia Asset Management Corp v York Montague Ltd [1997] AC 197 at 212 where he said: In the present case, there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of loss in respect of which the duty was owed. How is the scope of the duty determined? In the case of a statutory duty, the question is answered by deducing the purpose of the duty from the language and context of the statute: Gorris v. Scott (1874) L.R. 9 Ex In the case of tort, it will similarly depend upon the purpose of the rule imposing the duty. Most of the judgments in the Caparo case are occupied in examining the Companies Act 1985 to ascertain the purpose of the auditor's duty to take care that the statutory accounts comply with the Act. In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.

8 22. In her article Cause in Fact and the Scope of Liability For Consequences (2003) LQR 388, Professor Stapleton argued that this analysis was flawed: In the tort of negligence C must establish five elements: that the claim relates to a form of actionable damage; duty; breach; historical involvement of the tortious conduct in C suffering actionable damage; and the scope of liability for consequences, the analytical step traditionally known as remoteness of damage in the Commonwealth and as proximate cause in the United States. Logically the first of these elements to be addressed is that the complaint refers to a type of harm that is actionable in this tort. Other elements of the tort such as duty, breach and cause-infact as well as the limitation issue are dependent on what types of interference have been allowed to form the gist of the action. Damage is the gist of the action in negligence. But not all types of interference with a person's interests are accepted by the law as actionable damage in this tort. For example, though mere annoyance by noise is actionable in nuisance it is not actionable in negligence. The list of types of harm that are accepted as actionable is not closed. For example, Hedley Byrne & Co Ltd v Heller & Partners Ltd is widely taken to be the case that added pure economic loss to that list for the tort of negligence. The argument advanced by C in Hotson v East Berks AHA was that this list should be expanded to include the loss of a chance to avoid a particular outcome. This reformulation of actionable damage is one of five principal forms of the loss-of-a-chance argument that have arisen in case law. In relation to the duty of care, the case law reveals a diverse range of concerns regarded as relevant to the issue of whether a duty should be recognised. Some concerns are of general application, such as the concern with indeterminacy of liability. Some are only rarely raised by the facts, such as the concern that the law should not positively encourage abortion. Moreover, a concern may weigh in favour of the recognition of a duty in one case and weigh against such recognition in another. The formulation of the duty, which group of defendants owes which group of persons a duty, can have a profound effect on the focus of the cause-in-fact issue, especially where the allegedly tortious conduct is nonfeasance. Suppose a parent fails to feed his or her baby who then dies from starvation. If the parent is viewed merely as a citizen, the parent's conduct is identical to that of the rest of society. But viewed against a comparator group of parents and those in loco parentis, the parent's conduct is exceptional. By restricting the duty of affirmative action in these cases to this comparator group the

9 law ensures that the cause-in-fact issue is focused on the specific conduct raising concern. The duty of care should not be framed as being a duty only with respect to particular kinds of consequence. This scope of the duty or scope of the risk approach which asks what kind of harm was it the defendant's duty to guard against at best conflates inquiries that it is clearer to keep separate and at worst encourages circular reasoning. It is preferable to keep duty as the issue that considers general concerns relating to whether the obligation of care should be recognised between the parties and without regard to the consequences of breach in the particular case. Where it is owed, the scope of the duty is simply to act reasonably in the circumstances. The breach analysis considers what reasonableness entails in the circumstances. Cause-in-fact provides the link between the breach and C suffering actionable damage. Finally, scope of liability then considers which of the stream of consequences of the tort that happened on this particular occasion should be judged to be within the scope of D's liability. 23. Lord Hoffmann accepted the validity of this approach extra-judicially: Just as the terms and policy of the rule imposing liability may enlarge the consequences for which one is liable, beyond those of the standard criteria, so it may restrict them. A good example is liability for negligent misstatement, where liability is imposed because the defendant has expressly or impliedly undertaken to use reasonable care in providing some information. If he is negligent, what are the consequences for which he should be liable? Should the damages be the extent to which the claimant is worse off than he would have been if he had acted upon information which was correct? Or should they be all the consequences of the claimant not having received the correct information? There may not at first sight seem to be much of a difference, but it emerges in the cases about the liability of valuers who negligently overvalue land offered to their clients as security for a loan. If one asks: what has the lender lost by lending on a valuation which was too high, the answer is the difference between the security he thought he was getting and the security he actually got. If one asks: what were the consequences of his being given the wrong information, it may turn out that if he had known the true value, would for some reason not have lent at all. In that case, the loss is whatever loss the lender has suffered from having made a loan. It will include losses due to a fall in the property market which the lender would have suffered even if he had lent on the correct valuation. It seemed to the House of Lords unfair to make the valuer liable for the fall in the property market. So the consequences for which the valuer could be liable were more

10 restrictively defined. He was to be liable only for the consequences of the lender having had too little security. He was not to be liable for all the consequences of the lender having lent. In the South Australia case, I said that such a restriction followed from the scope of the duty of care in that particular case. Other judges have also spoken about the scope of the duty. Professor Jane Stapleton has pointed out that the language is inappropriate. The scope of the duty of care is to take reasonable care to get the valuation right. It has nothing to do with the extent of the consequences for which the valuer is liable. When one considers what causal relationship is required, one is really speaking about extent of the liability and not about the scope of the duty. Professor Stapleton is right. I shall try to mend my language in future. But I will say this. There is a close link between the nature of the duty and the extent of liability for breach of that duty. In the pollution case 3, liability extended to the acts of third parties because the nature of the duty was strict. In the valuer's case, liability was confined to the consequences of the client having too little security because the valuer had not been asked to advise on whether the client should lend. The valuation was to be only one factor which the client would take into account in making his own decision about whether to lend Lord Hoffmann s clarified approach appears to me to be consistent with the approach of Lord Nicholls in Nykredit Plc v Edward Erdman Ltd [1997] 1 WLR 1627, 1630F-G: I add only the cautionary reminder that the loss must be relevant loss. To constitute actual damage for the purpose of constituting a tort, the loss sustained must be loss falling within the measure of damage applicable to the wrong in question 25. I respectfully agree with the approach advocated by Professor Stapleton and as clarified extra-judicially by Lord Hoffmann. However, when considering the scope of liability for the consequences of breach, it is relevant on either approach to consider what was the purpose behind the advice given and the expectation of the recipient of that advice; or, in other words, what was the risk that should have prompted the putative tortfeasor to take reasonable care. This approach is applicable generally and not merely where it is alleged that the Claimant has entered into a specific transaction as a result of the negligent advice. 26. What then were the purpose and expectation that underlie the sub-contractors duty to exercise reasonable care? And what was the risk that a sub-contractor should have in mind when undertaking design and inspection services in relation to part of the development that the main contractor is constructing for an employer? Even if 3 Environment Agency v Empress Cars (Abertillery) [1999] 2 AC 22 4 Hoffmann Causation (2005) LQR 592

11 the sub-contractors had not known the terms of the main contract, they knew that part of Birse s obligations under the main contract had been subcontracted to them and that Birse s reasonable expectation was that they would provide design or inspection services that were appropriate to the proper discharge of those obligations as required by the terms of their sub-contracts. Equally, if their design was defective, the risk was that Birse would build in accordance with it, which would have two consequences: first, the building as built would be defective in Birse s hands and would consequently be less valuable because of the need to remedy it in order to bring it to an acceptable standard; and, second, if the building was handed over to the employer in its defective condition, Birse was likely to be placed in breach of contract, whether or not it appreciated it or accepted it at the time. 27. It is of course true that, because damage is not a necessary constituent of a claim for breach of contract, Birse could theoretically be in breach of its contract with the employer without the employer suffering or being able to pass on to Birse any loss that would amount to actionable damage for the purposes of a cause of action in negligence. However, where what is being contemplated is a failure to design or inspect a building under construction, the likelihood is that negligent failures by the sub-contractor will cause the main contractor to incur liabilities that are financially measurable and significant. The consequences of a negligent failure to inspect are predictably similar. I conclude that, in a case where the development is being constructed for someone other than the main contractor, the primary risk that should be in the contemplation of the parties will be that the main contractor will build and hand over a defective building to the employer and thereby incur liability. His liability will usually be measured by the cost to the main contractor of undertaking repairs or the sums necessary to compensate the main contractor for the defects. 28. Birse accepts that the incurring of liability may give rise to recoverable economic loss, as it claims damages amounting to an indemnity against such sums as it has to pay to discharge its liability. It pleads against Jubb and Stuarts (but not against Geofirma) that recoverable loss is not suffered until the loss is ascertained, which in the context of the present issue is presumed to be at some future trial. It did not pursue this line of argument at the hearing and, subject to any authority to the contrary, I would consider that to be unprincipled and unacceptable. It is unprincipled for two main reasons. First, the liability that will be ascertained at a future trial has existed since the date on which Birse acted in breach of contract and has not changed in its character. Second, the effect of the breach of contract would be to reduce the current value of Birse s rights under the main contract because it would give rise to a financial liability to make good the breach either by carrying out remedial works or paying damages; and the costs of remedial works or damages are quantifiable. It is unacceptable because, if correct, it would mean that Birse could determine when its cause of action against the sub-contractors accrued by denying liability to the employer even if it knew perfectly well that liability should be accepted. I rebel against the notion that the accrual of a cause of action can be delayed almost indefinitely by an unjustified and unjustifiable denial of liability. 29. These considerations suggest that Birse s cause of action in negligence accrued when Birse incurred actual liability to its employer as a result of the negligent design or inspection which is the subject of its claim over against the sub-

12 contractors. However, Birse submits that this conclusion is precluded by previous decisions of high authority. 30. In Forster v Outred & Co, the Court of Appeal accepted a formulation advanced by Leading Counsel for the Defendants: Mr. Stuart-Smith contends, on behalf of the defendants, that when she signed the mortgage deed she suffered actual damage. By entering into a burdensome bond or contract or mortgage she sustained immediate economic loss; her valuable freehold became encumbered with a charge and its value to her was diminished because she had merely the equity of redemption, varying in value at the whim of her son's creditors; she could not sell the land without discharging the mortgage; she could not prevent her son from borrowing on the security of her mortgage to the extent of the full value of the land; she could have sued the defendants in February 1973 for an indemnity or for damages on the basis of the diminished value of the land or the amount of the outstanding debt to the mortgagor. 31. Leading Counsel had also provided a formulation of what is meant by actual damage in the following terms, which contained a troublesome ambiguity: What is meant by actual damage? Mr. Stuart-Smith says that it is any detriment, liability or loss capable of assessment in money terms and it includes liabilities which may arise on a contingency, particularly a contingency over which the plaintiff has no control; things like loss of earning capacity, loss of a chance or bargain, loss of profit, losses incurred from onerous provisions or covenants in leases. They are all illustrations of a kind of loss which is meant by actual damage. [Emphasis added] 32. It was central to this formulation that the detriment, loss or liability should be capable of assessment in money terms, as were all the examples subsequently given. All but one of the examples would conventionally be regarded as a present loss, the exception being loss of profit, where the Court recognises that the loss is future but seeks to arrive at the present day value of that future loss. The need for a present loss that was capable of assessment in monetary terms was made clear by the submission that what happened to the plaintiff on signing the deed providing security for her son s debts constituted actual damage for the tort of negligence: because there was an immediate reduction in the value of her equity and a contingent liability contingent, it is true, but nevertheless a liability to repay the principal and interest on demand and that that was capable of assessment in money terms. 33. Dunn LJ at 100A-C concentrated on the immediate reduction in the value of the Plaintiff s equity of redemption, which was a quantifiable loss. He avoided the use of the word contingency but, referring to Sykes v Midland Bank Executor and

13 Trustee Co Ltd [1969] 2 QB 518, made clear the basis of his approach: in a case where financial loss should be foreseen the damage crystallises and the cause of action is complete at the date when the plaintiff, in reliance on negligent advice, acts to his detriment provided that he has then suffered a loss that is capable of quantification in terms of money: see 99F-H. 34. The central fact in Law Society v Sephton was that the misappropriations of client funds by the solicitor did not create any liability for or impose any liability on the Law Society. It created the possibility of a future liability, but for that to happen it was necessary that the misappropriation should not otherwise be made good and that a claim should be made in proper form. It could not be said that the misappropriations affected the value of the compensation fund or subjected the Law Society to an immediate detriment that was measurable in financial terms. Lord Hoffmann addressed the Forster v Outred ambiguity head on at [14]ff. He adopted the reasoning of the High Court of Australia in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 and rejected the broad interpretation of Forster v Outred that would have led to a conclusion that any possible future (i.e. contingent ) liability is sufficient to constitute actionable damage for the tort of negligence: see [18]. At [30] he concluded his opinion as follows: 30 In my opinion, therefore, the question must be decided on principle. A contingent liability is not as such damage until the contingency occurs. The existence of a contingent liability may depress the value of other property, as in Forster v Outred & Co [1982] 1 WLR 86, or it may mean that a party to a bilateral transaction has received less than he should have done, or is worse off than if he had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances). But, standing alone as in this case, the contingency is not damage. 31 The majority of the Court of Appeal appear to have decided the case on the basis that the Law Society did not enter into any transaction giving rise to the contingent liability. It did nothing and the contingent liability was created by the misappropriations and the previous existence of the compensation fund and the rules which governed its administration. No doubt in most cases in which a party incurs a contingent liability as a result of entering into a transaction, that liability will result in damage for the reasons already discussed in relation to bilateral transactions. But I would prefer to put my decision on the simple basis that the possibility of an obligation to pay money in the future is not in itself damage. 35. Lord Walker at [43-47] reviewed cases (including Forster v Outred) where the client through the negligence of his professional adviser ended up with a package of rights less valuable than he was entitled to expect damaged or defective goods, to pursue the metaphor, rather than the undamaged and serviceable goods which he should have got. At [48] he said:

14 In all these cases the claimant has as a result of professional negligence suffered a diminution (sometimes immediately quantifiable, often not yet quantifiable) in the value of an existing asset of his, or has been disappointed (as against what he was entitled to expect) in an asset which he acquires, whether it is a house, a business arrangement, an insurance policy, or a claim for damages. Your Lordships have not, I think, been shown any case in which the imposition on a claimant of a purely personal and wholly contingent liability, unsecured by a charge on any of the claimant's assets, has been treated as actual loss. That would have been the position if the claimant in the Forster case had given a personal covenant guaranteeing her son's debts (which she seems not to have done-she paid them simply to prevent enforcement of the security on her farm) and if she had not given any security over any of her own assets. 36. Lord Mance at [76-82] identified the ability to assess a detriment in financial terms, a change in the claimant s legal position and diminution in the value of an asset as key constituents of actual damage. 37. Sephton was analysed in detail by the Court of Appeal in Axa Insurance v Akther & Darby and ors [2010] 1 WLR The central facts were that the solicitors were meant to vet their clients claims and subsequently to monitor them and to report to Axa if the claims prospects of success fell below a stipulated minimum. The purpose of the vetting and monitoring was to ensure that Axa only issued and subsequently maintained policies of ATE insurance to cover some or all of the potential costs of proceedings if the claims had reasonable prospects of success. The risk was that, if (as was alleged) the solicitors negligently failed to vet or monitor the claims, Axa would either take on or fail to avoid a risk that was worse than it should have been. The issue was whether damage was suffered when Axa issued or maintained a policy because of the solicitors negligent failure to report that prospects were inadequate, or when a claim was made under the policy. The Court of Appeal held that it was the former. 38. Arden LJ (with whom Longmore LJ agreed) recognised that the cases may contain anomalies, and regarded the distinction between the position of Mrs Outred and the giver of an unsecured personal guarantee as one such anomaly: see [17], [22] and [28]. She identified two categories of case endorsed by Sephton where a possible future liability may give rise to an actual present liability, namely: a. Cases, like that of Mrs Forster, where a contingent liability is incurred but it does not crystallise into an actual liability until a future date but where damage occurs for the purposes of the commencement of the limitation period at the time when the transaction is entered into so that time starts running from that time. I will call this the damaged asset rule : see [30]; and b. Cases where there was a bilateral transaction under which the claimant should have received certain benefits but owing to the negligence of his professional adviser did not do so. I will refer to this situation as the package of rights rule. There is no reason in principle why this line of authority should

15 not apply where what the claimant by virtue of the bilateral transaction places himself under a contingent liability : see [31]. 39. These categories of case are not closed see [32-33]: In my judgment, the damaged asset rule and the package of rights rule are best regarded not as a series of independent qualifications on the basic rule in the Sephton case that the assumption of a contingent liability does not cause the limitation period to start to run, but as different cases in which the courts have tried to express a central idea. That idea has to be found by seeking the ultimate ratio in the Sephton case, that is, a ratio which expresses the reason for the decision on which, despite the differences in expression, all the members of the House in that case were agreed. As I see it, the concept on which all the members of the House agreed was that there had to be measurable loss before time began to be run, that is to say, loss which is additional to the incurring of a purely contingent liability. In my judgment, for this purpose, rights of contribution or subrogation must be ignored because those rights arise by operation of law, unless excluded by agreement or statute. If they were taken into account, they would undermine the basic rule which is clearly established in [Sephton] that a pure contingent liability is not damage. In my judgment, the central idea in the Sephton case is that there has to be loss additional to that resulting from the incurring of a purely contingent liability. 40. Thus far I have been referring to authorities that are binding on me. Birse relies in addition upon dicta of Akenhead J in Linklaters Business Services v Sir Robert Mcalpine Ltd and Ors [2010] EWHC 2931 (TCC). Having concluded that one of the parties ( Southern ) had not acted so as to be materially in breach of any duty of care to another party ( How ) the learned Judge set out his views relatively briefly on other issues which would have arisen had he held Southern to be in breach of duty. At [113] he said: If Southern had been materially in breach of this tortious duty, I would have decided that the claim for damages against Southern was not barred by limitation. One needs to have regard, in the context of a duty of care, such as this, which permits the recovery of economic loss, to determine when the relevant loss arises. By relevant loss I mean loss falling within the measure of damage applicable to the wrong in question (per Lord Nicholls in Nykredit v Edward Erdman Ltd [1997] 1 WLR 1627 at 1603F). In this case the relevant loss arises from the claim made by Linklaters against How (and McAlpine) and accordingly the earliest at which the relevant loss can be said to have been incurred was the time when the claim was first intimated (March 2007). In one sense, the date when a claim is intimated can be thought to be a haphazard date because

16 Birse s Submissions theoretically the claim in a case like this could have been raised in, say 2006, when the corrosion problem was discovered, or even earlier if by chance a maintenance person had discovered it then. However, the duty of care was intended to guard How against the financial loss directly flowing from the breach of duty in question and the reality is that How would not in practice or in fact have incurred that loss prior to the time that the claim was intimated. Of course, How was liable in breach of contract as from the date, if not before, that it handed over its work (including any carelessly executed insulation work) but the tortious duty of care arose to protect it from the economic consequences of Southern's breach of duty which would not arise and indeed did not arise until much later. In forming this view I have also had regard to the House of Lords case of [Sephton]. 41. On the basis of these authorities, Birse s first submission is that the existence of a purely contingent liability (i.e. a possible future liability which may or may not arise, depending upon the occurrence or non-occurrence of contingencies) is not of itself enough to constitute actionable damage. That is clearly right. What is required is present damage which will require something other than and in addition to a purely contingent liability. However, it does not follow that the existence of a purely contingent liability may not contribute to the existence of present actionable damage e.g. by depressing the value of other property: see Sephton at [30] and Axa at [32-33]. 42. Birse continues by submitting that the existence of an accrued present liability to a third party is not necessarily actionable damage for the purposes of a claim over against another in negligence. That also is right on current authority, as is shown by the example of the giver of a personal guarantee: the creditor s cause of action against the guarantor arises at the moment of the debtor s default and the limitation period then starts to run as between the creditor and the guarantor: see Lep Air Services v Rolloswin Ltd [1973] AC 331, 348A-E. Despite that, the guarantor s cause of action against a negligent adviser would not arise until later: see Axa at [17], [22] and [28]. However, that is anomalous and is not the basis for any general rule. 43. Birse then submits that the present case does not fall within the damaged asset rule or the package of rights rule. Although it pleaded against Stuarts and Jubb that no relevant loss was suffered or will be suffered until any liability it may be under to Co-op (based on its original liability to the employer) is ascertained, at the hearing it submitted that it was suffered on notification by Co-op of the claim under the main contract and the warranty it had given. Here lies the nub of the dispute, though the more extreme pleaded case remains relevant. The Damaged Asset Rule 44. The damaged asset in Forster v Outred was Mrs Forster s interest in her property which was devalued by becoming encumbered. I am unable to identify any reason

17 in principle why what is devalued must be an interest in physical property. So the measurable devaluation of a person s beneficial interest in a trust should be capable of constituting actual damage whether that devaluation occurs wholly or partly as a result of a contingent (i.e. possible future) liability or otherwise. Equally, if a person s interest in the benefit of a contract is devalued, that should be capable of constituting actual damage in accordance with established principles. Whether it does so will be determined by whether the devaluation is measurable and by reference to the purpose and expectations that underpin the finding of a failure to exercise reasonable care, together with the risks that the putative tortfeasor should have had in contemplation. 45. Although the full terms of the main contract have not been explored in the present hearing, it has proceeded on the conventional assumption that Birse was responsible for the construction until handover of the whole or sections of the development or, at the latest, until practical completion. Thereafter (subject to the precise terms of the contract) possession, risk and ownership would be transferred to the employer. It follows that, until handover or practical completion, Birse had at least a possessory interest in the development as well as accrued rights under the contract. Those accrued rights will have included the right to payment and will have been subject to the requirement for remedying defects either before or after handover or, failing that, for liability in damages for breach of contract. To my mind, Birse s interest in the development and in the benefit of its contractual rights are properly to be regarded as assets within the scope of the damaged assets rule. The object of the sub-contracts was to provide the necessary design and inspection to ensure that the development as built was satisfactory and Birse s rights were not prejudiced. The assets are capable of being devalued and the devaluation is measurable by reference to the cost of remedying the defects, whether that is undertaken by Birse or by the employer. 46. Wardley and Sephton are clearly distinguishable on their facts. In each of those cases there was nothing more than a purely contingent liability and no other financially measurable detriment to the Claimant s interest until (in the case of Wardley) the Claimant had proceeded to the fullest extent of its rights against others and made demand on the Claimant or (in the case of Sephton) the misappropriation had not been made good and a client had made a claim in proper form against the fund. In the present case there was a present liability which arose at the latest on practical completion and Birse had suffered measurable financial detriment before then on constructing the development in accordance with the defective design or as allowed by the negligent inspection. 47. In my judgment, therefore, the requirements of the damaged asset rule were satisfied and time began to run by practical completion at the latest. The Package of Rights Rule 48. In Sephton at [48] Lord Walker spoke in terms of a claimant being disappointed in an asset which he acquires. In Axa the Court of Appeal at [31] defined the package of rights rule as being where there was a bilateral transaction under which the claimant should have received certain benefits but owing to the negligence of his professional adviser did not do so. The examples cited both in Sephton and Axa included cases where, as a result of the negligent advice, the

18 Claimant entered into a transaction. However, it is not clear (at least to me) why it should be necessary that the Claimant s disappointment should be in an asset which he acquires. 49. In Knapp v Ecclesiastical Insurance [1998] Lloyds Rep IR 390, the broker s negligence meant that the insurance policy acquired by the Claimants was voidable. At 402 (col 2) and 404 (col 1) Hobhouse LJ said: From these authorities it can be seen that the cause of action can accrue and the plaintiff have suffered damage once he has acted upon the relevant advice to his detriment and failed to get that to which he was entitled. He is less well off than he would have been if the defendant had not been negligent. Applying this to the present case, the plaintiffs paid their renewal premium without getting in return a binding contract of indemnity from the insurance company. They had acted to their detriment: they did not get that to which they were entitled. The fact that how serious the consequences of the negligence would be depended upon subsequent events and contingencies does not alter this; such considerations go to the quantification of the plaintiffs' loss not to whether or not they have suffered loss. The risk of loss existed from the outset and in the absence of better evidence would have to be evaluated and assessed as a risk and damages awarded accordingly. The plaintiffs suffered loss as soon as they received an insurance contract which was not binding upon the insurers. The subsequent events, the question whether or not the insurers would thereafter avoid the policy and with what consequences, went only to the quantification of loss not to the identification of the first moment at which a plaintiff suffered loss and the tort became actionable. 50. The reasons for this decision would apply equally if the facts had been that the Claimants were already possessed of a (valid) policy and the intervention of the brokers had rendered that existing package of rights voidable either directly or by causing the Claimants to act in such a way as to make it so. 51. The Court of Appeal in Knapp relied upon Bell v Peter Browne [1990] QB 495. There the Claimant transferred the matrimonial home into the sole name of his wife on terms that he should receive one sixth of the gross proceeds of sale. The wife should have executed a trust deed in his favour and his interest should have been protected by lodging a caution but the solicitors negligently failed to do either of those things. The Court of Appeal held that damage was suffered when the solicitors failed to register the caution, despite the fact that their error would have been remediable if it had been identified at any stage before the wife sold the house. At 503 Nicholls LJ said: