Complex structure theory unresolved
- A sub-sub-contractor can, in theory, owe a tenant a tortious duty of care when carrying out works to the tenant's building not to cause damage to that building
- In the Linklaters case it was held, on the facts, the sub-sub-contractor had exercised reasonable skill and care but even if it had not, there could be no cause of action in tort
- The insulated pipework was essentially one 'thing' for the purposes of tort and the insulation was a key component
- The 'complex structure theory' has been further refined and may still give rise to a duty of care not to cause pure economic loss in appropriate factual circumstances
In Construction Law (Vol 21 No 10) we examined the scope of a builder's duty in tort not to cause 'pure economic loss' (or financial loss) in anticipation of the eagerly awaited decision in Linklaters Business Services v Sir Robert McAlpine  EWHC 2931 (TCC).
The full trial took place in October and November 2010. The decision is by no means a powerful endorsement of the complex structure theory but it has left some scope for its application in the future. In this follow up article, we examine the Linklaters decision and its implications on the future application of the complex structure theory.
An action for negligence will lie where there has been a breach of duty of care resulting in personal injury or physical damage to 'other property'. See Murphy v Brentwood District Council  2 All ER 908. Lord Keith cited Donoghue v Stevenson in which Lord Atkin stated that the law of negligence is based on the precept that you must take 'reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour.' Lord Keith went on to define the principle in a modern context by clarifying that there was 'no liability in tort on a manufacturer towards the purchaser from a retailer of an article which turns out to be useless or valueless through defects due to careless manufacture. The loss is economic'.
Therefore, in the case of builders, it had often been thought that a builder could not be liable for pure economic loss because such loss is damage to 'the thing itself', i.e. the building. In order to be liable for economic loss, the builder must have caused damage to 'other property' such as a neighbouring property or for example, a car parked close to the building in question.
However, the complex structure theory holds that, for the purposes of a tortious claim, a building can be viewed as the integration of various parts into one complex structure. Each element can therefore be described as 'other property'. It therefore follows that if a defect in one element of the building causes damage to another element, the damage to the other element will be recoverable in tort as damage to 'other property'.
The theory was first proposed by Lord Bridge in D & F Estates Ltd v Church Commissioners for England  AC 177 before being re-visited and refined in Murphy. The question as to whether the theory has survived and provides an avenue for the recovery of pure economic loss has gone unanswered. However, the recent decision in the Linklaters case provided the court with an opportunity to clarify the position. The litigation concerned a development occupied as lessee by Linklaters. The developer employed Sir Robert McAlpine Ltd (McAlpine) as main contractor to carry out major re-development work. McAlpine's works included design and installation of the mechanical and electrical services, which included an air conditioning system throughout the premises. McAlpine sub-contracted the mechanical and electrical works to How Engineering Services Limited (How). The sub-contract value was £11.4 million.
The air conditioning system was distributed throughout the building vertically by means of chilled water pipework. Installing the insulation to the chilled water pipework in the risers was sub-sub-contracted to Southern Installation (Medway) Ltd (Southern). The sub-sub-contract value was £250,000.
In June 2006, a leak was detected which was traced to the chilled water pipework which, on inspection, was found to be corroded and rusty. Further investigations detected extensive corrosion throughout the premises' chilled water pipework. Linklaters alleged that the insulation to the chilled water pipework and associated fittings was carelessly installed. Linklaters replaced the chilled water pipework and started proceedings against McAlpine and How for £3.5 million excluding interest pursuant to their respective warranties. How then started separate proceedings against Southern, claiming damages for breach of the sub-sub-contractor's duty of care and also a contribution towards a breach of duty in tort it alleged Southern owed Linklaters.
At a hearing in May 2010, Southern attempted to strike out the contribution proceedings brought against it by How (in the main Linklaters action) on the basis that the loss said to have been suffered by Linklaters was purely economic and that no duty of care existed to cover this loss. How argued that the corrosion or rusting of the pipework constituted physical damage to elements of the building which were not actually provided by Southern and could therefore be characterised as 'other property'. Akenhead J considered several cases including Murphy in which he specifically cited an example of a possible application of the complex structure theory given by Lord Jauncey of defective ancillary equipment such as central heating boilers. Lord Jauncey concluded that such equipment would be subject to the normal Donoghue v Stevenson principle if such defects gave rise to damage to other parts of the building. Akenhead J made no ultimate finding but stated that there was little or no obvious conceptual difference between flood or fire damage caused to other parts of the building by a carelessly installed boiler and corrosion damage caused to the chilled water pipework by carelessly installed insulation.
Akenhead J concluded that there was a real probability that the courts would adopt the complex structure theory. However, the application of the theory was dependent on the facts of each case and where the court chose to draw the line as to whether a building's parts could be viewed as 'other property'. Finally, Akenhead J suggested he was aware that there might be broad policy considerations to prevent the so-called floodgates from opening which might have to be applied by the higher courts.
At the full trial in October and November 2010, Southern again argued that the installation of the chilled water pipework encompassed both the insulation works and the pipework itself. It argued that one should not differentiate between the chilled water pipework and insulation that go to make up one installation. Therefore, any damage to the pipework was damage to the installation and therefore 'the thing itself', which could not give rise to a cause of action in negligence.
The court held that, on the balance of probabilities, Southern did not breach any duty of care it may have owed How or Linklaters to exercise reasonable skill and care. Given the court's findings of fact, it did not have to consider these claims further. However, it did set out obiter on whether the damage to the pipework was in fact damage to the 'thing itself'.
The judge referred to the judgments in Murphy and D&F Estates and pointed out that there was very little relevant binding case law in this country. There was, however, some obiter authority which gave examples of what might give rise to a cause of action in negligence. Akenhead J cited the example given in Murphy of carelessly installed electrical wiring causing fire damage to the building. He then cited an example given in D&F Estates of the purchase of a second-hand car fitted with a tyre which, as a result of careless manufacture, was dangerously defective and burst, causing injury to the driver and the car. In this scenario, the negligent manufacturer would be liable in tort on the ordinary application of Donoghue v Stevenson. Akenhead J pointed out that these examples did not deal satisfactorily with 'components of the offending installation' such as the reinforcement within a tyre or a valve within a boiler, causing damage only to the tyre or boiler. The issue was therefore as follows:
'... whether in English law as a matter of authority or policy (if different) there is or should be a distinction. I would be slow to suggest that the obiter dicta of eminent members of the House of Lords were wrong as a matter of principle but it is clear that they were not applying their minds to a carelessly installed or manufactured component causing damage to the thing or installation of which it was merely a component.'
The judge formed the view that:
'the insulated chilled water pipework was essentially one "thing" for the purposes of tort. One would simply never have chilled water pipework without insulation because the chilled water would not remain chilled and it would corrode. The insulation is a key component but a component nonetheless.'
Consequently, no cause of action arose in tort between Southern and Linklaters. The judge went on to suggest that his finding was not at all unreasonable as Linklaters or people in a similar position could protect themselves (as Linklaters had done) with contractual warranties from relevant parties such as the key contractors in any development.
Those who have been following the Linklaters litigation may be disappointed that the court only dealt with the issue of complex structure theory in obiter remarks. However, Akenhead J reached the conclusion that Southern could have owed Linklaters a duty of care in tort even though, on the facts, no cause of action arose because there was no loss since the physical damage complained of was damage 'to the thing itself '.
Southern may feel aggrieved that Akenhead J seems to have taken a different view at the full trial when compared to his comments in the dismissal of Southern's strike out application. However, Akenhead J said in his judgment of Southern's strike out application:
'The problem arises as to where one draws the line in fact between what I might call consequential damage (that is, physical damage to other construction elements caused by the carelessness in providing one element) and damage to the "thing itself".'
Akenhead J made it clear in Southern's strike out application that the application of the theory was dependent on the facts of each case and where the court chose to draw the line. In making no ultimate finding in the application, Akenhead J allowed the trial judge (himself) scope to consider the facts of the case more closely and draw that line. This reveals the inevitable judicial uncertainty in this area with each case turning on its specific facts.
Following Akenhead J's decision, it appears that, at one end of the spectrum, if an integrated element of an installation causes damage to the installation, it will be deemed to be part of the thing itself and the loss purely economic and therefore irrecoverable in tort.
At the other end of the spectrum, it appears that where a distinct element (or in this case an installation) of a structure causes damage to another, the complex structure theory may still apply. Practitioners may still rely on the examples given in Murphy as to circumstances in which the theory will apply and sub-contractors may owe a duty not to cause economic loss. The examples given by Lord Jauncey in Murphy are
'a steel frame erected by a specialist contractor which failed to give adequate support to floors or walls. Defects in such ancillary equipment as central heating, boilers or electrical installations will be subject to the normal Donoghue v Stevenson principle if such defects give rise to damage to other parts of the building'.
Lord Keith meanwhile gave examples of a defective central boiler which explodes and damages a house and defective electrical installations which malfunction and cause a house to burn down.
It appears that in these scenarios the complex structure theory may still be applicable. However, in distinguishing between the above examples and the components within Linklaters' air conditioning system, Akenhead J appears to have made a fact based decision. Although this would appear to fairly allocate the risk to those most able to meet the liability (given the respective contract values in the Linklaters litigation referred to above) it does not give any certainty in practice. As such, the application of the theory has been further refined and the court's unease with the theory exhibited.
For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Biddle on +44 (0)121 685 2708 or Amy Richards on +44 (0)121 260 9973
This published article may contain information of general interest about current legal issues, but does not give legal advice.