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锘縄t is ironic that one of the most important decisions in years on defects liability, given by HHJ Akenhead in Linklaters Business Services vs Sir Robert McAlpine and others, should relate to the refurbishment of the smart new premises into which one of the leading City law firms moved in the
mid-nineties.

The background is that the developer engaged Sir Robert McAlpine as main contractor on a JCT standard form with a contractor鈥檚 designed portion including
all the M&E work which was in turn sub-let to How Engineering Services. The contractual arrangements required both McAlpine and How to issue collateral warranties to Linklaters.

A key element of the M&E work was the integrated air conditioning system which involved insulated chilled water pipework passing up through the building. How engaged Southern Insulation to carry out the insulation work for the chilled water pipework and specified the insulation product which came in three layers to be stuck together to form an unbroken vapour seal.

锘縊f particular interest is the judge鈥檚 finding that, despite the absence of a contractual relationship, Southern did owe Linklaters a common law duty in relation to its work

About 10 years after completion, a leak from one of the sets of chilled water risers led to the discovery that a substantial amount of the chilled water pipework was severely corroded as a result of condensation which had penetrated the insulation. Ultimately it cost Linklaters about 拢2.8m to replace it. The firm then sued McAlpine and How separately in the Technology and Construction Court. How sought to 鈥減ass the parcel鈥� to Southern on the basis that Southern鈥檚 obligations to it were back to back with its obligations up the line.

The first task for the judge was to establish whether Southern鈥檚 insulation work had caused the corrosion problem. Although there were issues with the workmanship, the judge held that Southern鈥檚 duties to How under what was a simple contract based on its quotation were much narrower than the very far-reaching obligations undertaken by How in its formal contract with McAlpine. He found that, whereas How was in breach, Southern was not. It followed that the remaining issues on liablility, although important, were academic to the outcome.

Of particular interest is the judge鈥檚 finding that, despite the absence of a contractual relationship, Southern did owe Linklaters a common law duty in relation to its work. Historically, the courts have adopted a restrictive approach to imposing such duties particularly on construction projects where the parties tend to formalise rights and duties in contractual relationships. The judge considered that as a long-term tenant on full repairing terms, bearing the financial risk regarding the condition of the pipework, Linklaters had a 鈥渟ufficient interest鈥� in the property that had been damaged - the chilled water pipework - to have locus standi to bring a claim.

The decision also highlights some anomalous features of tort law in this context. For instance, whereas Southern鈥檚 potential liability to How, with whom it had a contract, depended upon whether Southern had caused How financial loss, in the case of Linklaters the absence of a contractual relationship meant the question was whether Southern had caused physical damage to its property. 

This distinction can be critical in terms of whether a claim falls foul of limitation problems. For instance, having categorised the relevant loss or damage in the case of the duty to How as of a financial nature, the judge considered that the loss arose, and time therefore started to run for limitation purposes, from when Linklaters notified How that it intended to claim. However, although this is not explicit in the judgment, it would appear that time would have started to run for any claim by Linklaters against Southern from the earlier date of when the corrosion of the pipework occurred which may well have made it time-barred.

Another important point raised in the context of the potential claim by Linklaters against Southern was whether Southern鈥檚 actions could be said to have caused damage to 鈥渙ther property鈥� which is a pre-requisite for this type of tort claim. How argued that the correct way of looking at Southern鈥檚 work was that the insulation and the pipework itself were in effect separate items of property so that it could be said that Southern had caused damage to 鈥渙ther property鈥�. Nevertheless, the judge preferred Southern鈥檚 analysis that the insulation was no more than one component part of the insulated chilled water pipework and to treat it as other than that would be wholly artificial. Any claim that Linklaters might have brought against Southern in tort would therefore have been doomed to fail.

This decision certainly represents good news for tenants. There are lessons to be learnt for parties who hope to find themselves in the position of passing the liability parcel at some stage in the future on to another party. Make sure you get a proper contract in place with that party or else you might find yourself holding the parcel when the music stops.         

Dominic Helps is a consultant with construction specialist law firm Corbett & Co