Having considered the law on the remoteness of damage, the Court of Appeal has confirmed that a contractor may now find itself liable for losses caused by a fall in property values, where there has been a significant delay caused by its breach of contract.

The Facts

In August 2006, Mr Gubbins obtained planning permission to develop a field, which he owned, for residential purposes. The development was to include a road which was to serve the new homes, and it was intended that following completion, the road would be adopted by the highway authority.

The John Grimes Partnership Ltd (“JGP”) was retained by Mr Gubbins to design the road and drainage for the development, and to obtain the necessary approvals from the County Council. To this end, a formal letter of engagement was entered into; it was an express oral term of the contact that JGP would complete the agreed work by March 2007.

The work was not completed by March 2007. Mr Gubbins retained another engineer to complete the design of the development road, and on 16 June 2008, the redesigned road and drainage layout was submitted by the new engineer to the County Council. Approval was given 2 days later, some 15 months after the agreed date for completion.

JGP had already been paid just under £20,000 in fees at this point, and invoiced Mr Gubbins for a further £2,893. Mr Gubbins refused to pay and JGP commenced proceedings to recoup the unpaid fees. Mr Gubbins subsequently brought a counterclaim for the sums previously paid to JGP, as well as seeking damages for the losses caused by JGP’s breach of contract, which included damages resulting from the fall in the market value of the new residential properties during the period of delay.

Decision at First Instance

The Judge at first instance noted that there were long periods of little or no progress; Mr Gubbins was only placed in the position he would have been in had JGP acted in accordance with the contract in June 2008. As such, the Judge had no trouble establishing causation, due to the fact that the delay in the development by those 15 months had been caused by JGP’s breach of contract, which resulted in a loss to Mr Gubbins. The question which arose then was whether or not the loss suffered by Mr Gubbins was too remote.

When considering whether the loss was too remote, the Judge at first instance concluded that JGP knew that any delay on its part brought with it a risk that the property market may move to the detriment of Mr Gubbins. As such, the loss was reasonably foreseeable by JGP. However, could JGP reasonably be considered to have assumed responsibility for the type of loss caused, given the “commercial background” of the contract? The Judge observed that although property markets do rise and fall, they are not as volatile as other such markets; it was the “egregious delay” of JGP which had produced the loss suffered by Mr Gubbins.

The court at first instance found in favour of Mr Gubbins, and awarded damages which were to be assessed. JGP appealed this decision

Court of Appeal Decision

Upon a consideration of the principles laid down in Hadley v Baxendale (1854) 9 Exch. 341, the Court of Appeal observed that there is “an implied term accepting responsibility for the types of losses which can be reasonably foreseen at the time of contract to be not unlikely to result if the contract is broken.” However, it is well established that although there may be a causal link between the breach of contract and the loss suffered; some types of loss may be regarded as being too remote for the contract breaker to be liable. The decision in Transfield Shipping Inc. v Mercator Shipping Inc. [2008] UKHL 48 confirms that where there is evidence that the commercial background would result in the implied assumption of responsibility being inappropriate, then “the contract breaker escapes liability”.

Considering whether there were particular circumstances which demonstrated that the parties could not have intended JGP to bear the liability for the loss suffered by Mr Gubbins, the Court of Appeal concluded that there was no evidence to suggest an understanding or expectation in the property industry that a person in JGP’s position would not be taken as having assumed responsibility for movements in the property market, where there was a delay resulting from a breach of contract. As such, the losses arising from the movement in the property market were reasonably foreseeable by JGP; JGP knew that the market could go up as well as down during the period of any delay.

Although JGP had no control over the property market, the fact that “a loss is suffered because of a change in market values during the period of wrongful delay does not of itself in any way render the case out of the ordinary”. The Court of Appeal drew a distinction between markets which are usually volatile, where a dramatic movement in price can occur almost overnight, and the property market, where generally prices do not drastically fall or rise over the course of a few days. As such, the Court of Appeal held that JGP’s “egregious delay” of 15 months gave rise to a quantifiable loss, and was unanimous in dismissing JGP’s appeal.

A further point which came out of the Court of Appeal’s decision was a rejection of JGP’s argument that the scale of the loss was likely to be disproportionate to the size of the fee payable under the contract by Mr Gubbins.

Comment

This case serves as a reminder of the importance of adhering to contractual deadlines in construction projects, and highlights the financial risks associated with a failure to meet those deadlines. As a result of the fall in property prices since 2007, those employed under construction contracts may now find themselves facing large claims because of their failure to complete construction projects on time.

However, this case should not be viewed as opening the floodgates on claims against contractors who fail to complete a construction project on time. Whilst the Court of Appeal held that the loss caused by a fall in the property market was reasonably foreseeable, when caused by the contractor’s delay, the courts are likely to require a significant delay before they will award damages for loss arising from a breach of contract in these circumstances.

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