JISCBAILII_CASE_TORT

Invercargill City Council Appellant v. Hamlin Respondent (New Zealand) [1996] UKPC 56 (12 February 1996)

Privy Council Appeal - 1996

Invercargill City Council

Appellant

v.

Hamlin

Respondent

FROM

THE COURT OF APPEAL OF

THE

NEW ZEALAND

---------------

JUDGMENT OF THE LORDS OF THE

JUDICIAL

COMMITTEE

OF THE PRIVY COUNCIL,

Delivered

the 12th Feburary 1996

------------------

Present at the

hearing:-

Lord

Browne-Wilkinson

Lord Keith of Kinkel

Lord Browne-Wilkinson

Lord Mustill

Lord Lloyd of Berwick

Sir Michael Hardie Boys

[Delivered by

Lord Lloyd of Berwick]

------------------

In May 1972, the plaintiff, Noel Gordon Hamlin, entered into an agreement

with a firm of builders whereby they sold him some land at 67, Edinburgh

Crescent, Invercargill, and agreed to build him a house. A building inspector

employed by the Invercargill City Council carried out a number of inspections

in the course of construction, as required by the city byelaws. On 1 June 1972

the inspector approved the foundations. 17 years later the plaintiff called in

another builder, who told him that the foundations were defective. In November

1990 the plaintiff commenced proceedings against the council as well as the

builders claiming $64,250 as the cost of repairs.

The case came before Williamson J. on 8 June 1992. He held that the builders

were in breach of contract, since the foundations were not laid in accordance

with the specification. But, as so often happens, the builders were no longer

in business. So the plaintiff's prospect of recovering damages depended on his

claim in tort against the council. The judge held that the building inspector

had been negligent in carrying out his inspection. In his report the inspector

had noted 'clay 15 inches siting approved.' But along the eastern wall the

foundations were only seven to eight inches deep. According to the expert

evidence which the judge accepted the inspector could have discovered without

difficulty that the foundations had not been carried down to firm clay.

A number of cracks, and other minor defects, had appeared over the

years. But the judge found that a reasonably prudent homeowner would not have

suspected the foundations, or discovered the cause of the trouble until 1989,

when the plaintiff called in the second builder. It followed that, as New

Zealand law then stood, his claim against the council was in time. Since it

was admitted, for the purposes of the hearing before the judge, that the

council was under a duty of care towards the plaintiff, the judge upheld the

plaintiff's claim. He assessed the damages at $53,550.

The council appealed. There were two main issues for determination. Since

the concession made in the court below was not binding in the Court of Appeal,

the first question was whether the council owed any duty of care to the

plaintiff at all. The council argued that the Court of Appeal ought to follow

the decisions of the House of Lords in D. & F. Estates Ltd. v. Church

Commissioners for England [1989] AC 177 and Murphy v. Brentwood District

Council [1991] 1 AC 398.

The second question was whether the plaintiff's claim was time-barred. The

council argued that the Court of Appeal ought to follow the decision of the

House of Lords in Pirelli General Cable Works Ltd. v. Oscar Faber & Partners

[1983] 2 A.C. 1, in other words, that the cause of action accrued when the

damage to the house came into existence, and not when it could with reasonable

diligence have been discovered. On that view the plaintiff issued his writ too

late.

The appeal came before a full court of five judges [1994] 3 N.Z.L.R 513.

They answered the first question unanimously in favour of the plaintiff. They

answered the second question by a majority in favour of the plaintiff with

McKay J. dissenting. Their Lordships would wish to pay tribute to the very

high quality of all five judgments.

There can be no doubt that the decision of the Court of Appeal is in

accordance with the law as it has been developed by New Zealand courts over

the last 20 years. A convenient starting point is Bowen v. Paramount Builders

(Hamilton) Ltd. [1975] 2 N.Z.L.R. 546, since it was also a case concerning

inadequate foundations. The sole defendant in that case was the builder, and

the plaintiff was a purchaser from the original owner. The case was decided

shortly after the English decision in Dutton v. Bognor Regis Urban District

Council [1972] 1 Q.B. 373. In Dutton's case the local authority was held

liable for the negligence of the building inspector on facts very similar to

the present case. Speight J., at first instance, declined to follow Dutton's

case. But his decision was reversed in the Court of Appeal [1977] 1 N.Z.L.R.

394. The leading judgment was given by Richmond P., who, as it happens,

dissented on the facts. But there was no disagreement as to the principle. The

case was treated as one involving physical damage to the premises. The court

did not find it necessary to deal with the question of 'pure' economic loss,

that is to say, economic loss unassociated with physical harm to the structure

itself. The point was left open for the future.

In Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234 the

plaintiff, a subsequent purchaser, brought proceedings against the council for

failing to ensure that the foundations were adequate. The council brought

in the builders as third party. By the time the case reached the Court of

Appeal, the House of Lords had decided Anns v. Merton London Borough Council

[1978] AC 728. Lord Wilberforce said in that case, at p. 758, that it was

the duty of the council 'to take reasonable care, no more, no less, to secure

that the builder does not cover in foundations which do not comply with byelaw

requirements.'

The leading judgment in Mount Albert Borough Council v. Johnson [1979] 2

N.Z.L.R. 234 was given by Cooke P. It was, he said, at p. 239, current law in

New Zealand that a purchaser in the plaintiff's position can recover in tort

for economic loss caused by negligence, 'at least when the loss is associated

with physical damage.'

In a subsequent and related case brought by the council against their

insurers, Cooke P. described the line of authority following on Dutton's case

[1972] 1 Q.B. 373 as depending on control: see Mount Albert City Council v.

New Zealand Municipalities Co-operative Insurance Co. Ltd. [1983] N.Z.L.R.

190, 196: 'The local authority's control of building in its district has been

held to carry a duty to take reasonable care in performing the statutory

functions.'

Next there came a group of cases all decided in 1986: Brown v. Heathcote

County Council [1986] 1 N.Z.L.R. 76, Stieller v. Porirua City Council [1986] 1

N.Z.L.R. 84, Craig v. East Coast Bays City Council [1986] 1 N.Z.L.R. 99 and

Williams v. Mount Eden Borough Council [1986] 1 N.Z.B.L.C. 102, 544. These

cases applied the principles stated in Bowen v. Paramount Builders (Hamilton)

Ltd. [1975] 2 N.Z.L.R. 546 and Mount Albert Borough Council v. Johnson [1979]

2 N.Z.L.R. 234 to building defects other than faulty foundations. They are

important because they extended the principle to cases where there was no

physical damage as such, nor any certainty that there would be. It was enough

that the value of the premises had been reduced. Whether it is right to

describe such cases as instances of 'pure' economic loss may not matter very

much. They do not depend on pure economic loss in the sense of White v. Jones

[1995] 2 AC 207 or Henderson v. Merrett Syndicates Ltd. [1995] 2 AC 145.

For in the building cases the economic loss is suffered by reason of a defect

in a physical object.

Secondly the cases are important because they recognise the element of

reliance in establishing a duty of care in economic loss cases. Thus in

Williams v. Mount Eden Borough Council [1986] 1 N.Z.B.L.C. 102,544, 102,551

Casey J. said:

"Having had these powers in relation to the construction of buildings

conferred on it, the reasonable local authority would no doubt have accepted

that they were intended to be exercised for the protection of those members of

the public concerned with those buildings, whether as owners, occupiers or

users. No doubt it would also have appeared to such an authority that many of

them would have no opportunity or expectation of checking or controlling

hidden details in its construction to ensure that appropriate standards had

been complied with, relating to its physical soundness, its ability to

withstand earthquake shocks, and the safety and health of its occupants.

Conversely, those members of the public would have been aware that local

bodies exercised this kind of control over buildings constructed in their

districts; this has been a known fact of at least New Zealand urban life for

several generations. The statement by Mrs. Williams that her knowledge of the

Mount Eden Borough Council as 'the toughest' and her assumption that

everything would be all right, reflects what I am sure all these plaintiffs

and most of the community at large would have felt. Work essential to the

structural integrity of a building and its earthquake resistance is almost

invariably covered in, and in the usual house buying situation, purchasers

have to rely on the council doing its job properly under the building controls

conferred on it. I am also satisfied that the latter and its officers would

have been well aware that such reliance was placed upon it by the community at

large, especially in this case where they must have realised the builder was

likely to sell the units; and that there was no feasible way any purchaser

could have discovered hidden structural defects."

Lastly these cases are important because they mark the point at which Cooke

P. felt able to say in Brown v. Heathcote County Council [1986] 1 N.Z.L.R. 76,

79:

"The lineaments of the contemporary New Zealand law of negligence in this

and related fields are now, I think, reasonably firmly established by a series

of cases; but in the main it is law of comparatively recent growth, largely

though by no means exclusively evolved since the appeal in Bowen was allowed

in this court. . . ."

The facts of Brown v. Heathcote County Council were that the plaintiffs

built a house on a site which, unknown to them, was subject to flooding. They

incurred expenditure of $32,000 in raising the level of the floor. They

brought an action against the council and the drainage board for negligence.

They succeeded against the board before Hardie Boys J. and the Court of

Appeal, on the ground that the board should have warned them of the danger of

flooding. In the course of his judgment Cooke P., at pp. 80-82, pointed out

that the facts bore some resemblance to those in Dennis v. Charnwood Borough

Council [1983] Q.B. 409, a decision which had survived Governors of Peabody

Donation Fund v. Sir Lindsay Parkinson & Co. Ltd. [1985] AC 210, 243-245.

But reconciling the results in particular cases in this field was not, he

thought, of the highest priority. He clearly foresaw the time when New Zealand

law might 'go its own way' having regard to the special circumstances

prevailing in that country.

The board appealed to the Privy Council [1987] 1 N.Z.L.R. 720. The appeal

was dismissed. Their Lordships did not find it necessary in that case to

consider the many authorities discussed in the courts below. For the appeal

turned on a straightforward question whether a sufficient degree of proximity

existed between the board and the plaintiffs. Their Lordships answered that

question in favour of the plaintiffs. Although the board had not been asked by

the council to check the flood levels, they habitually did so. Accordingly

they assumed a duty of care under the principle stated in Hedley Byrne & Co.

Ltd. v. Heller & Partners Ltd. [1964] AC 465, not only towards the council,

but also towards the plaintiffs.

Two years later the position which had by then been reached in New

Zealand was recognised by the House of Lords in D. & F. Estates Ltd. v. Church

Commissioners for England [1989] AC 177. After referring to Batty v.

Metropolitan Property Realisations Ltd. [1978] Q.B. 554, a case which Lord

Oliver of Aylmerton analysed as one of pure economic loss, he continued [1989] AC 177, 216:

"As in Anns v. Merton London Borough Council [1978] AC 728, the cause of

action was related not to damage actually caused by the negligent act but to

the creation of the danger of damage, and the case is therefore direct

authority for the recovery of damages in negligence for pure economic loss - a

proposition now firmly established in New Zealand: see Mount Albert Borough

Council v. Johnson [1979] 2 N.Z.L.R 234.'

Lord Bridge of Harwich said, at p. 207:

"I should wish to hear fuller argument before reaching any conclusion as

to how far the decision of the New Zealand Court of Appeal in Bowen v.

Paramount Builders (Hamilton) Ltd. should be followed as a matter of English

law. I do not regard Anns v. Merton London Borough Council as resolving that

issue."

Their Lordships can turn now to the decision of the Court of Appeal in the

instant case, while noting on the way that in Chase v. de Groot [1994] 1

N.Z.L.R. 613, yet another foundations case, Tipping J. followed the many

previous decisions of the New Zealand Court of Appeal, in preference to the

intervening decision of the House of Lords in Murphy v. Brentwood District

Council [1991] 1 AC 398; and in South Pacific Manufacturing Co. Ltd. v. New

Zealand Security Consultants & Investigations Ltd. [1992] 2 N.Z.L.R. 282 Cooke

P. concluded in agreement with the four other members of the court that the

decision in Murphy's case [1991] 1 AC 398 should not lead to any change in

the approach to negligence cases in New Zealand.

In the present case, Cooke P. [1994] 3 N.Z.L.R. 513, 519 observed that ' the

linked concepts of reliance and control' had underlain the New Zealand case

law from Bowen's case [1977] 1 N.Z.L.R. 394 onwards; he also regarded the

decision of the Privy Council in Brown v. Heathcote County Council [1987] 1

N.Z.L.R. 720 (to which their Lordships have just referred) as an important

authority in favour of the plaintiff's claim in the present case.

Their Lordships need not analyse the other four judgments. They are all

founded on what the court regarded as a consistent line of authority starting

with Bowen's case [1977] 1 N.Z.L.R. 394 in 1975, and thus stretching back over

a period of nearly 20 years.

Miss Bates, for the council, attacks the decision on a number of grounds.

Quite apart from the about turn which the House of Lords executed in Murphy's

case [1991] 1 AC 398, she submits that the decision represents a departure

from the previous line of authority in New Zealand. The previous cases (so it

was argued) were all based on a straightforward application of the principle

in Donoghue v. Stevenson [1932] AC 562. In the present case the court seems

for the first time to have imposed a duty of care on the basis of Hedley

Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] AC 465. But there was no

evidence that the council ever assumed responsibility for economic loss caused

by the builders' failure to comply with the building byelaws; nor was there

any evidence of any reliance by the plaintiff. Indeed reliance was not even

pleaded.

Their Lordships are unable to accept this argument. Hedley Byrne & Co. Ltd.

v. Heller & Partners was scarcely mentioned in the court below. Moreover

general reliance (as distinct from specific reliance established on the facts

of a particular case) has been a feature of this branch of New Zealand law for

many years. As early as 1976 Chilwell J. said in Hope v. Manukau City Council

(unreported), 2 August 1976:

"There is no direct evidence that the plaintiff relied upon the flat

having been built in accordance with the byelaws and regulations. She did not

say that she did. But she did say that she saw the plans and specification

before she agreed to purchase the flat. . . . I would be prepared to draw the

inference as a matter of common sense that the average prudent purchaser of a

new residential flat expects that the byelaws and regulations will have been

complied with. I would classify this plaintiff as an average purchaser. In our

cities there would be few citizens who would be unaware of the necessity for

buildings to comply with the byelaws and health regulations and unaware of the

control which city councils exercise over building works."

The same point was made by Casey J. 10 years later in Williams v. Mount Eden

Borough Council [1986] 1 N.Z.B.L.R. 102,544, 102,551, in a passage which has

already been quoted, and by Cooke P. in the South Pacific Manufacturing Co.

case [1992] 2 N.Z.L.R. 282, 297. So there was nothing new in the concept of

reliance by house buyers generally as an element in the imposition of a duty

of care. Cooke P. drew attention in that connection to Housing in New Zealand:

Report of the Commission of Inquiry (1971), over which he presided. He made

the following comment [1994] 3 N.Z.L.R. 513, 519:

"whatever may be the position in the United Kingdom, homeowners in New

Zealand do traditionally rely on local authorities to exercise reasonable care

not to allow unstable houses to be built in breach of the byelaws."

But even if (which their Lordships doubt) it were possible to detect in the

present case an increased emphasis on reliance when compared with previous

cases that is just the sort of change of emphasis which is to be expected in a

developing branch of the common law. Were it not for the intervening decisions

of the House of Lords in D. & F. Estates Ltd. v. Church Commissioners for

England [1989] AC 177 and Murphy v. Brentwood District Council [1991] 1 AC 398, it is unlikely that the present case would ever have reached the Board at

all, at any rate on the duty of care point. It is to consider the impact of

those decisions on New Zealand law that their Lordships now turn.

Miss Bates's argument can be stated in very simple terms. The decision in

Bowen's case [1977] 1 N.Z.L.R. 394 was explicitly based on the English

decision in Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373.

The authority of the line of cases which followed Bowen's case [1977] 1

N.Z.L.R. 394 was reinforced by the decision of the House of Lords in Anns v.

Merton London Borough Council [1978] AC 728. Both those English cases are

now known to have been wrongly decided. If English law had not taken a wrong

turning in 1972, New Zealand law would never have followed. The present appeal

affords an opportunity for the Board, as the final appellate court for New

Zealand, to put New Zealand law back on the correct path.

Where the New Zealand Court of Appeal is purporting to apply settled

principles of English common law, then it is the function of the Board to

ensure that those principles are applied correctly. Hart v. O'Connor [1985] AC 1000 was such a case, and Lord Scarman's observations in Tai Hing Cotton

Mill Ltd. v. Liu Chong Hing Bank Ltd. [1986] AC 80, 108 are to be understood

in that light.

But in the present case the judges in the New Zealand Court of Appeal were

consciously departing from English case law on the ground that conditions in

New Zealand are different. Were they entitled to do so? The answer must surely

be 'Yes.' The ability of the common law to adapt itself to the differing

circumstances of the countries in which it has taken root, is not a weakness,

but one of its great strengths. Were it not so, the common law would not have

flourished as it has, with all the common law countries learning from each

other. The point was put by Lord Diplock in a very different context in Broome

v. Cassell & Co. Ltd. [1972] AC 1027, 1127:

"Other supreme appellate tribunals exercise a similar function in other

countries which have inherited the English common law at various times in the

past. Despite the unifying effect of that inheritance upon the concept of

man's legal duty to his neighbour, it does not follow that the development of

the social norms in each of the inheritor countries has been identical or will

become so. I do not think that your Lordships should be deflected from your

function of developing the common law of England and discarding judge-made

rules which have outlived their purpose and are contrary to contemporary

concepts of penal justice in England, by the consideration that other courts

in other countries do not yet regard an identical development as appropriate

to the particular society in which they perform a corresponding function."

By the same token, the Court of Appeal of New Zealand should not be deflected

from developing the common law of New Zealand (nor the Board from affirming

their decisions) by the consideration that the House of Lords in D. & F.

Estates Ltd. v. Church Commissioners for England [1989] AC 177 and Murphy v.

Brentwood District Council [1991] 1 AC 398 have not regarded an identical

development as appropriate in the English setting.

The particular branch of the law of negligence with which the present appeal

is concerned is especially unsuited for the imposition of a single monolithic

solution. There are a number of reasons why this is so. The first and

most obvious reason is that there is already a marked divergence of view among

other common law jurisdictions.

In Canada it is well established that a municipality may be liable for

economic loss caused by the negligence of a building inspector. Thus in City

of Kamloops v. Nielsen (1984) 10 D.L.R. (4th) 641, the facts of which were

very similar to the present case, the plaintiff, a subsequent purchaser, sued

the municipality for failing to prevent his house being built with defective

foundations in breach of a local byelaw. He also sued the builder. He

succeeded against both defendants. The Kamloops case was decided before

Murphy's case [1991] 1 AC 398. But in a subsequent case, a majority of the

Supreme Court followed the Kamloops case, 10 D.L.R. (4th) 641, and declined to

follow Murphy's case [1991] 1 AC 398: see Canadian National Railway Co. v.

Norsk Pacific Steamship Co. Ltd. (1992) 91 D.L.R. (4th) 289. McLachlin J.

said, at p. 365:

"The fact is that situations arise, other than those falling within the

old exclusionary rule, where it is manifestly fair and just that recovery of

economic loss be permitted. Faced with these situations, courts will strain to

allow recovery, provided they are satisfied that the case will not open the

door to a plethora of undeserving claims. They will refuse to accept injustice

merely for the sake of the doctrinal tidiness which is the motivating spirit

of Murphy. This is in the best tradition of the law of negligence, the history

of which exhibits a sturdy refusal to be confined by arbitrary forms and rules

where justice indicates otherwise. It is the tradition to which this court has

adhered in suggesting in Kamloops that the search should not be for a

universal rule but for the elaboration of categories where recovery of

economic loss is justifiable on a case-by-case basis."

A little later she said, at p. 371:

"I conclude that, from a doctrinal point of view, this court should

continue on the course chartered in Kamloops rather than reverting to the

narrow exclusionary rule as the House of Lords did in Murphy."

The same approach was reaffirmed unanimously in a recent decision of the

Supreme Court: see Winnipeg Condominium Corporation No. 36 v. Bird

Construction Co. (1995) 121 D.L.R. (4th) 193.

In Australia, the High Court at first declined to hold local authorities

liable for economic loss suffered by reason of houses being built with

defective foundations: see Council of the Shire of Sutherland v. Heyman (1985)

157 C.L.R. 424. A lengthy passage from Brennan J.'s judgment in that case was

quoted with approval by Lord Keith of Kinkel in Murphy's case [1991] 1 AC 398, 467-468. But 10 years later Brennan J. found himself in a minority of one

when the High Court changed tack. In Bryan v. Maloney (1995) 69 A.L.J.R. 375

it was held that a negligent builder was liable for economic loss suffered by

a subsequent purchaser. Mason C.J. referred to the D. & F. Estates case [1989] AC 177 and Murphy's case [1991] 1 AC 398 and continued, 69 A.L.J.R. 375,

383:

"It is, however, apparent that, in each case, their Lordships considered

that a negligent builder's liability under the law of negligence did not

extend to compensating either the first or a subsequent owner for economic

loss sustained when the inadequacy of the footings of a building first becomes

manifest by reason of consequent damage to the fabric of the building. Their

Lordships' view in that regard seems to us, however, to have rested upon a

narrower view of the scope of the modern law of negligence and a more rigid

compartmentalisation of contract and tort than is acceptable under the law of

this country."

Their Lordships cite these judgments in other common law jurisdictions not

to cast any doubt on Murphy's case [1991] 1 AC 398, but rather to illustrate

the point that in this branch of the law more than one view is possible: there

is no single correct answer. In Bryan v. Maloney, 69 A.L.J.R. 375 the majority

decision was based on the twin concepts of assumption of responsibility and

reliance by the subsequent purchaser. If that be a possible and indeed

respectable view, it cannot be said that the decision of the Court of Appeal

in the present case, based as it was on the same or very similar twin

concepts, was reached by a process of faulty reasoning, or that the decision

was based on some misconception: see Australian Consolidated Press Ltd. v.

Uren [1969] 1 AC 590, 644.

In truth, the explanation for divergent views in different common law

jurisdictions (or within different jurisdictions of the United States of

America) is not far to seek. The decision whether to hold a local authority

liable for the negligence of a building inspector is bound to be based at

least in part on policy considerations. As Mason C.J. said in Bryan v.

Maloney, 69 A.L.J.R. 375, 377:

"Inevitably, the policy considerations which are legitimately taken into

account in determining whether sufficient proximity exists in a novel category

will be influenced by the court's assessment of community standards and

demands."

In a succession of cases in New Zealand over the last 20 years it has been

decided that community standards and expectations demand the imposition of a

duty of care on local authorities and builders alike to ensure compliance with

local byelaws. New Zealand judges are in a much better position to decide on

such matters than the Board. Whether circumstances are in fact so very

different in England and New Zealand may not matter greatly. What matters is

the perception. Both Richardson and McKay JJ. [1994] 3 N.Z.L.R. 513, 528, 546

in their judgments in the court below stress that to change New Zealand law so

as to make it comply with Murphy's case [1991] 1 AC 398 would have '

significant community implications' and would require a 'major attitudinal

shift.' It would be rash for the Board to ignore those views.

In one important respect circumstances prevailing in England at the time of

Murphy's case and those prevailing in New Zealand are indeed very different.

Their Lordships have in mind the statutory background. In Murphy's case the

House of Lords attached great weight to the passing of the Defective Premises

Act 1972. Thus Lord Mackay of Clashfern L.C. said, at p. 457:

"Faced with the choice I am of the opinion that it is relevant to take

into account that Parliament has made provisions in the Defective

Premises Act 1972 imposing on builders and others undertaking work in the

provision of dwellings obligations relating to the quality of their work and

the fitness for habitation of the dwelling. For this House in its judicial

capacity to create a large new area of responsibility on local authorities in

respect of defective buildings would in my opinion not be a proper exercise of

judicial power."

See also per Lord Keith of Kinkel, at p. 472, Lord Oliver of Aylmerton, at p.

491, and Lord Jauncey of Tullichettle, at p. 498.

By contrast there is no legislation corresponding to the Defective Premises

Act 1972 in New Zealand. Instead there was an extended period of research

starting with the Commission of Inquiry into Housing in 1971, and including

the Review of Planning and Building Controls published in 1983, which resulted

eventually in the Building Act 1991. That Act was passed a year and a half

after the decision in Murphy's case. There is nothing in the Act to abrogate

or amend the existing common law, as developed by New Zealand judges, so as to

bring it into line with Murphy's case. On the contrary, a number of provisions

in the Act clearly envisage that private law claims for damages against local

authorities will continue to be made as before. Thus section 90 provides:

"Civil proceedings against building certifiers. Civil proceedings against

a building certifier in respect of the exercise by the building certifier of

the building certifier's statutory function in issuing a building certificate

or a code compliance certificate are to be brought in tort and not in

contract."

Similarly section 91 provides:

"Limitation defences. (1) Except to the extent provided in subsection (2)

of this section, the provisions of the Limitation Act 1950 apply to civil

proceedings against any person where those proceedings arise from - (a) the

construction, alteration, demolition, or removal of any building; or (b) the

exercise of any function under this Act or any previous enactment relating to

the construction, alteration, demolition, or removal of that building. (2)

Civil proceedings may not be brought against any person 10 years or more after

the date of the act or omission on which the proceedings are based. (3) For

the purposes of subsection (2) of this section if - (a) civil proceedings are

brought against a territorial authority, a building certifier, or the

authority; and (b) the proceedings arise out of the issue of a building

consent, a building certificate, a code compliance certificate, or an

authority determination - the date of the act or omission is the date of issue

of the consent or certificate or determination. . . ."

It is neither here nor there that the Building Act 1991 was not in force at

the time of the inspection of the foundations in the present case. The

question is whether New Zealand law should now be changed so as to bring it

into line with Murphy's case. If the New Zealand Parliament has not chosen to

do so, as a matter of policy, it would hardly be appropriate for their

Lordships to do so by judicial decision.

It follows that on the first question their Lordships are content to

adopt the reasoning of the unanimous judgments of the Court of Appeal.

The negligent act or omission of the building inspector in approving the

foundations occurred on 1 June 1972. The first cracks in the masonry veneer,

and in the north wall of the kitchen, appeared in 1974. By 1979 a crack in the

eastern wall had developed to such an extent that a brick was loose. In the

early 1980s the plaintiff noticed some cracks in the foundation wall. Yet

proceedings were not issued until November 1990.

The facts as found by the judge thus raise in an acute form the question

when the plaintiff's cause of action accrued. If the cause of action arose at

the time of the negligent act or omission, or when the first cracks appeared,

then it is obvious that the plaintiff's claim in tort against the council

would be time-barred. But if the cause of action did not accrue until the

plaintiff was advised in 1989 that the foundations were defective, and if, as

the judge found, a reasonably prudent homeowner would not have discovered the

cause of the cracks any earlier, then the proceedings were in time. Which view

is correct?

This is an important question of principle which has been much debated in

recent years in different common law jurisdictions, in a number of different

contexts. Their Lordships propose to confine their advice to the particular

context of latent defects in buildings.

In New Zealand the law has been relatively clear and straightforward since

at least the decision of the Court of Appeal in Mount Albert Borough Council

v. Johnson [1979] 2 N.Z.L.R. 234. That was the case in which, as already

mentioned, Cooke J. said that by the current law of New Zealand a plaintiff

could recover in tort for economic loss 'at least when the loss is associated

with physical damage' Cooke J. continued, at p. 239:

"Such a cause of action must arise, we think, either when the damage

occurs or when the defect becomes apparent or manifest. The latter appears to

be the more reasonable solution. It is powerfully supported by what Lord Reid

said about the common law in Cartledge v. E. Jopling & Sons Ltd. [1963] A.C.

758, 772 . . ."

Ten years later, in Askin v. Knox [1989] 1 N.Z.L.R. 248 the plaintiff

brought an action against a builder and the local authority, alleging

negligence in laying and inspecting the foundations. He failed to prove

negligence on the facts. But Cooke P., giving the judgment of a five judge

court, said that, with regard to limitation, judges in New Zealand should

continue to follow the guidance given by the Court of Appeal in Mount Albert

Borough Council v. Johnson [1979] 2 N.Z.L.R. 234. He foresaw the time when the

matter might have to be reconsidered in the light of the intervening decision

of the House of Lords in Pirelli General Cable Works Ltd. v. Oscar Faber &

Partners [1983] 2 A.C. 1. He commented [1989] 1 N.Z.L.R. 248, 255:

"it does not follow that the reasoning in Pirelli will be irresistible. It

might still be possible to maintain the approach that a cause of action arises

when the defect becomes apparent or ought to have been discovered, that being

the time when the effect of the negligence (whether classified as

physical or economic) is suffered or experienced by the owner of the

building."

He went on to urge Parliament to consider introducing a 'longstop' limitation

period such as the absolute limit of 15 years from the date of the negligent

act or omission contained in the (English) Latent Damage Act 1986. Parliament

acted swiftly on this suggestion: see the Building Act 1991, section 91(2),

already cited.

The foreseen opportunity for reviewing the Pirelli case [1983] 2 A.C. 1

arose in the present case. Williamson J. correctly regarded himself as bound

by Mount Albert Borough Council v. Johnson [1979] 2 N.Z.L.R. 234 and Askin v.

Knox [1989] 1 N.Z.L.R. 248. In the Court of Appeal [1994] 3 N.Z.L.R. 513 Cooke

P., Casey and Gault JJ. reaffirmed the New Zealand approach on limitation, and

pointed out some of the disadvantages of following the Pirelli case [1983] 2

A.C. 1. Not only does that decision mean that a cause of action may become

time-barred before any defect has become apparent (it was this obvious

injustice which led the Supreme Court of Canada to reject the Pirelli decision

in the Kamloops case, 10 D.L.R. (4th) 641), but the reasoning in the Pirelli

case was also suspect, in so far as it was based on certain observations in

the earlier decision of the House of Lords in Cartledge v. E. Jopling & Sons

Ltd. [1963] A.C. 758.

In Cartledge v. E. Jopling & Sons Ltd. (which concerned an action for

personal injuries) Lord Reid had been minded to hold that a cause of action

for personal injuries ought not to accrue until the injured person has

discovered or could reasonably have discovered the injury. 'The common law' he

said, at p. 772, 'ought never to produce a wholly unreasonable result . . .'

But Lord Reid felt constrained by section 26 of the Limitation Act 1939

(corresponding to section 28 of the New Zealand Limitation Act 1950) to reach

just such an unreasonable result. By providing in section 26 for the

postponement of the limitation period in the particular cases of fraud,

mistake and concealment, Parliament must have intended that knowledge of the

injury or damage should be irrelevant in all other cases.

The majority in the court below considered that this did not follow. The

inclusion of three specific instances did not necessarily exclude the general

law. As for the injustice inherent in the Pirelli approach, this was swiftly

cured, so far as English law was concerned, by the Latent Damage Act 1986.

Cooke P. concluded [1994] 3 N.Z.L.R. 513, 523:

"the view that in building negligence cases any cause of action must

accrue on the occurrence of damage to the building itself has been either

wholly or largely abandoned in England by judicial decision, quite apart from

the limitation changes made by the Latent Damage Act. To introduce now the

outmoded English position into New Zealand law would seem a paradoxical and

peculiarly unsatisfactory step."

Richardson J. agreed with the majority on the limitation point.

McKay J., at p. 544, while acknowledging that Lord Reid's speech in

Cartledge v. E. Jopling & Sons Ltd. [1963] A.C. 758 contains a non sequitur,

nevertheless regarded the reasoning in that case and in the Pirellicase [1983]

2 A.C. 1 as compelling. A cause of action has always, he said, been

taken to accrue when all the facts necessary to establish the cause of action

are in existence. In the case of defective foundations that must mean when the

damage occurs whether or not the damage could reasonably have been discovered.

On the facts, McKay J. regarded the cracks in the walls and in the foundation

as more than minimal damage. Accordingly the claim was in his view

time-barred.

Compared with New Zealand the course of English authority has run less

smooth. In Cartledge v. E. Jopling & Sons Ltd. [1963] A.C. 758 the plaintiffs

were workmen who had contracted pneumoconiosis at work. It was held by the

House of Lords that their causes of action were already time-barred before

they could have known that they had suffered any personal injury. The House

called for urgent remedial legislation. But the Limitation Act 1963, passed

later the same year, was confined to actions for personal injuries. It did not

apply to property damage. Accordingly when the Court of Appeal decided Dutton

v. Bognor Regis Urban District Council [1972] 1 Q.B. 373 in 1972, Lord Denning

M.R., relying on a dictum of Diplock L.J. in Bagot v. Stevens Scanlan & Co.

Ltd. [1966] 1 Q.B. 197, 203 (a case concerning defective drains), said [1972]

1 Q.B. 373, 396 that: 'The damage was done when the foundations were badly

constructed.'

But four years later in Sparham-Souter v. Town and Country Developments

(Essex) Ltd. [1976] Q.B. 858 Lord Denning M.R. recanted. The Court of Appeal

held that where a house is built with defective foundations the cause of

action does not accrue until the defect becomes apparent or ought reasonably

to have become apparent. Geoffrey Lane L.J. distinguished Cartledge v. E.

Jopling & Sons Ltd. [1963] A.C. 758 in the following passage [1976] Q.B. 858,

880:

"There is no proper analogy between this situation' - i.e. the situation

in Sparham-Souter's case - 'and the type of situation exemplified in Cartledge

v. E. Jopling & Sons Ltd. where a plaintiff due to the negligence of the

defendants suffers physical bodily injury which at the outset and for many

years thereafter may be clinically unobservable. In those circumstances

clearly damage is done to the plaintiff and the cause of action accrues from

the moment of the first injury albeit undetected and undetectable. That is not

so where the negligence has caused unobservable damage not to the plaintiff's

body but to his house. He can get rid of his house before any damage is

suffered. Not so with his body."

For the seven years following Sparham-Souter's case [1976] Q.B. 858, English

law and New Zealand law went hand-in-hand (on the limitation point).

Unfortunately Sparham-Souter's case was then overruled by the House of Lords

in the Pirelli case [1983] 2 A.C. 1, thereby, presumably, restoring the view

expressed by Lord Denning M.R. in Dutton v. Bognor Regis Urban District

Council [1972] 1 Q.B. 373, until that decision, too, was overruled on the duty

of care point in Murphy's case [1991] 1 AC 398.

Their Lordships refer to the Pirelli case [1983] 2 A.C. 1 as an unfortunate

decision not only because that is how the House itself regarded the

decision - Lord Fraser of Tullybelton, at p. 19, described the result as

unreasonable and contrary to principle - but also because it has been

subjected to a barrage of judicial and academic criticism ever since: see, by

way of example, Michael A. Jones, 'Defective Premises and Subsequent Purchases

- A Comment' (1984) 100 L.Q.R. 413; I. N. Duncan Wallace, ' Negligence and

Defective Buildings: Confusion Confounded?' (1989) 105 L.Q.R. 46 and Todd, The

Law of Torts in New Zealand (1991), p. 912. Their Lordships do not find it

necessary to review these criticisms in any detail, or to enter into the

question what Lord Fraser of Tullybelton may have had in mind when he referred

to buildings which are 'doomed from the start:' see Ketteman v. Hansel

Properties Ltd. [1987] A.C. 189, 207, per Lord Brandon of Oakbrook. Instead

they will quote a passage from an article written shortly after the Pirelli

case [1983] 2 A.C. 1 but before Murphy's case [1991] 1 AC 398, since it

leads on directly to the ground on which the limitation point must now be

decided:

'There is undoubtedly a superficial attraction in the argument which found

favour with all five Lords of Appeal in Pirelli's case. If the nature of the

damage suffered is regarded as a physical loss, it does indeed look as if the

principle in Cartledge v. E. Jopling & Sons Ltd. should apply, on the basis

that the damage is there but is unknown and, it may be, unknowable. But if the

damage is recognised as economic the whole picture changes. It is thought that

a failure to appreciate this point undermines the whole thrust of the argument

in Pirelli's case:' Stephen Todd, 'Latent Defects in Property and the

Limitation Act: A Defence of the 'Discoverability' Test' (1983) 10 N.Z.U.L.R.

311, 316.

This passage is a remarkable anticipation of the reasoning of the House of

Lords in Murphy's case [1991] 1 AC 398.

In Murphy's case [1991] 1 AC 398, 466 Lord Keith of Kinkel said: 'In my

opinion it must now be recognised that, although the damage in Anns [1978] AC 728 was characterised as physical damage by Lord Wilberforce, it was

purely economic loss.' Lord Keith went on, at pp. 467-468, to quote with

approval a lengthy passage from the judgment of Deane J. in Sutherland Shire

Council v. Heyman, 157 C.L.R. 424, 503-505:

'Nor is the respondents' claim in the present case for ordinary physical

damage to themselves or their property. Their claim, as now crystallised, is

not in respect of damage to the fabric of the house or to other property

caused by collapse or subsidence of the house as a result of the inadequate

foundations. It is for the loss or damage represented by the actual inadequacy

of the foundations, that is to say, it is for the cost of remedying a

structural defect in their property which already existed at the time when

they acquired it . . . It is arguable that any such loss or injury should be

seen as being sustained at the time of acquisition when, because of ignorance

of the inadequacy of the foundations, a higher price is paid (or a higher rent

is agreed to be paid) than is warranted by the intrinsic worth of the freehold

or leasehold estate that is being acquired. Militating against that approach

is the consideration that, for so long as the inadequacy of the

foundations is neither known nor manifest, no identifiable loss has come home:

if the purchaser or tenant sells the freehold or leasehold estate within that

time, he or she will sustain no loss by reason of the inadequacy of the

foundations. The alternative, and in my view preferable, approach is that any

loss or injury involved in the actual inadequacy of the foundations is

sustained only at the time when that inadequacy is first known or manifest. It

is only then that the actual diminution in the market value of the premises

occurs. On either approach, however, any loss involved in the actual

inadequacy of the foundations by a person who acquires an interest in the

premises after the building has been completed is merely economic in its

nature."

Once it is appreciated that the loss in respect of which the plaintiff in the

present case is suing is loss to his pocket, and not for physical damage to

the house or foundations, then most, if not all the difficulties surrounding

the limitation question fall away. The plaintiff's loss occurs when the market

value of the house is depreciated by reason of the defective foundations, and

not before. If he resells the house at full value before the defect is

discovered, he has suffered no loss. Thus in the common case the occurrence of

the loss and the discovery of the loss will coincide.

But the plaintiff cannot postpone the start of the limitation period by

shutting his eyes to the obvious. In Dennis v. Charnwood Borough Council

[1983] Q.B. 409, 420, a case decided in the Court of Appeal before the Pirelli

case reached the House of Lords, Templeman L.J. said that time would begin to

run in favour of a local authority:

"if the building suffers damage or an event occurs which reveals the

breach of duty by the local authority or which would cause a prudent

owner-occupier to make investigations which, if properly carried out, would

reveal the breach of duty by that local authority."

In other words, the cause of action accrues when the cracks become so bad, or

the defects so obvious, that any reasonable homeowner would call in an expert.

Since the defects would then be obvious to a potential buyer, or his expert,

that marks the moment when the market value of the building is depreciated,

and therefore the moment when the economic loss occurs. Their Lordships do not

think it is possible to define the moment more accurately. The measure of the

loss will then be the cost of repairs, if it is reasonable to repair, or the

depreciation in the market value if it is not: see Ruxley Electronics and

Construction Ltd. v. Forsyth [1996] 1 A.C. 344.

This approach avoids almost all the practical and theoretical difficulties

to which the academic commentators have drawn attention, and which led to the

rejection of the Pirelli decision [1983] 2 A.C. 1 by the Supreme Court of

Canada in the Kamloops case, 10 D.L.R. (4th) 641. The approach is consistent

with the underlying principle that a cause of action accrues when, but not

before, all the elements necessary to support the plaintiff's claim are in

existence. For in the case of a latent defect in a building the element of

loss or damage which is necessary to support a claim for economic loss in tort

does not exist so long as the market value of the house is unaffected. Whether

or not it is right to describe an undiscoverable crack as damage, it

clearly cannot affect the value of the building on the market. The existence

of such a crack is thus irrelevant to the cause of action. It follows that the

judge applied the right test in law.

Their Lordships repeat that their advice on the limitation point is confined

to the problem created by latent defects in buildings. They abstain, as did

Cooke P., from considering whether the 'reasonable discoverability' test

should be of more general application in the law of tort.

It is regrettable that there should be any divergence between English and

New Zealand law on a point of fundamental principle. Whether the Pirelli case

[1983] 2 A.C. 1 should still be regarded as good law in England is not for

their Lordships to say. What is clear is that it is not good law in New

Zealand.

There is no ground for disturbing the judge's conclusions on the facts, as

to which there are in any event concurrent findings.

Finally their Lordships would wish to pay tribute to the excellence of all

three arguments at the bar and are particularly grateful for the learned and

comprehensive written submissions furnished by Miss French, to which they are

much indebted.

Their Lordships will humbly advise Her Majesty that the appeal should be

dismissed. By agreement, there will be no order as to costs.