358 Construction contracts

21.3.4Direct claim by subsequent owner

Under the Contracts (Rights of Third Parties) Act 1999, the subsequent owner of a defective building may be able to enforce relevant terms in the contract between the original employer and whichever contractor or designer is to blame for the defects. The circumstances in which such third party actions (which were formerly ruled out under the privity of contract doctrine) may be brought are discussed in Section 9.2.5; to recap briefly, the contract in question must have expressly provided for third party enforcement or, alternatively, must be seen as purporting to confer a benefit on the third party. In either case, the third party (here the subsequent owner) must have been identified in the contract (by name, description or by class). It was at one point considered that, if this statutory provision were to be widely used, it could render superfluous the devices described above. In practice, use of collateral warranties may have dimished but seems to have been retained as the preferred practice by some. JCT SBC 11 makes express provision for them.

21.4ASSESSMENT OF DAMAGES

Assessing the appropriate measure of damages in defective premises claims has historically been a complex process involving a number of different considerations. Damages could be measured on three possible bases:

the cost of reinstatement;

the difference in cost to the builder of the actual work done and work specified; or

the diminution in value of the work due to the breach of contract.

In practice these heads of loss were considered to be alternatives. The decision in the Harrison v Shepherd Homes Ltd 28 provides an insight into a court’s approach to measuring damages in defective premises claims. The proceedings involved a claim brought by the owners of new build properties against a housebuilding group. The development was constructed on a former landfill site utilizing piled foundations designed and installed by a third party. Defects, principally in the form of cracking, became apparent in the properties leading to a multi-party action being issued against SHL. The trial involved ten lead properties which exhibited a range of damage from the least affected to the worst. The Court found that the foundations were defective and the housebuilder was responsible for the defects as a consequence of its breach of both the express and the implied terms of the contract of sale. A liability was also found under the NHBC Buildmark Warranty and the Defective Premises Act 1972.

Having reviewed the authorities, the court formulated some general principles to be applied when considering damages in defective premises claims. Those principles are set out below:

28 [2011] EWHC 1811 (TCC).

Defective buildings and subsequent owners 359

Reinstatement: There will generally be an award of the cost of reinstatement provided that reinstatement is reasonable; reinstatement will be unreasonable if the cost of reinstatement would be out of all proportion to the benefit to be obtained; the question of reasonableness has to be answered in relation to the particular contract; it is not necessary for recovery of the cost of reinstatement to show that the claimant will reinstate the property, but the intention to reinstate may be relevant to reasonableness.

Diminution in value: If reinstatement is unreasonable, the measure will generally be diminution in value.

Loss of amenity: Where reinstatement is unreasonable and there is no diminution in value, then the Court may award damages for loss of amenity. Damages under this head will be modest. Any award for loss of amenity is subject to the following considerations:

There is a general rule, subject to exceptions, that a claimant cannot recover

damages for injured feelings for breach of contract;

o One of the exceptions is that where the object of the contract is to afford pleasure, relaxation, peace of mind or freedom from molestation, such

damages are recoverable;

o In cases not falling within that exception, damages may be recovered for physical inconvenience and discomfort caused by the breach and mental

suffering directly related to physical inconvenience and discomfort;

o For physical inconvenience or discomfort, the cause of that inconvenience or discomfort must be a sensory (sight, touch, hearing, smell etc.) experience.

The court in Harrison held that the correct measure of damages was the diminution in the value of the properties. One of the reasons for this was that the risk of future settlement was minimal and therefore the cost of re-piling the properties was disproportionate and not strictly necessary. Further, whilst the Court refused to award damages for loss of amenity, modest damages were awarded for distress and inconvenience.

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