Junior Books Ltd. Respondents and Veitchi Co

ICLR: Appeal Cases/1983/Volume 1/JUNIOR BOOKS LTD. RESPONDENTS AND VEITCHI CO. LTD.APPELLANTS - [1983] 1 A.C. 520

[1983] 1 A.C. 520

[HOUSE OF LORDS]

JUNIOR BOOKS LTD. RESPONDENTS AND VEITCHI CO. LTD. APPELLANTS

1982 April 20, 21, 22, 29; July 15

Lord Fraser of Tullybelton, Lord Russell of Killowen, Lord Keith of Kinkel, Lord Roskill and LordBrandon of Oakbrook

Damages - Remoteness - Economic loss - Specialist sub-contractors laying floor in factory - Allegation byfactory owners of negligence causing cracks - No allegation of actual or prospective danger to persons orproperty from state of floor - Scope of duty of care - Whether cost of replacing defective floor recoverable -Whether consequential costs of relaying recoverable

The defenders, specialist flooring contractors, were engaged as sub-contractors to lay a floor in a factorywhich was being erected for the pursuers by a building company. There was no contractual relationshipbetween the pursuers and the defenders. The pursuers averred that the floor was defective owing to thedefenders' negligence, and that the defenders as specialist flooring contractors knew what products wererequired and were alone responsible for the composition and construction of the floor, and knew that thepursuers relied on their skill and judgment. The pursuers also averred that as a result of the floor crackingthey had suffered loss and damage, and they brought an action claiming for the estimated cost of relayingthe floor and various items of economic and financial loss consequential on replacement such as the cost ofremoval of machinery and loss of profits while the floor was being relaid. It was not alleged that the state ofthe floor had given rise to or was likely to give rise to any danger of injury to people or property in the factory.The defenders tabled a plea to the relevancy of the pursuers' averments. The Lord Ordinary, holding that agood cause of action was disclosed, declined to give effect to the plea and allowed the pursuers a proofbefore answer of their averments. The Second Division of the Court of Session refused a reclaiming motionby the defenders.

On appeal by the defenders:-

Held, dismissing the appeal (Lord Brandon of Oakbrook dissenting), that where the relationship between theparties was sufficiently close, the scope of the duty of care in delict or tort owed by a person doing work wasnot limited to a duty to avoid causing foreseeable harm to persons or to property other than thesubject-matter of the work by negligent acts or omissions, but extended to a duty to avoid causing pureeconomic loss consequential on defects in the work and (per Lord Fraser of Tullybelton, Lord Russell ofKillowen and Lord Roskill) to avoid defects in the work itself, and that, on the assumption that the pursuers'averments were correct, they disclosed a sufficient degree of proximity to give rise to a duty of care and (perLord Fraser of Tullybelton, Lord Russell of Killowen and Lord Roskill) disclosed nothing to restrict that duty,so that the pursuers were entitled to recover their financial loss for repairing the floor but (per Lord Keith ofKinkel) they

[1983] 1 A.C. 520 Page 521

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could only recover for the less profitable operation of their business due to the heavy cost of maintenance ofthe floor, and if they relaid the floor in order to mitigate their loss, the cost of doing so would be the measureof the defenders' liability (post, pp. 533B-D, 534B-D, H - 536D, 542B-D, 546A-D, 547D).

Dictum of Lord Wilberforce in Anns v. Merton London Borough Council [1978] A.C. 728, 751, H.L.(E.)applied.

Donoghue v. Stevenson [1932] A.C. 562, H.L.(Sc.); Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964]A.C. 465, H.L.(E.) and Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373, C.A. considered.

Dynamco Ltd. v. Holland & Hannen & Cubitts (Scotland) Ltd., 1971 S.C. 257, Ct. of Sess. doubted.

Decision of the Second Division of the Court of Session, 1982 S.L.T. 333 affirmed.

The following cases are referred to in the opinions of their Lordships:

Anns v. Merton London Borough Council [1978] A.C. 728; [1977] 2 W.L.R. 1024; [1977] 2 All E.R. 492,H.L.(E.).

Batty v. Metropolitan Property Realisations Ltd. [1978] Q.B. 554; [1978] 2 W.L.R. 500; [1978] 2 All E.R.445, C.A.

Bowen v. Paramount Builders (Hamilton) Ltd. [1975] 2 N.Z.L.R. 546; [1977] 1 N.Z.L.R. 394,

Caltex Oil (Australia) Pty. Ltd. v. Dredge Willemstad (1976) 136 C.L.R. 529.

Donoghue v. Stevenson [1932] A.C. 562, H.L.(Sc.).

Dorset Yacht Co. Ltd. v. Home Office [1970] A.C. 1004; [1970] 2 W.L.R. 1140; [1970] 2 All E.R. 294,H.L.(E.).

Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373; [1972] 2 W.L.R. 299; [1972] 1 All E.R.462, C.A.

Dynamco Ltd. v. Holland & Hannen & Cubitts (Scotland) Ltd., 1971 S.C. 257, Ct. of Sess.

Heaven v. Pender (1883) 11 Q.B.D. 503, C.A.

Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465; [1963] 3 W.L.R. 101; [1963] 2 All E.R.575, H.L.(E.).

Morrison Steamship Co. Ltd. v. Greystoke Castle (Cargo Owners) [1947] A.C. 265; [1946] 2 All E.R. 696,H.L.(E.).

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

Rivtow Marine Ltd. v. Washington Iron Works (1973) 40 D.L.R. (3d) 530.

Sparham-Souter v. Town and Country Developments (Essex) Ltd. [1976] Q.B. 858; [1976] 2 W.L.R. 493;[1976] 2 All E.R. 65, C.A.

Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd. [1973] Q.B. 27; [1972] 3 W.L.R. 502; [1972]3 All E.R. 557, C.A.

Ultramares Corporation v. Touche (1931) 174 N.E. 441.

Voli v. Inglewood Shire Council (1963) 110 C.L.R. 74.

Wimpey Construction (U.K.) Ltd. v. Martin Black & Co. (Wire Ropes) Ltd., 1982 S.L.T. 239.

Young & Marten Ltd. v. McManus Childs Ltd. [1969] 1 A.C. 454; [1968] 3 W.L.R. 630; [1968] 2 All E.R.1169, H.L.(E.).

The following additional cases were cited in argument:

Arenson v. Arenson [1977] A.C. 405, [1975] 3 W.L.R. 815; [1975] 3 All E.R. 901, H.L.(E.).[1983] 1 A.C. 520 Page 522

Colgan v. Connolly Construction Co. (Ireland) Ltd. (unreported), February 29, 1980, High Court of Ireland(McMahon J.).

Diamante Sociedad de Transportes S.A. v. Todd Oil Burners Ltd. [1966] 1 Lloyd's Rep. 179.

Gypsum Carrier Inc. v. The Queen (1977) 78 D.L.R. (3d) 175.

Jamieson v. Jamieson, 1952 S.C.(H.L.) 44, H.L.(Sc.).

JEB Fasteners Ltd. v. Marks, Bloom & Co. [1981] 3 All E.R. 289.

Ministry of Housing and Local Government v. Sharp [1970] 2 Q.B. 223; [1970] 2 W.L.R. 802; [1970] 1 AllE.R. 1009, C.A.

Robertson v. Turnbull, 1982 S.L.T. 96, H.L.(Sc.).

Ross v. Caunters [1980] Ch. 297; [1979] 3 W.L.R. 605; [1979] 3 All E.R. 580.

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Schiffahrt & Kohlen G.m.b.H. v. Chelsea Maritime Ltd. [1982] Q.B. 481; [1982] 2 W.L.R. 422; [1982] 1 AllE.R. 218.

Seaway Hotels Ltd. v. Cragg (Canada) Ltd. (1959) 21 D.L.R. (2d) 264.

Yianni v. Edwin Evans & Sons [1982] Q.B. 438; [1981] 3 W.L.R. 843; [1981] 3 All E.R. 592.

APPEAL from the Court of Session.

This was an appeal by Veitchi Co. Ltd., defenders in an action for damages by the respondents,Junior Books Ltd., from a decision dated September 1, 1980, of the Second Division of the Court ofSession in Scotland (Lord Wheatley, Lord Justice-Clerk, Lord Kissen and Lord Robertson) 1982S.L.T. 333 refusing the appellants' reclaiming motion against an interlocutor dated November 22,1979, of Lord Grieve, Lord Ordinary, allowing the respondents a proof before answer of theiraverments, the appellants having tabled a plea to the relevancy of those averments. The followingstatement of facts appears in the opinion of the Lord Ordinary, at p. 336:

"The pursuers in this case are a company who have a factory in Earls Road, Grangemouth, which wasconstructed between September 1969 and May 1970. The defenders are a company which specialise inthe laying of floors. According to the pursuers' averments the defenders laid the flooring of the productionarea of the pursuers' said factory. The material for the flooring was a magnesium oxychloride compositionwhich was laid in two coats on a screeded concrete base. The contract for the laying of the said flooringwas concluded between the defenders and Messrs. Ogilvie (Builders) Ltd., who were the main contractorsfor the construction of the pursuers' factory. The pursuers were thus not in a contractual relationship withthe defenders in respect of the laying of the flooring, but the pursuers aver that their architects relied on thedefenders as flooring specialists to ensure that the flooring was correctly laid so far as the mix and theprocedure for laying it was concerned.

"In article III of the condescendence the pursuers aver that 'in 1972 cracks began to appear in the surfaceof the said floor,' and that: 'further cracks have appeared since then ... over extensive areas of the floor.'They aver that substantially the whole of the production area is affected, but that the 'cracking is confined tothe top layer of the said floor.' The pursuers aver that as a result of the cracking they have suffered lossand damage. The loss and damage

[1983] 1 A.C. 520 Page 523

which the pursuers allege they have suffered is set out in article VII of the condescendence. In theirarticle of condescendence the pursuers aver that ultimately large sections of the floor were liftedfrom the concrete base, that certain areas of the floor have lifted already and require replacement.They go on to aver that to avoid the necessity of continual maintenance, which would be moreexpensive than immediate replacement, the floor surface requires replacement at as early a dateas possible. The cost of replacement is estimated at £50,000. The pursuers further aver that duringthe period of treatment books would have to be stored at a cost of £1,000; machinery would have tobe moved at a cost of £2,000; the business would have to be temporarily closed with a loss of profitof £45,000; wages would have to be paid to employees who cannot work amounting to £90,000;fixed overheads of £16,000 which will produce no return, will have to be paid, and a sum of £3,000will have to be paid for the investigations into the treatment required. These items total £206,000which is the sum sued for, and, with a possible exception of the £50,000 required to replace thefloor, and the £3,000 allegedly necessary to investigate the treatment required to do so, all theitems could reasonably be described as items of economic or financial loss. These damages arealleged to be due on the basis that the pursuers' loss was caused by the negligence of thedefenders.

"In article IV of the condescendence it is averred that the defenders, as reasonably competent flooring

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contractors, should have known the proportions of magnesium oxychloride and accordingly were under aduty to mix and lay the magnesium oxychloride composition with reasonable care, and that by using anunnecessarily wet mix they had failed in that duty. In article V it is averred that, as reasonably competentflooring contractors, the defenders should have known of a code of standard practice and were accordinglyunder a duty to take reasonable care in laying the top coat of the composition and that they failed to do sobecause the top coat was insufficiently thick. In article VI it is averred that the defenders, as reasonablycompetent flooring contractors, ought to have known the correct procedure for curing and dressing themagnesium oxychloride composition flooring and were accordingly under a duty to take reasonable care toensure that the floor was dry before dressing it, that they did not do so, and that that materially contributedto the ultimate cracking of the plot there. In none of these articles of condescendence is it specified why thedefenders owed the alleged duties of care to the pursuers. The duties are all averred to flow from thedefenders' position as reasonably competent flooring contractors, and not from any relationship which theyhad as such with the pursuers."

W. Douglas Cullen Q.C. and Alan Rodger (both of the Scottish Bar) for the appellants (defenders). Thecase is about the relevancy of the pursuers' averments. For the test applicable, see Jamieson v. Jamieson,1952 S.C.(H.L.) 44. The question is whether, assuming that the pursuers proved all their averments, theywould nevertheless fail as a matter of law. All that follows assumes the correctness of the averments. Themain building

[1983] 1 A.C. 520 Page 524

contract was between the pursuers and a building company. The laying of the flooring was sub-contracted bythe building company to the defenders, who were not in a contractual relationship with the pursuers. Cracksappeared in the flooring, and the pursuers did not sue the main contractors, but brought a claim in delict fordamages against the defenders, alleging that the flooring had been negligently laid by them.

The law to be applied is the same in Scotland and England. It is well established in the law of delict that abuilder is under a duty to take reasonable care to avoid causing personal injury or damage to property incarrying out the work. The duty is owed not only to people with whom he is in contractual relationship, butalso at large, subject to remoteness. If the duty is breached, he is liable in damages for the personal injury ordamage to property. The occurrence of personal injury or damage to property completes the cause of action.

So far the law is familiar. It is also suggested by recent authorities that there may be a cause of action whena building is in such a state that there is imminent danger of injury to occupants or of damage to property. Itseems that the builder may then be liable in damages which represent not merely the cost of damage whichhas already occurred, but also the cost of altering the property so as to forestall injury or damage to property.The cases which show this are cases where the builder has undertaken the responsibility for the safe designof a property, and the design has been defective. It had not, however, been held that a builder was under aduty in delict to avoid providing work or materials of defective quality.

The pursuers' averments in the present case show that their claim is not that the defenders provided a typeof flooring which was unsuitable for the factory. Nor is it concerned with anything collateral to the carrying outof the work, for example, loss caused by a negligent misstatement as to the suitability of the type of flooring.Nor is the claim based on a defective design by the defenders before they carried out the work. The claimdoes not depend on any particular circumstance of the pursuers or defenders, or their knowledge of thecircumstance. There is no allegation of danger or damage to persons or to any other property of thepursuers. It is not a claim where the essence of the claim is that loss of production or other financial loss hasbeen caused owing to the state of the flooring. The averment is simply that the flooring was defectivebecause of defective workmanship, and the principal claim is for the cost of replacing the flooring with asimilar type of flooring, in order "to avoid the necessity for continual maintenance" (the other items claimedbeing consequential thereon).

It was held by the Second Division of the Court of Session that, in addition to the two types of cause of action

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referred to above, a builder has a duty in the law of delict (as distinct from a duty to someone with whom heis in contractual relationship), to avoid providing work and materials of defective quality, i.e., work andmaterials in which there has been defective workmanship. It must follow that all that is necessary to completethe cause of action is for the defect to become manifest, and that it is immaterial that there is no actual orimminent injury to persons or damage to property, or defective design.

[1983] 1 A.C. 520 Page 525

It is submitted that no such duty exists. To hold otherwise would be to extend the law greatly beyond thelimits which the cases have hitherto put upon it. It is not disputed, with reference to Lord Wilberforce'sstatement of principle in Anns v. Merton London Borough Council [1978] A.C. 728, 751-752, that there was aclose relationship of proximity between the pursuers and the defenders, but that is irrelevant since theessence of the claim was not damage caused by the flooring but the defective nature of the flooring itself.

In Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373, 414, Stamp L.J. expressly rejected theproposition that a builder was under a duty not to build something that was useless or defective. He agreedwith the other two members of the Court of Appeal on the decision because in his view the responsibility ofthe local authority depended on their being clothed with authority by an Act of Parliament, but his remarks onp. 414 are entirely apposite and of general application where the claim is simply based on defectiveworkmanship by a builder. The decison in Dutton was concerned with the liability of a local authority for thefault of their inspector. It was essentially a design case, since the inspector was treated as one of a class ofpersons giving advice about the safety of buildings. The house should not have been constructed in the wayit was because the foundations were insecure; the design was therefore inadequate for the situation of thehouse.

In Rivtow Marine Ltd. v. Washington Iron Works (1973) 40 D.L.R. (3d) 530, what distinguished the majorityfrom the minority was the attitude they respectively took to the cost of the repair of the crane. The majorityrejected that claim on the ground that it only sounded in contract and was not of a type recognised in the lawof tort. Laskin J., in the minority, took a different view only because of the significance he attached to thestate of affairs brought about by negligent design and negligent manufacture constituting a danger topersons and property other than the crane. He did not treat the case as one of a defective product per se.What was involved in Bowen v. Paramount Builders (Hamilton) Ltd. [1975] 2 N.Z.L.R. 546 was also theproduction by a builder of a design which was inadequate. The building was sound, but it was placed onfoundations which were unsuitable for it. It was not a case of bad workmanship.

The point in the design cases is that if a builder builds to the design of an architect, the architect isresponsible for the design. He has a duty to prepare a safe and adequate plan, but he does not build thehouse. The builder is liable if there is bad workmanship by him which causes personal injury or damage tootherwise undamaged property, but he is not liable for the design. It may be otherwise if he designs thehouse himself.

In Anns v. Merton London Borough Council [1978] A.C. 728, as in Dutton v. Bognor Regis Urban DistrictCouncil [1972] 1 Q.B. 373, the prime concern was with the scope of a local authority's duty having regard toan Act of Parliament. The position of builders was also mentioned, but only for the purposes of comparison,for the argument that it would be unreasonable for a local authority to be liable where a builder was not. Thepassage of Lord Wilberforce at p. 759F may seem against the defenders, but it needs to be read in thecontext of the facts. Design

[1983] 1 A.C. 520 Page 526

was once again an important element in the facts, as was the imminent threat of danger. Lord Wilberforcewas saying that in the case of a local authority there was a right of action to recover not only for physicaldamage that had already occurred, but also for what was necessary to put the building in a state where it nolonger constituted a threat. It is accepted that a builder may be liable in situations similar to Anns or Dutton,but he is not on the present facts.

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Lord Wilberforce's approach was applied in Batty v. Metropolitan Property Realisations Ltd. [1978] Q.B. 554by Megaw L.J., who rested the right to damages on the fact that the house presented imminent danger to thehealth and safety of the occupiers. It is difficult to interpret what Bridge L.J. said at p. 572. Either he meantthat damages were recoverable where a house was so dangerous to occupiers that it had become valueless,or that they were recoverable simply because it had become valueless per se. If the latter, it is submitted thathe was wrong. Since Bridge L.J. adopted what Lord Wilberforce had said in Anns [1978] A.C. 728, 759E, it isprobable that the first interpretation is correct, and all he was saying was that the house losing its value wasa consequence of its dangerous state. Sparham-Souter v. Town and Country Developments (Essex) Ltd.[1976] Q.B. 858 takes the matter no further. It was another Dutton-type case, which was overtaken by Anns.There was support in Young & Marten Ltd. v. McManus Childs Ltd. [1969] 1 A.C. 454 for the approachcontended for: see per Lord Pearce, at p. 468, and Lord Upjohn, at p. 475.

What emerges from the authorities, therefore, is (1) that persons making something have a duty to takereasonable care to avoid causing personal injury or damage to property other than the work itself, and (2)that the owner can also sue where it is necessary for him to take steps to forestall imminent personal injuryor damage to property. That is the true explanation of cases concerned with property which has becomehazardous, like Bowen [1975] 2 N.Z.L.R. 546 and Batty [1978] Q.B. 554. But the law provides no remedywhere, as in the present case, there is no allegation of danger, and the claim is simply for the provision of aninferior article.

[LORD ROSKILL. What is the logic of distinguishing between imminent danger and potential butnon-imminent danger?]

That is the way the law has developed. It is a question of degree. No case has specifically decided that thereis a dividing line between harm done by (and beyond) the defective work, and the state of the defective workitself, but there should be no remedy if there is no risk. If it were otherwise, it would be necessary tointroduce into the law of delict something approaching warranties in contract (and it is notable that theaverments of duty and damages claimed in the present case resemble very much what one would expect ina contract case). There is no justification for that in the authorities. There is no need to extend the law ofdelict as the pursuers suggest, in view of the existence of a contractual remedy. There would be a problemas to what standard of care to apply. If it were to take reasonable care to reach the standard imposed by thecontract, that would be very odd since a stranger to the contract would be suing on the standard specified init. A similar anomaly would arise in relation to exclusion or limitation of liability clauses in the contract. It couldnot therefore be the contract which would set the standard, but the question remains what the standard

[1983] 1 A.C. 520 Page 527

would be. The whole matter is far too much at large for a court to determine.

The Second Division also held that in any event the pursuers were entitled to treat the damages asrecoverable "economic loss." That cannot be correct. Economic loss is recoverable if it is consequential upondamage or the imminence of damage to the pursuer's property. No such damage is averred. There werecases in which economic loss was recoverable without reference to property damage, but those were casesin which the loss was distinct from the delictual act. Thus in the case of negligent misstatement, damagesare given not in order to put the advice right, but to compensate for damage sustained by reliance on theadvice, whereas in the present case the damages would be given to put the work right. The disruption tobusiness would be merely consequential upon the replacement of the flooring.

John Murray Q.C. and James Drummond Young (both of the Scottish Bar) for the respondents (pursuers).The defenders have accepted that the first branch of Lord Wilberforce's principle in Anns v. Merton LondonBorough Council [1978] A.C. 728, 751, is satisfied, and that there was a relationship of close proximitybetween the pursuers and defenders. A prima facie duty of care therefore arose, in accordance with LordAtkin's neighbour principle in Donoghue v. Stevenson [1932] A.C. 562. The law of delict applies irrespective

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of whether what is averred is economic damage, personal injury or damage to property: Dorset Yacht Co.Ltd. v. Home Office [1970] A.C. 1004, 1026, per Lord Reid. The question is whether, in the words of thesecond branch of Lord Wilberforce's principle, there are special circumstances which ought to negative orreduce or limit the scope of the duty. It has been conceded that damages are recoverable if damage iscaused to corporeal property other than the thing constructed itself. There is no reason in logic or principlewhy damages should not be recoverable for damage to the thing itself as well. There is nothing in the casesto bar such recoverability.

In Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373, the damage was to the house itself. Itwould appear from the award that Mrs. Dutton was given not only the cost of repairs to the defective house,but also £500 for diminution in value. Lord Denning M.R. dealt with the case on the basis that the defect wasdangerous, but not the other members of the court. Sachs L.J., at p. 403, indicated that physical damagewas not necessary, and that if it was necessary, it was sufficient that the house itself had suffered damage.Stamp L.J. at p. 414D envisaged recovery for economic damage by virtue of buying a useless thing. There isno reason why the purchaser of a ginger beer bottle which in fact contains water should not recoverdamages.

Similarly, it is clear that in Bowen v. Paramount Builders (Hamilton) Ltd. [1975] 2 N.Z.L.R. 546 the questionwas whether there had been actual physical damage to the building itself caused by a latent defect. It wasnot said that there had to be an external risk. In Batty v. Metropolitan Property Realisations Ltd. [1978] Q.B.554, the liability in question, unlike in Dutton and Anns, was directly that of the builder. The test proposedwas whether there had been physical damage to the property: see per Megaw L.J. at p. 571, and Bridge L.J.at p. 572.

[1983] 1 A.C. 520 Page 528

It is therefore enough, for the right to damages to arise in delict, that there should have been physicaldamage to the thing constructed. If, however, that is wrong, and physical damage in the relevant sense hasnot occurred because the damage is "internal," the second submission is that it is sufficient that there shouldhave been economic damage.

The starting point again is Lord Atkin's duty to take reasonable care to avoid acting so as to cause injury toone's neighbour: Donoghue v. Stevenson [1932] A.C. 562. Lord Reid in Dorset Yacht Co. Ltd. v. Home Office[1970] A.C. 1004 said that an analogous principle applied to economic loss. In Anns v. Merton LondonBorough Council [1978] A.C. 728, Lord Wilberforce specifically mentioned economic loss in the context of theprima facie duty to take care, given the requisite degree of proximity.

The first question is what is the nature of Lord Atkin's injury to one's neighbour. In Donoghue v. Stevensonitself it was only personal physical injury, and for a time thereafter it was regarded as so limited. But later itwas extended to damage to physical property. Physical property is only a species of property. There is nodifference in principle between injury to physical property and injury to a bank balance: both involvediminution of the pursuer's estate. In Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, thequestion was purely one of financial loss. The respondents contended that a claim for financial loss was notsustainable unless it flowed from physical loss. Lord Reid did not mention the point specifically, andconcentrated on the limitations of liability for negligent misstatement, but the other members of the House ofLords rejected the respondents' contention and held that where a duty of care existed, liability for financialloss was not tied to physical injury: see pp. 494, 497, 506, 514, 516, 526, 528 and 538. The position reachedso far was, therefore, that where there was a sufficient relationship of proximity, and perhaps reliance by thepursuer on the defender, there was liability for economic loss.

Ministry of Housing and Local Government v. Sharp [1970] 2 Q.B. 223 was the first case where there was noreliance in the narrow sense (which is not, however, the present case). The Court of Appeal took the viewthat liability in delict arose where there was (a) proximity and (b) reasonable foreseeability that financial loss

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might occur if care was not taken. In Spartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd. [1973]Q.B. 27, on the other hand, recovery for "pure" economic loss was not allowed. It is submitted that themajority in that case were wrong, and Edmund-Davies L.J.'s conclusion at p. 46D is to be preferred. In anyevent, there was no relationship of proximity between the parties. The decision in Dynamco Ltd. v. Holland &Hannen & Cubitts (Scotland) Ltd., 1971 S.C. 257, which was very similar to the majority conclusion inSpartan Steel, is also wrong. The Canadian case of Seaway Hotels Ltd. v. Cragg (Canada) Ltd. (1959) 21D.L.R. (2d) 264 went the opposite way, and all the loss suffered by virtue of the cutoff of the electricity supplywas held recoverable. See also Gypsum Carrier Inc. v. The Queen (1977) 78 D.L.R. (3d) 175 and Colgan v.Connolly Construction Co. (Ireland) Ltd. (unreported), February 29, 1980, High Court

[1983] 1 A.C. 520 Page 529

of Ireland, where financial loss cases such as Hedley Byrne and Dorset Yacht were not cited, and there wasno reference to the idea put forward in Anns v. Merton London Borough Council [1978] A.C. 728 that wherenegligence causing economic loss was involved, the tendency was to apply principles analogous toDonoghue v. Stevenson.

Caltex Oil (Australia) Pty. Ltd. v. Dredge Willemstad (1976) 136 C.L.R. 529 should be seen as an attempt todefine proximity for the purpose of setting a limit to recovery for economic loss. It was suggested (althoughthe approaches of the judges vary) that the duty was owed to particular persons who it was known would beaffected by the defendant's default, and did not extend to members of an unidentified or unascertained class.The pursuers are content to accept that definition of proximity. Whatever limitation is put on it, they mustcome within it since the relationship between a building owner and a sub-contractor nominated by him is veryclose indeed. Caltex Oil was considered in Ross v. Caunters [1980] Ch. 297, where there was held to be aduty to one identified person. However, in Ministry of Housing and Local Government v. Sharp [1970] 2 Q.B.223, referred to by Sir Robert Megarry V.-C. in Ross v. Caunters, the duty is not so restricted. In JEBFasteners Ltd. v. Marks, Bloom & Co. [1981] 3 All E.R. 289 a definite class of persons was contemplated, sothat on that authority the duty can extend to a class. See also Dorset Yacht Co. Ltd. v. Home Office [1970]A.C. 1004, 1027C, per Lord Reid and, generally, Schiffahrt & Kohlen G.m.h.H. v. Chelsea Maritime Ltd.[1982] Q.B. 481.

A number of possible tests for determining the limitations to be placed on the right of recovery for economicloss are suggested by the cases. (1) Is there a sufficient degree of proximity between the parties: Anns v.Merton London Borough Council [1978] A.C. 728; Caltex Oil (Australia) Pty. Ltd. v. Dredge Willemstad, 136C.L.R. 529, 575. per Stephen J.; Ministry of Housing and Local Government v. Sharp [1970] 2 Q.B. 223, 280,per Salmon L.J. (2) To determine further what proximity is, other factors are identified. In particular, is theplaintiff someone who was in the contemplation of the defendant as an individual or member of anascertained class who would suffer loss, at the time the duty arose? (Looking not so much to the duty as todamages), was economic loss a reasonably foreseeable and direct loss? See per Edmund-Davies L.J. inSpartan Steel & Alloys Ltd. v. Martin & Co. (Contractors) Ltd. [1973] Q.B. 27.

The cases also show that there are four classes of factual circumstances where pecuniary loss which isnegligently caused is recoverable: (1) where there is personal injury, and pecuniary loss consequentialthereon; (2) where there is damage to property other than the thing itself, and consequential pecuniary loss;(3) where there is a threat of such damage or injury, and pecuniary loss in taking steps to remove it; andfinally (4) where pecuniary loss is sustained in consequence of an act of the defender in circumstanceswhere it is at least foreseeable to him that pecuniary loss will be caused to those who in his reasonablecontemplation will rely on that act. For the fourth class, see Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.[1964] A.C. 465; Yianni v. Edwin Evans

[1983] 1 A.C. 520 Page 530

& Sons [1982] Q.B. 438, 454-456 and Arenson v. Arenson [1977] A.C. 405, 419, 434, 438 and 442. Movingon from reliance, an action will also lie where pecuniary loss has been sustained in consequence of an act oromission of a defender in circumstances in which it was at least foreseeable that pecuniary loss would be

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caused by such act or omission. There was no question of reliance in Ross v. Caunters [1980] Ch. 297,310A, 322, per Sir Robert Megarry V.-C. lf, per contra, reliance is necessary, it is amply averred.

In conclusion, a manufacturer producing a thing that is defective or useless should be liable in delict toanyone who is sufficiently proximate. That is the view of P. S. Atiyah: see the last paragraph of his article,"Negligence and Economic Loss" in the Law Quarterly Review (1967) 83 L.Q.R. 248, 276. See alsoDiamante Sociedad de Transportes S.A. v. Todd Oil Burners Ltd. [1966] 1 Lloyd's Rep. 179. The standard ofcare must be related to the particular duty. The contract between the manufacturer and the retailer might beof assistance. The presence of a clause in the contract excluding or limiting liability for negligence would notbe an answer to a claim for damage to property or personal injury. There is no reason why it should be anargument against recovery for damage to the thing itself. The submission does not involve the spectre ofunlimited liability. There is already a limitation in that the duty of care is restricted to the relationship ofproximity. The question is whether the House should go further and say that for the purpose of economicloss there is a further restriction to situations where damage is only foreseeable to a particular individual, asseems to have been the view of the majority in Caltex Oil (Australia) Pty. Ltd. v. Dredge Willemstad, 136C.L.R. 529.

Cullen Q.C. in reply. Liability in respect of the defective quality of the product itself, irrespective of anyexternal damage it causes, is said to arise from Lord Atkin's formulation in Donoghue v. Stevenson [1932]A.C. 562, but no later case has extended liability in negligence so far. In the three cases, Dutton v. BognorRegis Urban District Council [1972] 1 Q.B. 373, Bowen v. Paramount Builders (Hamilton) Ltd. [1975] 2N.Z.L.R. 546 and Batty v. Metropolitan Property Realisations Ltd. [1978] Q.B. 554, the occupier was exposedto the risk of physical injury. The pursuers' extra principle cannot be extracted from them. Stamp L.J.'sobservations in Dutton at p. 414 still stand, as does the decision in Rivtow Marine Ltd. v. Washington IronWorks, 40 D.L.R. (3d) 530. No reasons have been given for saying that the majority in the latter case werewrong in a case not involving actual or threatened personal injury or damage to property.

The pursuers would control their new ground of liability by the test of remoteness. In their pleadings theyclaim for the cost of replacing the flooring, and other items which will only arise in the event of reflooring. Thedefenders raise no argument about recoverability for the other items if the first item is recoverable. They areconcerned with the trunk, not the branches. If the pursuers cannot recover the cost of reflooring because it isnot within the scope of the law of delict, the other items will fall with it. The case does not depend onproximity. The essence of the claim is

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simply that there is a defective floor, and not that the pursuers by reason of circumstances peculiar to themhave suffered production loss, or anything else, in consequence of an act of negligence of the defenders.The question of proximity is not integral to the nature of the loss; the claim would also extend to cases wherethere was no relationship of proximity. The pursuers' argument in relation to reliance is also a red herring.This is not a Hedley Byrne type of case. There was reliance between the parties in the very broad sense thatanyone who buys an article expects it to be reasonably made, but there is no question of the "specialreliance" arising in the relationship of proximity.

If the pursuers are right, there is a duty of care, imposed for its own sake and irrespective of consequences,to avoid making defective products. There would be great difficulties in defining the province of the action, forexample, whether it would be confined to defective quality simply (e.g. a camera which did not takephotographs), or whether there would also have to be shown an element of physical disintegration. Therewould be no reason (given the existence of the duty in principle) for confining it to the latter; the floodgateswould be opened. Further, how would the new duty fit in with the contractual position? Presumably it wouldtranscend the contractual obligations. That would be wholly unreasonable.

On the pursuers' second submission, it is not contended that an action based on pure economic loss cannot

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be brought, but there must be a limit on the recoverability of economic loss: see Robertson v. Turnbull, 1982S.L.T. 96. All the cases cited by the pursuers show that it must be economic loss consequential on andhence distinct from the negligent work, as opposed to loss incurred in putting the work right without respectto the consequences if that is not done. The reason is that the pure economic loss cases have proceededvery much by analogy with physical loss: see Dorset Yacht Co. Ltd. v. Home Office [1970] A.C. 1004, 1026H- 1027D, per Lord Reid. For example, in Ministry of Housing and Local Government v. Sharp [1970] 2 Q.B.223 the financial loss was loss of entitlement to compensation by reason of the negligent failure of the clerkto record the compensation notice. The claim was not for putting right the work by rectifying the register. Inthe present case the "economic loss" claimed would not be external to the negligent work, but a reflection ofit. At the end of the day there is really only one question in the case: whether the pursuers can recover fordefective work alone.

Their Lordships took time for consideration.

July 15. LORD FRASER OF TULLYBELTON. My Lords, I have had the advantage of reading in draft thespeech of my noble and learned friend, Lord Roskill, and I am in full agreement with his conclusion and withthe reasons on which he bases it. I also gratefully adopt his summary of the facts. It is enough for me to saythat the appellants (defenders) are specialist sub-contractors who laid composition flooring in a factory thatwas built for the respondents (pursuers) at Grangemouth between September 1969 and May 1970. Therespondents aver that the floor is defective, owing to failure by the appellants to take reasonable care inlaying it, and that it will have to be replaced. There was no contractual relationship

[1983] 1 A.C. 520 Page 532

between the appellants and the respondents, and for some reason that has not been explained therespondents have not taken legal proceedings against the main contractors with whom they did have acontractual relationship. The respondents have raised this action against the appellants, claiming damageswhich consist mainly of the direct and indirect cost of replacing the floor, the action being founded onaverments that the appellants were negligent in laying the floor. At the present stage of relevancy theseaverments must be taken as true. The appeal raises an important question on the law of delict or, strictlyspeaking, quasi delict, which is not precisely covered by authority. The question is whether the appellants,having (as must at this stage be assumed) negligently laid a floor which is defective, but which has notcaused danger to the health or safety of any person nor risk of damage to any other property belonging tothe owner of the floor, may in the circumstances averred by the respondents be liable for the economic losscaused to them by having to replace the floor.

Lord Grieve, Lord Ordinary, and the Second Division of the Court of Session answered that question in theaffirmative, and they have allowed to the respondents a proof before answer. The appellants maintain thatthe question should be answered in the negative and that the action should be dismissed as irrelevant. As Iagree with my noble and learned friend, Lord Roskill, that the appeal fails I only add to his speech in order todeal in my own words with two important matters that arise.

The first is the concern which has been repeatedly expressed by judges in the United Kingdom andelsewhere, that the effect of relaxing strict limitations upon the area of liability for delict (tort) would be, in thewords of Cardozo C.J. in Ultramares Corporation v. Touche (1931) 174 N.E. 441, 444, to introduce "liabilityin an indeterminate amount for an indeterminate time to an indeterminate class." This is the "floodgates"argument, if I may use the expression as a convenient description, and not in any dismissive orquestion-begging sense. The argument appears to me unattractive, especially if it leads, as I think it would inthis case, to drawing an arbitrary and illogical line just because a line has to be drawn somewhere. But it hasto be considered, because it has had a significant influence in leading judges to reject claims for economicloss which were not consequent upon physical danger to persons or other property of the pursuer/plaintiff. Itwas the main reason for rejecting the claim in the Scottish case of Dynamco Ltd. v. Holland & Hannen &Cubitts (Scotland) Ltd., 1971 S.C. 257, which has recently been followed with some apparent reluctance by

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Lord Maxwell, Lord Ordinary, in Wimpey Construction (U.K.) Ltd. v. Martin Black & Co. (Wire Ropes) Ltd.,1982 S.L.T. 239.

The floodgates argument was much discussed by the High Court of Australia in Caltex Oil (Australia) Pty.Ltd. v. Dredge Willemstad (1976) 136 C.L.R. 529, where the majority of the court held that there wassufficient proximity between the parties to justify a claim for economic loss because the defendant knew, inthe words of the headnote, "that a particular person, not merely as a member of an unascertained class,[would] be likely to suffer economic loss as a consequence of his negligence." Whether the defenders'knowledge of the identity of the person likely to

[1983] 1 A.C. 520 Page 533

suffer from his negligence is relevant for the present purpose may with respect be doubted and it seems tobe contrary to the views expressed in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465 byLord Reid, at p. 482, and by Lord Morris of Borth-y-Gest, at p. 494. But it is not necessary to decide thequestion in this appeal because the appellants certainly knew, or had the means of knowing, the identity ofthe respondents for whom the factory was being built. So if knowledge of the respondents' identity is arelevant test, it is one that the appellants can satisfy. They can also satisfy most, if not all, of the other teststhat have been suggested as safeguards against opening the floodgates. The proximity between the partiesis extremely close, falling only just short of a direct contractual relationship. The injury to the respondentswas a direct and foreseeable result of negligence by the appellants. The respondents, or their architects,nominated the appellants as specialist sub-con-tractors and they must therefore have relied upon their skilland knowledge. It would surely be wrong to exclude from probation a claim which is so strongly based,merely because of anxiety about the possible effect of the decision upon other cases where the proximitymay be less strong. If and when such other cases arise they will have to be decided by applying soundprinciples to their particular facts. The present case seems to me to fall well within limits already recognisedin principle for this type of claim, and I would decide this appeal strictly on its own facts. I rely particularly onthe very close proximity between the parties which in my view distinguishes this case from the case ofproducers of goods to be offered for sale to the public.

The second matter which might be thought to justify rejecting the respondents' claim as irrelevant is thedifficulty of ascertaining the standard of duty owed by the appellants to the respondents. A manufacturer'sduty to take care not to make a product that is dangerous sets a standard which is, in principle, easy toascertain. The duty is owed to all who are his "neighbours." It is imposed upon him by the general law and isin addition to his contractual duties to other parties to the contract. It cannot be discharged or escaped bypleading that it conflicts with his contractual duty. But a duty not to produce a defective article sets astandard which is less easily ascertained, because it has to be judged largely by reference to the contract.As Windeyer J. said in Voli v. Inglewood Shire Council (1963) 110 C.L.R. 74, 85, if an architect undertakes

"to design a stage to bear only some specified weight, he would not be liable for the consequences of someonethereafter negligently permitting a greater weight to be put upon it."

Similarly a building constructed in fulfilment of a contract for a price of £100,000 might justly be regarded asdefective, although the same building constructed in fulfilment of a contract for a price of £50,000 might not.Where a building is erected under a contract with a purchaser, then provided the building, or part of it, is notdangerous to persons or to other property and subject to the law against misrepresentation, I see no reasonwhy the builder should not be free to make with the purchaser whatever contractual arrangements about thequality of the product the purchaser wishes. However jerry-built the product, the purchaser would

[1983] 1 A.C. 520 Page 534

not be entitled to damages from the builder if it came up to the contractual standard. I do not think asubsequent owner could be in any better position, but in most cases he would not know the details of the

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contractual arrangements and, without such knowledge, he might well be unable to judge whether theproduct was defective or not. But in this case the respondents, although not a party to the contract with theappellants, had full knowledge of the appellants' contractual duties, and this difficulty does not arise. Whatthe position might have been if the action had been brought by a subsequent owner is a matter which doesnot have to be decided now.

For the reasons given by my noble and learned friend, Lord Roskill, and for the additional reasons which Ihave stated, I would dismiss this appeal.

LORD RUSSELL OF KILLOWEN. My Lords, I have had the advantage of reading in draft the speechesprepared by my noble and learned friends, Lords Fraser of Tullybelton and Roskill. I agree with them andwith their conclusion that this appeal fails. In my respectful opinion the view of my noble and learned friend,Lord Brandon of Oakbrook, unnecessarily confines the relevant principles of delict to exclude cases of suchimmediate proximity as the present.

LORD KEITH OF KINKEL. My Lords, the respondents own and occupy a factory in Grangemouth. Thisfactory was constructed for them over a period in 1969 and 1970, under a contract between them and acompany called Ogilvie (Builders) Ltd., which I shall call "the main contractors." The respondents' architectsnominated the appellants as specialist subcontractors for the purpose of laying a floor in the main productionarea of the factory. The appellants entered into a contract with the main contractors for the carrying out ofthis work.

According to the respondents' averments the appellants' workmanship was seriously defective in a number ofrespects, with the result that after two years the floor began to develop cracks over the whole of its surface.They say that it requires replacement in order to avoid the necessity for continual maintenance, which wouldbe more expensive in the long run. They claim against the appellants for the cost of such replacement,together with certain consequential loss which they say they will suffer while the work of replacement is beingcarried out. The claim is founded in delict, the respondents pleading that they have suffered loss through theappellants' negligence and are entitled to reparation therefor.

The appellants plead that the respondents' averments are irrelevant. Lord Grieve, Lord Ordinary, afterdebate, refused to sustain this plea and allowed a proof before answer. The Second Division (Lord Wheatley,Lord Justice-Clerk, Lord Kissen and Lord Robertson) 1982 S.L.T. 333 refused a reclaiming motion againstthe Lord Ordinary's interlocutor. The appellants now appeal to your Lordships' House.

It is a notable feature of the respondents' pleadings that they contain no averment that the defective nature offlooring has led or is likely to lead to any danger of physical injury to work people or of damage to

[1983] 1 A.C. 520 Page 535

property, moveable or immoveable, other than the floor surface itself, or even of economic loss throughinterruption of production processes. The only type of pecuniary consequential loss claimed for is that arisingout of the need to replace the flooring. Had there been an averment of any such apprehended danger, I amof opinion that the respondents' case would have been clearly relevant. There undoubtedly existed betweenthe appellants and the respondents such proximity of relationship, within the well known principle ofDonoghue v. Stevenson [1932] A.C. 562, as to give rise to duty of care owed by the former to the latter. Asformulated in Donoghue v. Stevenson, the duty extended to the avoidance of acts or omissions which mightreasonably have been anticipated as likely to cause physical injury to persons or property. The scope of theduty has, however, been developed so as to cover the situation where pure economic loss is to be foreseenas likely to be suffered by one standing in the requisite degree of proximity: Hedley Byrne & Co. Ltd. v. Heller& Partners Ltd. [1964] A.C. 465. That case was concerned with a negligent statement made in response toan inquiry about the financial standing of a particular company, in reliance on the accuracy of which the

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plaintiffs had acted to their detriment. So the case is not in point here except in so far as it established thatreasonable anticipation of physical injury to person or property is not a sine qua non for the existence of aduty of care. It has also been established that where a duty of care exists through the presence of suchreasonable anticipation, and it is breached, then even though no such injury has actually been causedbecause the person to whom the duty is owed has incurred expenditure in averting the danger, that person isentitled to damages measured by the amount of that expenditure: Anns v. Merton London Borough Council[1978] A.C. 728, 759, per Lord Wilberforce. That is the principle which in my view underlies Dutton v. BognorRegis Urban District Council [1972] 1 Q.B. 373 and Batty v. Metropolitan Property Realisations Ltd. [1978]Q.B. 554.

So in the present case I am of opinion that the appellants in the laying of the floor owed to the respondents aduty to take reasonable care to avoid acts or omissions which they ought to have known would be likely tocause the respondents, not only physical damage to person or property, but also pure economic loss.Economic loss would be caused to the respondents if the condition of the floor, in the course of its normallife, came to be such as to prevent the respondents from carrying out ordinary production processes on it, or,short of that, to cause the production process to be more costly than it would otherwise have been. In thatsituation the respondents would have been entitled to recover from the appellants expenditure incurred inrelaying the floor so as to avert or mitigate their loss. The real question in the appeal, as I see it, is whetherthe respondents' averments reveal such a state of affairs as, under the principles I have outlined, gives thema complete right of action. I am of opinion that they have relevantly averred a duty of care owed to them bythe appellants, though I think their averments in this respect might have been more precise and betterrelated to the true legal position.

It is the averments of loss which cause me some trouble. On the face of it, their averments might be read asmeaning no more than that the

[1983] 1 A.C. 520 Page 536

respondents have got a bad floor instead of a good one and that their loss is represented by the cost ofreplacing the floor. But they do also aver that the cost of maintaining the floor which they have got is heavy,and that it would be cheaper to take up the floor surface and lay a new one. If the cost of maintaining thedefective floor is substantially greater than it would have been in respect of a sound one, it must necessarilyfollow that their manufacturing operations are being carried on at a less profitable level than would otherwisehave been the case, and that they are therefore suffering economic loss. That is the sort of loss which theappellants, standing in the relationship to the respondents which they did, ought reasonably to haveanticipated as likely to occur if their workmanship was faulty. They must have been aware of the nature ofthe respondents' business, the purpose for which the floor was required, and the part it was to play in theiroperations. The appellants accordingly owed the respondents a duty to take reasonable care to see that theirworkmanship was not faulty, and are liable for the foreseeable consequences, sounding in economic loss, oftheir failure to do so. These consequences may properly be held to include less profitable operation due tothe heavy cost of maintenance. In so far as the respondents, in order to avert or mitigate such loss, incurexpenditure on relaying the floor surface, that expenditure becomes the measure of the appellants' liability.Upon that analysis of the situation, I am of opinion that the respondents have stated a proper case for inquiryinto the facts, and that the Lord Ordinary and the Second Division were therefore right to allow a proof beforeanswer. I would accordingly dismiss the appeal.

Having thus reached a conclusion in favour of the respondents upon the somewhat narrow ground which Ihave indicated, I do not consider this to be an appropriate case for seeking to advance the frontiers of thelaw of negligence upon the broad lines favoured by certain of your Lordships. There are a number of reasonswhy such an extension would, in my view, be wrong in principle. In the first place, I am unable to regard thedeterioration of the flooring which is alleged in this case as being damage to the respondents' property suchas to give rise to a liability falling directly within the principle of Donoghue v. Stevenson [1932] A.C. 562. Theflooring had an inherent defect in it from the start. The appellants did not, in any sense consistent with theordinary use of language or contemplated by the majority in Donoghue v. Stevenson, damage the

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respondents' property. They supplied them with a defective floor. Such an act can, in accordance with theviews I have expressed above, give rise to liability in negligence in certain circumstances. But it does not doso merely because the flooring is defective or valueless or useless and requires to be replaced. So to holdwould raise very difficult and delicate issues of principle having a wide potential application. I think it wouldnecessarily follow that any manufacturer of products would become liable to the ultimate purchaser if theproduct owing to negligence in manufacture was, without being harmful in any way, useless or worthless ordefective in quality so that the purchaser wasted the money he spent on it. One instance mentioned inargument and adverted to by Stamp L.J. in Dutton v. Bognor Regis Urban District Council [1972]

[1983] 1 A.C. 520 Page 537

1 Q.B. 373, 415, was a product purchased as ginger beer which turned out to be only water, and manyothers may be figured.

To introduce a general liability covering such situations would be disruptive of commercial practice, underwhich manufacturers of products commonly provide the ultimate purchaser with limited guarantees usuallyundertaking only to replace parts exhibiting defective workmanship and excluding any consequential loss.There being no contractual relationship between manufacturer and ultimate consumer, no room would exist,if the suggested principle were accepted, for limiting the manufacturer's liability. The policy considerationswhich would be involved in introducing such a state of affairs appear to me to be such as a court of lawcannot properly assess, and the question whether or not it would be in the interests of commerce and thepublic generally is, in my view, much better left for the legislature. The purchaser of a defective productnormally can proceed for breach of contract against the seller who can bring his own supplier into theproceedings by third party procedure, so it cannot be said that the present state of the law is unsatisfactoryfrom the point of view of available remedies. I refer to Young & Marten Ltd. v. McManus Childs Ltd. [1969] 1A.C. 454. In the second place, I can foresee that very considerable difficulties might arise in assessing thestandards of quality by which the allegedly defective product is to be judged. This aspect is more fullydeveloped in the speech to be delivered by my noble and learned friend, Lord Brandon of Oakbrook, withwhose views on the matter I respectfully agree.

My Lords, for the reasons which I have given I would concur in the dismissal of the appeal.

LORD ROSKILL. My Lords, this appeal against an interlocutor of the Second Division of the Court of Session(Lord Wheatley, Lord Justice-Clerk, Lord Kissen and Lord Robertson) dated September 1, 1980, refusing areclaiming motion against an interlocutor of Lord Grieve, Lord Ordinary, dated November 22, 1979, raises aquestion of fundamental importance in the law of delict. Since it was accepted in the courts below and inargument before your Lordships' House that there was no relevant difference between the Scots law of delictand the English law of negligence, it follows that this appeal equally raises a question of fundamentalimportance in the development of the latter law. The defenders, the appellants before your Lordships' House,tabled a general plea to the relevance of the pursuers' (respondents') averments and it was that plea whichwas debated in both courts below. The appellants contended that there was no averment in the respondents'pleadings relevant to found an action against the appellants in delict and that therefore the action should bedismissed as irrelevant. The respondents, on the other hand, contended that proof before answer should beallowed. Both courts below allowed proof before answer. The Lord Ordinary started his opinion, 1982 S.L.T.333, 337 by stating that there was no Scottish authority directly in point and while in argument before yourLordships' House much Scottish, English and indeed Commonwealth authority was cited, it remains the factthat no decision in any court that

[1983] 1 A.C. 520 Page 538

was cited to your Lordships conclusively shows the correct route to be taken, though many may be saidgreatly to illuminate that route.

My Lords, since the appeal comes before your Lordships' House in the manner I have just stated, it followsthat the respondents' averments, alleged not to state a relevant case, must be assumed for present purposes

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to be correct. Those averments are fully set out in the record and in the opinion of the Lord Ordinary and toavoid repetition, I gratefully borrow his statement of them. I need only summarise the bare essentials. Theappellants are specialist contractors in the laying of flooring. They were nominated sub-contractors under amain building contract concluded between the respondents and some main contractors. There was no privityof contract between the appellants and the respondents. The appellants laid flooring in the production area ofa factory which was being built for the respondents at Grangemouth as long ago as 1969 and 1970. In 1972it is averred that the flooring showed defects allegedly due to bad workmanship or bad materials or both. Atthe time the pleadings were prepared no repair work had been carried out but it was averred that the cost ofrepairs would be some £50,000 to which were added certain figures which, as the Lord Ordinary said, mightreasonably be described as items of economic or financial loss. The total sum claimed by the respondentswas over £200,000.

My Lords, your Lordships are thus invited to deal with events which happened long ago. It is difficult tobelieve that in the intervening period some work has not been done to this flooring but no information wasvouchsafed as to the course of subsequent events. The main building contract was not exhibited in thecourts below. Your Lordships were not told whether that contract included as between the main contractorsand the respondents any relevant exceptions clause, nor whether if there were such an exceptions clause itmight be available for the benefit of the appellants. Nor were your Lordships told why the respondents hadchosen to proceed in delict against the appellants rather than against the main contractors in contract, norindeed why the main contractors had not been joined as parties to these proceedings. This economy of factis in stark contrast to the wealth of citation of authority of which your Lordships have had the benefit. Thusthe bare point of law has to be decided upon an assumption of the truth of the facts pleaded. But I cannot butsuspect that the truth regarding the supposed deficiencies of this flooring at Grangemouth has long sincebeen either established or disproved. Of those matters however your Lordships know and have been toldnothing. Half a century ago your Lordships' House decided Donoghue v. Stevenson [1932] A.C. 562 upon asimilar plea of irrelevancy. In that case however some 3¾ years only had elapsed between the purchase ofthe allegedly offending bottle of ginger beer and the decision of your Lordships' House.

My Lords, there was much discussion before your Lordships' House as to the effect of the pleadings. I seeno need to discuss them in detail. They seem to me clearly to contain no allegation that the flooring was in adangerous state or that its condition was such as to cause danger to life or limb or to other property of otherpersons or that repairs were urgently or imminently required to avoid any such danger, or that any

[1983] 1 A.C. 520 Page 539

economic or financial loss had been, or would be, suffered save as would be consequential upon the ultimatereplacement of the flooring, the necessity of which was averred in condescendence VII. The essential featureof the respondents' pleading was that it advanced a claim for the cost of remedying the alleged defects in theflooring itself by replacement together with resulting or economic or financial loss consequential upon thatreplacement.

My Lords, it was because of that scope of the respondents' pleading and that that pleading was limited in thisway that the appellants were able to mount their main attack upon those pleadings and to contend that theywere, at least in the absence of amendment, for which no leave has been sought at any stage, irrelevantsince the law neither of Scotland nor of England made the appellants liable in delict or in negligence for thecost of replacing this flooring or for the economic or financial loss consequent upon that replacement. It wasstrenuously argued for the appellants that for your Lordships' House now to hold that in those circumstanceswhich I have just outlined the appellants were liable to the respondents would be to extend the duty of careowed by a manufacturer and others, to whom the principles first enunciated in Donoghue v. Stevenson havesince been extended during the last half century, far beyond the limits to which the courts have hithertoextended them. The familiar "floodgates" argument was once again brought fully into play. My Lords,although it cannot be denied that policy considerations have from time to time been allowed to play their partin the tort of negligence since it first developed as it were in its own right in the course of the last century, yettoday I think its scope is best determined by considerations of principle rather than of policy. The floodgates

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argument is very familiar. It still may on occasion have its proper place but if principle suggests that the lawshould develop along a particular route and if the adoption of that particular route will accord a remedy wherethat remedy has hitherto been denied, I see no reason why, if it be just that the law should henceforth accordthat remedy, that remedy should be denied simply because it will, in consequence of this particulardevelopment, become available to many rather than to few.

My Lords, I think there is no doubt that Donoghue v. Stevenson [1932] A.C. 562 by its insistence uponproximity, in the sense in which Lord Atkin used that word, as the foundation of the duty of care which wasthere enunciated, marked a great development in the law of delict and of negligence alike. In passing itshould be noted that Lord Atkin emphasised, at p. 579, that the laws of Scotland and of England were in thatcase, as is agreed in the present, identical. But that advance having been thus made in 1932, the doctrinethen enunciated was at first confined by judicial decision within relatively narrow limits. The gradualdevelopment of the law will be found discussed by the editor of Salmond & Heuston on Torts, 18th ed.(1981), p. 289 et seq. Though initially there is no doubt that because of Lord Atkin's phraseology inDonoghue v. Stevenson [1932] A.C. 562, 599, "in jury to the consumer's life or property," it was thought thatthe duty of care did not extend beyond avoiding physical injury or physical damage to the person or theproperty of the person to whom the duty of care was owed, that limitation has long since ceased as

[1983] 1 A.C. 520 Page 540

Professor Heuston points out in the passage in Salmond to which I have just referred.

My Lords, in discussion upon the later developments of the law the decision of your Lordships' House (albeitby a majority) in Morrison Steamship Co. Ltd. v. Greystoke Castle (Cargo Owners) [1947] A.C. 265, issometimes overlooked. The facts were essentially simple. Two ships collided. For simplicity I will call them Aand B. Both ships were to blame albeit in unequal proportions. The owners of the cargo on ship A becameliable to contribution in general average to the owners of ship A. The cargo owners then sued ship B torecover the relevant proportion of that liability for general average contribution. They succeeded in that claim.My Lords, I shall not quote extensively from the speeches of either the majority or of the minority. Suffice it tosay that here the recovery of economic loss was allowed and I do not think that the decision is to beexplained simply upon some supposed esoteric mystery appertaining to the law regarding general averagecontribution. It is true that there seems to be little discussion in the speeches regarding the extent of the dutyof care but the very rejection by the majority of the views expressed by Lord Simonds in his dissentingspeech, at p. 307, that

"nothing ... would justify me in holding that the cargo owner can recover damages from the wrongdoing ship notbecause his cargo has suffered damage but because he has been placed under an obligation to make a generalaverage contribution"

shows that Lord Simonds at least was appreciating the consequences of the step forward which the majoritywere then taking. The decision is indeed far from the previously limited application of the doctrine enunciatedin Donoghue v. Stevenson.

Fifteen years later in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, your Lordships'House made plain that the duty of care was not limited in the manner for which the respondents in thatappeal had contended. Your Lordships' House held without doubt that economic loss was recoverablewithout physical damage having been suffered provided was recoverable without physical damage havingbeen suffered provided that the relevant duty of care had existed, and that that duty existed when the partyto whom the allegedly negligent advice was given relied upon the "judgment" or "skill" (I take those twowords from the speech of Lord Morris of Borth-y-Gest, at p. 503) of him who gave the advice. I draw attentionwithout citation to a passage of Lord Hodson, at p. 509, where he refers to Morrison Steamship Co. Ltd. v.

Page 17

Greystoke Castle (Cargo Owners) [1947] A.C. 265. Two passages in the opinion of Lord Devlin howeverdemand quotation in full. The noble and learned Lord said, [1964] A.C. 465, 529:

"I have had the advantage of reading all the opinions prepared by your Lordships and of studying the terms which yourLordships have framed by way of definition of the sort of relationship which gives rise to a responsibility towards thosewho act upon information or advice and so creates a duty of care towards them. I do not understand any of yourLordships to hold that it is a responsibility imposed by law upon certain types of persons or in certain sorts of situations.It is a responsibility that is voluntarily accepted or undertaken, either

[1983] 1 A.C. 520 Page 541

generally where a general relationship, such as that of solicitor and client or banker and customer, is created,or specifically in relation to a particular transaction."

Later, Lord Devlin said, at p. 530:

"I shall therefore content myself with the proposition that where-ever there is a relationship equivalent to contract, thereis a duty of care. Such a relationship may be either general or particular ... I regard this proposition as an application ofthe general conception of proximity. Cases may arise in the future in which a new and wider proposition, quiteindependent of any notion of contract, will be needed. There may, for example, be cases in which a statement is notsupplied for the use of any particular person, any more than in Donoghue v. Stevenson [1932] A.C. 562 the ginger beerwas supplied for consumption by any particular person; and it will then be necessary to return to the general conceptionof proximity and to see whether there can be evolved from it, as was done in Donoghue v. Stevenson, a specificproposition to fit the case."

My Lords, it was, as I think, this development of the law which led Lord Reid in Dorset Yacht Co. Ltd. v.Home Office [1970] A.C. 1004 to say, at p. 1026:

"In later years there has been a steady trend towards regarding the law of negligence as depending on principle sothat, when a new point emerges, one should ask not whether it is covered by authority but whether recognisedprinciples apply to it. Donoghue v. Stevenson [1932] A.C. 562 may be regarded as a milestone, and the well-knownpassage in Lord Atkin's speech should I think be regarded as a statement of principle. It is not to be treated as if it werea statutory definition. It will require qualification in new circumstances. But I think that the time has come when we canand should say that it ought to apply unless there is some justification or valid explanation for its exclusion. ... Butwhere negligence is involved the tendency has been to apply principles analogous to those stated by Lord Atkin: ..."

Similarly in Anns v. Merton London Borough Council [1978] A.C. 728, 751, Lord Wilberforce, approving theearlier decisions of the Court of Appeal in Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B. 373and Sparham-Souter v. Town and Country Developments (Essex) Ltd. [1976] Q.B. 858, said of the trilogy ofcases, Donoghue v. Stevenson. Hedley Byrne, and Dorset Yacht:

"the position has now been reached that in order to establish that a duty of care arises in a particular situation, it is notnecessary to bring the facts of that situation within those of previous situations in which a duty of care has been held toexist. Rather the question has to be approached in two stages. First one has to ask whether, as between the allegedwrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhoodsuch that, in the reasonable contemplation of the former, carelessness

[1983] 1 A.C. 520 Page 542

on his part may be likely to cause damage to the latter - in which case a prima facie duty of care arises.Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are anyconsiderations which ought to negative, or to reduce or limit the scope of the duty or the class of person towhom it is owed or the damages to which a breach of it may give rise: ..."

Applying those statements of general principle as your Lordships have been enjoined to do both by LordReid and by Lord Wilberforce rather than to ask whether the particular situation which has arisen does ordoes not resemble some earlier and different situation where a duty of care has been held or has not been

Page 18

held to exist, I look for the reasons why, it being conceded that the appellants owed a duty of care to othersnot to construct the flooring so that those others were in peril of suffering loss or damage to their persons ortheir property, that duty of care should not be equally owed to the respondents. The appellants, though not indirect contractual relationship with the respondents, were as nominated subcontractors in almost as close acommercial relationship with the respondents as it is possible to envisage short of privity of contract. Whythen should the appellants not be under a duty to the respondents not to expose the respondents to apossible liability to financial loss for repairing the flooring should it prove that that flooring had beennegligently constructed? It is conceded that if the flooring had been so badly constructed that to avoidimminent danger the respondents had expended money upon renewing it the respondents could haverecovered the cost of so doing. It seems curious that, if the appellants' work had been so bad that to avoidimminent danger expenditure had been incurred, the respondents could recover that expenditure, but that ifthe work was less badly done so that remedial work could be postponed they cannot do so. Yet this isseemingly the result of the appellants' contentions.

My Lords, I have already said that there is no decided case which clearly points the way. But it is, I think, ofassistance to see how far the various decisions have gone. I shall restrict my citation to the more importantdecisions both in this country and overseas. In Dutton v. Bognor Regis Urban District Council [1972] 1 Q.B.373, which, as already stated, your Lordships' House expressly approved in Anns v. Merton London BoroughCouncil [1978] A.C. 728, the Court of Appeal held that the plaintiff, who bought the house in question longafter it had been built and its foundations inadequately inspected by the defendants' staff, was entitled torecover from the defendants inter alia the estimated cost of repairing the house as well as other items of lossincluding diminution in value. There was in that case physical damage to the house. It was argued that thedefendants were not liable for the cost of repairs or diminution in value. This argument was expresslyrejected by Lord Denning M.R. [1972] 1 Q.B. 373, 396, and by Sachs L.J. at pp. 403-404. Stamp L.J. washowever more sympathetic to this argument, at p. 414:

"It is pointed out that in the past a distinction has been drawn between constructing a dangerous article andconstructing one which is defective or of inferior quality. I may be liable to one who purchases in the market a bottle ofginger beer which I have carelessly

[1983] 1 A.C. 520 Page 543

manufactured and which is dangerous and causes injury to person or property; but it is not the law that I am liable tohim for the loss he suffers because what is found inside the bottle and for which he has paid money is not ginger beerbut water. I do not warrant, except to an immediate purchaser, and then by the contract and not in tort, that the thing Imanufacture is reasonably fit for its purpose. The submission is, I think, a formidable one and in my view raises themost difficult point for decision in this case. Nor can I see any valid distinction between the case of a builder whocarelessly builds a house which, though not a source of danger to person or property, nevertheless owing to aconcealed defect in its foundations, starts to settle and crack and becomes valueless, and the case of a manufacturerwho carelessly manufactures an article which, though not a source of danger to a subsequent owner or to his otherproperty, nevertheless owing to a hidden defect quickly disintegrates. To hold that either the builder or themanufacturer was liable except in contract would be to open up a new field of liability the extent of which could not, Ithink, be logically controlled, and since it is not in my judgment necessary to do so for the purposes of this case, I donot, more particularly because of the absence of the builder, express an opinion whether the builder has a higher orlower duty than the manufacturer. But the distinction between the case of the manufacturer of a dangerous thing whichcauses damage and that of a thing which turns out to be defective and valueless lies, I think, not in the nature of theinjury but in the character of the duty. I have a duty not carelessly to put out a dangerous thing which may causedamage to one who may purchase it; but the duty does not extend to putting out carelessly a defective or useless orvalueless thing. So again one goes back to consider what was the character of the duty, if any, owed to the plaintiff,and one finds on authority that the injury which is one of the essential elements of the tort of negligence is not confinedto physical damage to personal property but may embrace economic damage which the plaintiff suffers through buyinga worthless thing, as is shown by the Hedley Byrne case [1964] A.C.465."

Thus it was upon the character of the duty that Stamp L.J. founded and was able to agree with the othermembers of the Court of Appeal in that case.

My Lords, a similar question arose some years later in Batty v. Metropolitan Property Realisations Ltd. [1978]

Page 19

Q.B. 554. By the date of this decision the Court of Appeal had the benefit of the decision in your Lordships'House in Anns v. Merton London Borough Council [1978] A.C. 728. Megaw L.J. [1978] Q.B. 554, 570,regarded the doubts raised by Stamp L.J. as resolved by Lord Wilberforce's speech in Anns. Once again theargument based upon absence of physical damage was advanced as it had been in Dutton v. Bognor RegisUrban District Council [1972] 1 Q.B. 373. Once again it was rejected but on the basis that there was in H thiscase as in Dutton the requisite degree of physical damage. Bridge L.J. at p. 573, however, seems to me touse somewhat wider language and indeed he refers to two sentences at the end of Lord Wilberforce'sspeech in Anns [1978] A.C. 728, 759:

[1983] 1 A.C. 520 Page 544

"Subject always to adequate proof of causation, these damages may include damages for personal injury and damageto property. In my opinion they may also include damage to the dwelling house itself; ..."

My Lords, I am inclined to think that that last sentence was directed to the facts in Anns where there was, asin the other cases to which I have referred, the element of physical damage present due to trouble with thefoundations, rather than directed to the full breadth of the proposition for which the respondents in thepresent appeal contended. Nonetheless the three decisions, Dutton v. Bognor Regis Urban District Council[1972] 1 Q.B. 373, Anns v. Merton London Borough Council [1978] A.C. 728 and Batty v. MetropolitanProperty Realisations Ltd. [1978] Q.B. 554 seem to me to demonstrate how far the law has developed in therelevant respect in recent years.

My Lords, I turn next to the three main Commonwealth decisions. They are Rivtow Marine Ltd. v.Washington Iron Works (1973) 40 D.L.R. (3d) 530, a decision of the Supreme Court of Canada, Caltex Oil(Australia) Pty. Ltd. v. Dredge Willemstad (1976) 136 C.L.R. 529, a decision of the High Court of Australia,and Bowen v. Paramount Builders (Hamilton) Ltd. [1977] 1 N.Z.L.R. 394, a decision of the Court of Appeal ofNew Zealand. All three of these cases were decided before Anns reached your Lordships' House.

My Lords, in the first of this trilogy, Rivtow Marine Ltd. v. Washington Iron Works (1973) 40 D.L.R. (3d) 530,the Supreme Court by a majority held that the manufacturer of a dangerously defective article is not liable intort to an ultimate consumer or user of that article for the cost of repairing damage arising in the article itself,nor for such economic loss as would have been sustained in any event as a result of the need to effectrepairs. But there was, if I may respectfully say so, a powerful dissenting judgment by Laskin J. with whichHall J. concurred. The learned judge posed as the first question, at p. 549, whether the defendants' liabilityfor negligence should "embrace economic loss when there has been no physical harm in fact." He gave anaffirmative answer. After pointing out, at p. 551, that the judicial limitation on liability was founded upon what Ihave called the "floodgates" argument rather than upon principle, he adopted the view that economic lossresulting from threatened physical loss from a negligently designed or manufactured product wasrecoverable. It was this judgment which my noble and learned friend, Lord Wilberforce, described in hisspeech in Anns v. Merton London Borough Council [1978] A.C. 728, 760A, as "of strong persuasive force."

In Caltex Oil (Australia) Pty. Ltd. v. Dredge Willemstad (1976) 136 C.L.R. 529, the High Court of Australiaelaborately reviewed all the relevant English authorities and indeed others as well. My Lords, I hope I shallnot be thought lacking in respect for those elaborate judgments or failing to acknowledge the help which Ihave derived from them if I do not cite from them, for to some extent certain of the difficulties there discussedhave been subsequently resolved by the decision of this House in Anns.

In Bowen v. Paramount Builders (Hamilton) Ltd. [1975] 2 N.Z.L.R.[1983] 1 A.C. 520 Page 545

546, to which Lord Wilberforce also referred in Anns as having afforded him much assistance, the Court ofAppeal in New Zealand [1977] 1 N.Z.L.R. 394 followed the Court of Appeal decision in Dutton. Cooke J. took

Page 20

the view that it was enough for the purpose of the case in question to say that the damage was basicallyphysical. But as the passage at p. 423 of the report shows, he would have been prepared in agreement withthe judgments of Lord Denning M.R. and of Sachs L.J. in Dutton to go further.

My Lords, to my mind in the instant case there is no physical damage to the flooring in the sense in whichthat phrase was used in Dutton, Batty and Bowen and some of the other cases. As my noble and learnedfriend, Lord Russell of Killowen, said during the argument, the question which your Lordships' House nowhas to decide is whether the relevant Scots and English law today extends the duty of care beyond a duty toprevent harm being done by faulty work to a duty to avoid such faults being present in the work itself. It waspowerfully urged on behalf of the appellants that were your Lordships so to extend the law, a pursuer in theposition of the pursuer in Donoghue v. Stevenson [1932] A.C. 562 could, in addition to recovering for anypersonal injury suffered, have also recovered for the diminished value of the offending bottle of ginger beer.Any remedy of that kind, it was argued, must lie in contract and not in delict or tort. My Lords I seem to detectin that able argument reflections of the previous judicial approach to comparable problems before Donoghuev. Stevenson was decided. That approach usually resulted in the conclusion that in principle the properremedy lay in contract and not outside it. But that approach and its concomitant philosophy ended in 1932and for my part I should be reluctant to countenance its re-emergence some 50 years later in the instantcase. I think today the proper control lies not in asking whether the proper remedy should lie in contract orinstead in delict or tort, not in somewhat capricious judicial determination whether a particular case falls onone side of the line or the other, not in somewhat artificial distinctions between physical and economic orfinancial loss when the two sometimes go together and sometimes do not - it is sometimes overlooked thatvirtually all damage including physical damage is in one sense financial or economic for it is compensated byan award of damages - but in the first instance in establishing the relevant principles and then in decidingwhether the particular case falls within or without those principles. To state this is to do no more than torestate what Lord Reid said in Dorset Yacht Co. Ltd. v. Home Office [1970] A.C. 1004 and Lord Wilberforcein Anns v. Merton London Borough Council [1978] A.C. 728. Lord Wilberforce, at p. 751, in the passage Ihave already quoted enunciated the two tests which have to be satisfied. The first is "sufficient relationship ofproximity," the second any considerations negativing, reducing or limiting the scope of the duty or the classof person to whom it is owed or the damages to which a breach of the duty may give rise. My Lords, it is Ithink in the application of those two principles that the ability to control the extent of liability in delict or innegligence lies. The history of the development of the law in the last 50 years shows that fears aroused bythe floodgates argument have been unfounded. Cooke J. in Bowen v. Paramount Builders (Hamilton) Ltd.[1977] 1 N.Z.L.R. 394, 422 described the floodgates

[1983] 1 A.C. 520 Page 546

argument as "specious" and the argument against allowing a cause of action such as was allowed in Duttonv. Bognor Regis Urban District Council [1972] 1 Q.B. 373, Anns v. Merton London Borough Council [1978]A.C. 728 and Bowen v. Paramount Builders (Hamilton) Ltd. [1977] 1 N.Z.L.R. 394 as "in terrorem ordoctrinaire."

Turning back to the present appeal I therefore ask first whether there was the requisite degree of proximityso as to give rise to the relevant duty of care relied on by the respondents. I regard the following facts as ofcrucial importance in requiring an affirmative answer to that question. (1) The appellants were nominatedsub-contractors. (2) The appellants were specialists in flooring. (3) The appellants knew what products wererequired by the respondents and their main contractors and specialised in the production of those products.(4) The appellants alone were responsible for the composition and construction of the flooring. (5) Therespondents relied upon the appellants' skill and experience. (6) The appellants as nominatedsub-contractors must have known that the respondents relied upon their skill and experience. (7) Therelationship between the parties was as close as it could be short of actual privity of contract. (8) Theappellants must be taken to have known that if they did the work negligently (as it must be assumed that theydid) the resulting defects would at some time require remedying by the respondents expending money uponthe remedial measures as a consequence of which the respondents would suffer financial or economic loss.

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My Lords, reverting to Lord Devlin's speech in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C.465, it seems to me that all the conditions existed which give rise to the relevant duty of care owed by theappellants to the respondents.

I then turn to Lord Wilberforce's second proposition. On the facts I have just stated, I see nothing whatsoeverto restrict the duty of care arising from the proximity of which I have spoken. During the argument it wasasked what the position would be in a case where there was a relevant exclusion clause in the main contract.My Lords, that question does not arise for decision in the instant appeal, but in principle I would venture theview that such a clause according to the manner in which it was worded might in some circumstances limitthe duty of care just as in the Hedley Byrne case the plaintiffs were ultimately defeated by the defendants'disclaimer of responsibility. But in the present case the only suggested reason for limiting the damage (exhypothesi economic or financial only) recoverable for the breach of the duty of care just enunciated is thathitherto the law has not allowed such recovery and therefore ought not in the future to do so. My Lords, withall respect to those who find this a sufficient answer, I do not. I think this is the next logical step forward in thedevelopment of this branch of the law. I see no reason why what was called during the argument "damage tothe pocket" simpliciter should be disallowed when "damage to the pocket" coupled with physical damage hashitherto always been allowed. I do not think that this development, if development it be, will lead to untowardconsequences. The concept of proximity must always involve, at least in most cases, some degree ofreliance - I have already mentioned the words "skill" and "judgment" in the speech of Lord Morris ofBorth-y-Gest

[1983] 1 A.C. 520 Page 547

in Hedley Byrne [1964] A.C. 465, 503. These words seem to me to be an echo, be it conscious orunconscious, of the language of section 14 (1) of the Sale of Goods Act 1893. My Lords, though the analogyis not exact, I do not find it unhelpful for I think the concept of proximity of which I have spoken and thereasoning of Lord Devlin in the Hedley Byrne case involve factual considerations not unlike those involved ina claim under section 14 (1); and as between an ultimate purchaser and a manufacturer would not easily befound to exist in the ordinary everyday transaction of purchasing chattels when it is obvious that in truth thereal reliance was upon the immediate vendor and not upon the manufacturer.

My Lords, I have not thought it necessary to review all the cases cited in argument. If my conclusion becorrect, certain of them can no longer be regarded as good law and others may have to be considered afreshhereafter, for example whether the decision of the majority of the Court of Appeal in Spartan Steel & AlloysLtd. v. Martin & Co. (Contractors) Ltd. [1973] Q.B. 27 is correct or whether the reasoning of Edmund-DaviesL.J. in his dissenting judgment is to be preferred, and whether the decision of the First Division in DynamcoLtd. v. Holland & Hannen & Cubitts (Scotland) Ltd., 1971 S.C. 257, a decision given after Dorset Yacht Co.Ltd. v. Home Office [1970] A.C. 1004 but before Anns v. Merton London Borough Council [1978] A.C. 728,but seemingly without reference to the Dorset Yacht case, is correct.

My Lords, for all these reasons I would dismiss this appeal and allow this action to proceed to proof beforeanswer.

My Lords, I would add two further observations. First, since preparing this speech I have had the advantageof reading in draft the speech of Lord Fraser of Tullybelton, with which I agree. Secondly, my attention hasbeen drawn to the decision of the Court of Appeal in New Zealand in Mount Albert Borough Council v.Johnson [1979] 2 N.Z. L.R. 234. The judgment of Cooke and Somers JJ., in which at pp. 238-239 thedecision in Bowen v. Paramount Builders (Hamilton) Ltd. [1977] 1 N.Z.L.R. 394 is stated to reflect thepresent law in New Zealand, is consonant with the views I have expressed in this speech.

LORD BRANDON OF OAKBROOK. My Lords, this appeal arises in an action in which Junior Books Ltd. arethe pursuers and Veitchi Co. Ltd. are the defenders. In that action, which purports to be founded in delict, thepursuers (respondents) seek reparation from the defenders (appellants) for loss and damage which they

Page 22

claim to have suffered by reason of the want of care of the appellants in laying flooring at the respondents'factory in Grangemouth.

The appellants made a general challenge to the relevancy of the averments contained in the respondents'condescendence at procedure roll. The question of law raised by that challenge came first before LordGrieve, Lord Ordinary. He decided the question in favour of the respondents, and by an interlocutor ofNovember 22, 1979, allowed them a proof before answer of all their averments. The appellants reclaimed tothe Inner House and by an interlocutor of September 1, 1980, the Second Division, consisting of LordWheatley, Lord Justice-Clerk, Lord Kissen and Lord

[1983] 1 A.C. 520 Page 548

Robertson, [1982] S.L.T. 333 refused the reclaiming motion and affirmed the interlocutor of the LordOrdinary. The appellants now appeal from that decision to your Lordships' House.

Avoiding all matters of detail, the averments contained in the condescendence can be summarised asfollows. (1) In 1969-1970, the respondents had built for them by main contractors a factory in Grangemouth.(2) Earlier, in July 1968, the respondents' architects had nominated the appellants as sub-contractors to layflooring, consisting of a magnesium oxychloride composition, in the production area of the factory. (3) Therespondents' architects, in so nominating the appellants, had relied on the fact that the appellants werespecialists in the laying of flooring. (4) The appellants had accepted the nomination and, after entering into acontract with the main contractors, laid flooring of the specified composition in the specified area. (5) It wasthe duty of the appellants to mix and lay the flooring with reasonable care. (6) The appellants were in breachof that duty in that they failed, in a number of respects, to mix and lay the flooring with reasonable care. (7) Inconsequence of that breach of duty by the appellants the flooring began to develop cracks in 1972 and hadgone on cracking more and more ever since. (8) As a result of the cracking of the flooring, the respondentssuffered the following items of damage or loss: necessary relaying or replacement of the flooring, £50,000;storage of books during the carrying out of the work, £1,000; removal of machinery to enable the work to bedone, £2,000; loss of profits due to disturbance of business, £45,000; wages of employees thrown away,£90,000; overheads thrown away, £16,000; investigation of necessary treatment of flooring £3,000. The totalof these items was pleaded as £206,000; it is in fact, although the point is not material, £207,000.

For the purpose of considering the relevancy of the respondents' averments of fact, it is necessary to makethe assumption that all such averments are true. On the basis of that assumption, the dispute between theparties is not whether the appellants owed a duty of care to the respondents in connection with the laying ofthe flooring; the existence of some duty arising from the proximity of the parties is, rightly in my view,admitted by the appellants. The dispute is rather concerned with the scope of that admitted duty of care.

For the appellants, on the one hand, it was contended that the duty was limited to a duty to exercisereasonable care so to mix and lay the flooring as to ensure that it was not a danger to persons or property,excluding for this purpose the property brought into being by the work and labour done, that is to say theflooring itself. For the respondents, on the other hand, it was contended that the duty was a duty to exercisereasonable care so to mix and lay the flooring as to ensure that it was free of any defects, whetherdangerous to persons or property or not; alternatively, if the duty was in principle that put forward by theappellants, the relevant property, damage to which the appellants were under a duty to exercise reasonablecare to avoid, included the property brought into being by the work and labour done, that is to say the flooringitself.

In relation to that dispute it is common ground that, so far as the present case is concerned, there are nomaterial differences between the Scottish law of delict and the English law of negligence, so that authorities

[1983] 1 A.C. 520 Page 549

relating to the latter are properly to be taken into account in relation to the former. It is further common

Page 23

ground that authorities in Commonwealth countries, the laws of which, in so far as they are not statutory, arederived from the English common law, may usefully be considered, although their value is necessarilypersuasive only.

My Lords, it appears to me clear beyond doubt that, there being no contractual relationship between therespondents and the appellants in the present case, the foundation, and the only foundation, for theexistence of a duty of care owed by the defenders to the pursuers, is the principle laid down in the decisionof your Lordships' House in Donoghue v. Stevenson [1932] A.C. 562. The actual decision in that case relatedonly to the duty owed by a manufacturer of goods to their ultimate user or consumer, and can besummarised in this way: a person who manufactures goods which he intends to be used or consumed byothers, is under a duty to exercise such reasonable care in their manufacture as to ensure that they can beused or consumed in the manner intended without causing physical damage to persons or their property.

While that was the actual decision in Donoghue v. Stevenson, it was based on a much wider principleembodied in passages in the speech of Lord Atkin, which have been quoted so often that I do not find itnecessary to quote them again here. Put shortly, that wider principle is that, when a person can or ought toappreciate that a careless act or omission on his part may result in physical injury to other persons or theirproperty, he owes a duty to all such persons to exercise reasonable care to avoid such careless act oromission.

It is, however, of fundamental importance to observe that the duty of care laid down in Donoghue v.Stevenson [1932] A.C. 562 was based on the existence of a danger of physical injury to persons or theirproperty. That this is so, is clear from the observations made by Lord Atkin at pp. 581-582 with regard to thestatements of law of Brett M.R. in Heaven v. Pender (1883) 11 Q.B.D. 503, 509. It has further, until thepresent case, never been doubted, so far as I know, that the relevant property for the purpose of the widerprinciple on which the decision in Donoghue v. Stevenson was based, was property other than the veryproperty which gave rise to the danger of physical damage concerned.

My Lords, I have already indicated my opinion that the wider principle on which the decision in Donoghue v.Stevenson was based applies to the present case. The effect of its application is that the appellants owed aduty to the respondents to exercise reasonable care so to mix and lay the flooring as to ensure that it did not,when completed and put to its contemplated use, constitute a danger of physical damage to persons or theirproperty, other than the flooring itself.

The averments contained in the condescendence in the present case do not include any averment that thedefects in the flooring complained of by the pursuers either constitute presently, or might reasonably beexpected to constitute in the future, a danger of physical damage to persons or their property, other than theflooring itself. In the absence of any averment of that kind, I am of opinion that the averments contained inthe condescendence disclose no cause of action in delict and are accordingly irrelevant.

[1983] 1 A.C. 520 Page 550

My Lords, a good deal of the argument presented to your Lordships during the hearing of the appeal wasdirected to the question whether a person can recover, in an action founded on delict alone, purely pecuniaryloss which is independent of any physical damage to persons or their property. If that were the question to bedecided in the present case, I should have no hesitation in holding that, in principle and depending on thefacts of a particular case, purely pecuniary loss may be recoverable in an action founded on delict alone.Two examples can be given of such cases. First, there is the type of case where a person suffers purelypecuniary loss as a result of relying on another person's negligent misstatements: Hedley Byrne & Co. Ltd. v.Heller & Partners Ltd. [1964] A.C. 465. Secondly, there may be a type of case where a person, who has acause of action based on Donoghue v. Stevenson [1932] A.C. 562, reasonably incurs pecuniary loss in orderto prevent or mitigate imminent danger of damage to the persons or property exposed to that danger: see thedissenting judgment of Laskin J. in the Canadian Supreme Court case of Rivtow Marine Ltd. v. Washington

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Iron Works (1973) 40 D.L.R. (3d) 530, referred to with approval in the speech of Lord Wilberforce in Anns v.Merton London Borough Council [1978] A.C. 728, 760.

I do not, however, consider that the question of law for decision in this case is whether a person can, in anaction founded in delict alone, recover for purely pecuniary loss. On the contrary, I adhere to the nature ofthe question of law to be decided which I formulated earlier, namely, what is the scope of the duty of careowed by the appellants to the respondents on the assumed facts of the present case.

My Lords, in support of their contentions the respondents placed reliance on the broad statements relating toliability in negligence contained in the speech of Lord Wilberforce in Anns v. Merton London Borough Council[1978] A.C. 728, 751:

"Through the trilogy of cases in this House - Donoghue v. Stevenson [1932] A.C. 562, Hedley Byrne & Co. Ltd. v. Heller& Partners Ltd. [1964] A.C. 465, and Dorset Yacht Co. Ltd. v. Home Office [1970] A.C. 1004, the position has nowbeen reached that in order to establish that a duty of care arises in a particular situation, it is not necessary to bring thefacts of that situation within those of previous situations in which a duty of care has been held to exist. Rather thequestion has to be approached in two stages. First one has to ask whether, as between the alleged wrongdoer and theperson who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in thereasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter - in whichcase a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary toconsider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty orthe class of person to whom it is owed or the damages to which a breach of it may give rise: ..."

Applying that general statement of principle to the present case, it is, as I indicated earlier, common groundthat the first question which Lord Wilberforce said one should ask oneself, namely, whether there is sufficient

[1983] 1 A.C. 520 Page 551

proximity between the parties to give rise to the existence of a duty of care owed by the one to the other, fallsto be answered in the affirmative. Indeed, it is difficult to imagine a greater degree of proximity, in theabsence of a direct contractual relationship, than that which, under the modern type of building contract,exists between a building owner and a sub-contractor nominated by him or his architect.

That first question having been answered in the affirmative, however, it is necessary, according to the viewsexpressed by Lord Wilberforce in the passage from his opinion in Anns v. Merton London Borough Councilquoted above, to ask oneself a second question, namely, whether there are any considerations which ought,inter alia, to limit the scope of the duty which exists.

To that second question I would answer that there are two important considerations which ought to limit thescope of the duty of care which it is common ground was owed by the appellants to the respondents on theassumed facts of the present case.

The first consideration is that, in Donoghue v. Stevenson itself and in all the numerous cases in which theprinciple of that decision has been applied to different but analogous factual situations, it has always beeneither stated expressly, or taken for granted, that an essential ingredient in the cause of action relied on wasthe existence of danger, or the threat of danger, of physical damage to persons or their property, excludingfor this purpose the very piece of property from the defective condition of which such danger, or threat ofdanger, arises. To dispense with that essential ingredient in a cause of action of the kind concerned in thepresent case would, in my view, involve a radical departure from long-established authority.

The second consideration is that there is no sound policy reason for substituting the wider scope of the duty

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of care put forward for the respondents for the more restricted scope of such duty put forward by theappellants. The effect of accepting the respondents' contention with regard to the scope of the duty of careinvolved would be, in substance, to create, as between two persons who are not in any contractualrelationship with each other, obligations of one of those two persons to the other which are only reallyappropriate as between persons who do have such a relationship between them.

In the case of a manufacturer or distributor of goods, the position would be that he warranted to the ultimateuser or consumer of such goods that they were as well designed, as merchantable and as fit for theircontemplated purpose as the exercise of reasonable care could make them. In the case of sub-contractorssuch as those concerned in the present case, the position would be that they warranted to the building ownerthat the flooring, when laid, would be as well designed, as free from defects of any kind and as fit for itscontemplated purpose as the exercise of reasonable care could make it. In my view, the imposition ofwarranties of this kind on one person in favour of another, when there is no contractual relationship betweenthem, is contrary to any sound policy requirement.

It is, I think, just worth while to consider the difficulties which would arise if the wider scope of the duty of careput forward by the respondents were accepted. In any case where complaint was made by an ultimate

[1983] 1 A.C. 520 Page 552

consumer that a product made by some persons with whom he himself had no contract was defective, bywhat standard or standards of quality would the question of defectiveness fall to be decided? In the case ofgoods bought from a retailer, it could hardly be the standard prescribed by the contract between the retailerand the wholesaler, or between the wholesaler and the distributor, or between the distributor and themanufacturer, for the terms of such contracts would not even be known to the ultimate buyer. In the case ofsubcontractors such as the appellants in the present case, it could hardly be the standard prescribed by thecontract between the subcontractors and the main contractors, for, although the building owner wouldprobably be aware of those terms, he could not, since he was not a party to such contract, rely on anystandard or standards prescribed in it. It follows that the question by what standard or standards allegeddefects in a product complained of by its ultimate user or consumer are to be judged remains entirely at largeand cannot be given any just or satisfactory answer.

If, contrary to the views expressed above, the relevant contract or contracts can be regarded in order toestablish the standard or standards of quality by which the question of defectiveness falls to be judged, and ifsuch contract or contracts happen to include provisions excluding or limiting liability for defective products ordefective work, or for negligence generally, it seems that the party sued in delict should in justice be entitledto rely on such provisions. This illustrates with especial force the inherent difficulty of seeking to impose whatare really contractual obligations by unprecedented and, as I think, wholly undesirable extensions of theexisting law of delict. By contrast, if the scope of the duty of care contended for by the appellants isaccepted, the standard of defectiveness presents no problem at all. The sole question is whether the productis so defective that. when used or consumed in the way in which it was intended to be, it gives rise to adanger of physical damage to persons or their property, other than the product concerned itself.

My Lords, for the reasons which I have given, I would decide the question of relevancy in favour of theappellants and allow the appeal accordingly.

Appeal dismissed.

Solicitors: Macfarlanes for McClure Naismith Brodie & Co., Glasgow; Beaumont & Son for Russel & Aitken,Falkirk.

M. I. H.

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