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Construction PI: Damages recoverable for diminution in market value of property

The Court of Appeal has held unanimously that a developer of land, whose development was delayed by failure of a consulting engineer to complete tasks he had contracted to peform, could recover damages for loss suffered from a diminution in market value of the development.

Background

John Grimes Partnership (JGP) is a company providing consulting engineering and geological services and Mr Gubbins is a farmer who, in August 2006, obtained planning permission to develop his field into a mix of open-market and ‘affordable’ residential dwellings.

JGP was appointed in September 2006 to design the road and drainage layout for the development and to secure the technical approvals necessary for the road to be adopted by the highway authority on completion. At first instance the judge found that there was an express oral term of the contract that JGP would complete the work by March 2007. In fact, by April 2008 JGP had still not completed the works and Mr Gubbins engaged another consultant to assist with completing the works. This assistance amounted to a re-design of what were, by trial, conceded to be JGP’s negligent works. The relevant technical approvals were finally obtained in June 2008, some 15 months later than had been originally agreed.

By the time Mr Gubbins appointed an alternative engineer, he had already paid JGP nearly £20,000 in fees, but there was an outstanding invoice of £2,893 that Mr Gubbins refused to pay and JGP, in what the judge described as “an extremely misguided step”, issued proceedings. JGP successfully claimed for the unpaid fees, but the judge also allowed Mr Gubbins’ £400,000 counterclaim for professional negligence for JGP’s failure to complete the agreed work by March 2007, which had resulted in a reduction in market value of the private residential units, a reduction in the offer from a Housing Association for the affordable units and an increase in building costs.

Court of Appeal judgment

The Court of Appeal, upholding the first instance decision, found that the development of the site had been delayed by 15 months as a result of JGP’s breach of contract and that that had resulted in loss to Mr Gubbins because of the reduced value of the development. The remaining issue was whether that loss was too remote for JGP to be liable. The court considered the judgment of Lord Hoffman in The Achilleas (2009) and the classic decision on remoteness of damage in contract cases, Hadley v Baxendale (1854), and concluded that, where breach of contract by a professional gives rise to inability to progress with the realisation of an asset, then it is reasonably foreseeable that a market fall could occur. JGP further admitted that delay brought with it the risk of market fluctuation and it was therefore within JGP’s actual knowledge that a decline in the property market was a potential effect of delay.

JGP argued that it had no control over the property market and that there were no reported cases of a construction professional being held liable for a fall in the property market during a period of delay and consequently, the developer alone takes the risk of a market movement. The court determined that a lack of control is the case with all markets and there are many decided cases where delay in the delivery of goods has been held to give rise to damages for loss suffered through a change in the market price. The court further noted that, whilst some markets are particularly volatile, the fall in the property market here was by 14% in just over a year, which did not render the case out of the ordinary. It was instead the “egregious delay” that in the present case gave rise to a quantifiable loss. Further, JGP’s argument that the scale of the loss was disproportionate, in relation to the relatively low fee paid, was unpersuasive and was merely a pointer, but not itself sufficient to establish an absence of responsibility.

Comment

Whilst the delay in this case might be extreme, this is a timely reminder to all construction professionals and their insurers that the recent and continuing downturn in the property market may lead to significant claims where a professional fails to meet contractual deadlines on developments.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, click here.

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