Negligence and Pure Economic Loss in Construction: A Case Study Analysis

This article discusses a case study on negligence and pure economic loss in construction, analyzing the legal principles and their application. It explores the duty of care owed by builders and the liability for latent defects. The first part of the article focuses on the essential elements of negligence, while the second part discusses the recovery of pure economic loss. The case study involves a builder, Billy Jean, who constructed a complex with latent defects, causing Donald & Co. to sustain a pure economic loss of $40 million.

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COMPANY LAW
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Author Note

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Answer One
Issue
The issue that has been identified in the given scenario is whether there was negligence on the art
of Billy Jean in constructing the complex.
Rule
The tort of Negligence is a legal wrong in which one of the parties suffers damage at the hands
of another party due to failure of the latter party to take care or avoid what seems to be potential
risk to a reasonable person.
The law of Negligence had been established first in the case of Donoghue v Stevenson [1932]
AC 562. The neighbor principle was first established in this case. As held by Lord Atkin, a
person must take reasonable care to avoid acts or omissions which is likely to injure such
person’s neighbor. The neighbor principle made provisions for claiming damages by injured
parties, to whom a duty of care was owed by the defendant and the defendant breached such duty
of care.. It can be said in accordance with the decision of the aforementioned case that a claimant
must prove the following elements in order to be successful in claiming negligence on the part of
the defendant:
 The defendant owed a duty of care to the to the plaintiff
 Such defendant breached his duty of care
 The damage sustained by the claimant was caused directly by the negligent action of the
defendant
 The Damage was not too remote.

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Duty of Care
This is the first essential element of negligence. It must be proved by the claimant that the
defendant owed a duty of care to him. To identify whether a duty of care was owed by the
defendant, the Caparo test was applied. The Caparo test can be said to be a threefold test which
takes into consideration the following:
 Whether the damage sustained by the claimant as a result of the defendant’s conduct was
reasonably foreseeable
 Whether a relationship of proximity between the parties existed
 Whether it fair and reasonable to impose such duty on the defendant.
Breach of duty of care
This is the second important essential to establish negligence is breach of duty of care on the part
of the defendant. To assess whether the duty of care as imposed on the defendant was breached
the courts generally apply an objective test as established in the case Vaughan v Menlove (1837)
3 Bing. N.C. 467. By the application of the objective test the courts assess whether the defendant
had met the standard of a reasonable person. However it can be mentioned that the objective test
can vary depending upon the circumstance of the particular defendant n the situation. In the case
Blake v Galloway [2004] 3 All ER 315, it was held by the court that if the defendant is
professional, such defendant will be held to be of the standard of a reasonable person within the
same profession.
By applying the objective test the courts generally tend to assess the following factors:

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 Likelihood of the harm- As held in the case Roe v Minister of Health [1954] 2 WLR
915, a defendant is no expected to safeguard the claimant against event which cannot e
reasonable foreseen.
 Seriousness of the harm- As held in the case Paris v Stepney [1951] AC 367
 Cost of prevention – As held in the case Latimer v AEC [1953] AC 643
 Utility of the conduct of the Defendant – As held in the case Watt v Hertfordshire [1954]
1 WLR 835.
Causation
Causation of damage is the next important essential in claim negligence successfully. Causation
of damage to a plaintiff is assessed by the courts by the application of the “But for” test as held
in the case Barnett v Chelsea & Kensington Hospital [1969] 1 QB 428. The ‘But for’ test
assesses whether the claimant would have sustained the losses had it not been for the negligent
actions of the defendant. If it is found that the claimant would have sustained the damages
regardless of the actions of the defendant, then the defendant cannot be held liable. The ‘But For’
test was also applied in the case Chester v Afshar [2004] 3 WLR 927. However as held in the
case, Performance Cars Ltd v Abraham [1962] 1 QB 33, where there exists more than cause
which occurs in succession, it may be possible for the courts to identify the actual cause of
damage.
Remoteness of Damage
The remoteness of the damage sustained by the plaintiff to the defendant must is an essential
element in claiming negligence. According to the judgment of the Wagon Mound no1 [1961] AC
388 case it can be stated that a defendant is only personally liable for the losses sustained which

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was of a foreseeable kind. Remoteness can be said to be a legal principle which aims to limit the
liability of the potential liability of the breaching party.
Application
As provided in the facts of the case, Billy Jean had been appointed by Sergei to build the Retail
and Residential complex called ‘Petersberg Dreaming’. It has been provided through the facts of
the given case study that Billy had very limited experience in the field of construction. She had
only undertaken the construction of free residential building in the past. However, after the
completion of the project “Petersberg Dreaming’, the entire complex was purchased by
Donald&Co. from Sergei. However, it was later established that a number of problems existed in
the complex due to which Donald&Co faced an economic loss of $40 million. Sergei had been
approached by Donald & Co. However, it was found that Sergei had become bankrupt. The issue
which arises in this situation is whether, the builder Billie jean can be held liable for the losses
sustained by Donald & Co. Thus, to establish negligence on the part of Billy Jean, it first
important to establish a duty of care on the part of Billy Jean according to the Donoghue vs
Stevenson case. Such duty of care can be assessed by the application of the Caparo test. It can be
said that it was only reasonable for Billy Jean to foresee the damage sustained by Donald & Co.
as she was the builder of the complex. Further it can be said according to the principle of the
Donoghue vs Stevenson case it can be stated that a manufacturer owes a general duty of care to
any consumer who consumes such product, thus a proximity existed between parties. It was also
fair and reasonable to impose the duty on Billy Jean since she had constructed the complex. Thus
a duty of care on behalf of Billy Jean towards Donald &Co. can be said to be existing in this
given scenario.

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Whether Billy Jean breached her duty of care can be assessed by the objective test as established
in the Vaughan v Menlove case. It can be stated that any reasonable person would have assessed
the damage likely to be caused to the plaintiff due to the water leakage. Further it can be said by
the application of the principle as established in the case Blake v Galloway case that the
defendant, Billy Jean is expected to meet the standard of a reasonable person with her profession.
To prove Negligence on the part of Biily Jean it is essential to establish that the damage
sustained by Donald & Co. was caused directly due to the negligent actions of Billy Jean. It can
be said that the causation of Damage of Donald & Co can be assessed by the “But For” test as
applied in the Chester v Afshar case. It s evident from the facts that are provided through the
case study that Donald and Co. would not have sustained the losses if Billy Jean had built the
complex properly. In this case, thus it can be stated that the cause of damage was directly related
to the negligent actions of Billy Jan and that Donnald & Co would not have sustained the
damages had it not been for the negligent action of the builder.
The last element that is necessary to prove negligence on the part of the defendant is remoteness
of damage. By applying the principles of the Wagon Mound Case, it can be stated that it was
reasonably foreseeable to the defendant, Billy jean that the damage caused to the defendant was
of foreseeable kind and therefore he is liable personally for the losses sustained by Donald & Co.
Thus after discussing the facts of the case and applying the legal principles to the same, it can be
stated that there was negligence on the part of Billy Jean, the builder as he had a duty of care
towards any resident in the complex built by him, he breached such duty of care, the damage
sustained by Donald & Co. was caused directly because of the negligent actions of the defendant
and the damage was not too remote to Billy Jean.

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Conclusion
Thus to conclude it can be said that there was negligence on the part of Billy jean as all the
essential elements of negligence had been present.

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Answer 2
Issue
The issue that has been identified in the given case study is whether Billy Jean owed a duty of
care to Donald & Co. to avoid the purely economic loss sustained by the latter party.
Rule
Pure economic loss can be considered to be the damage sustained by the plaintiff due to
negligent act of another party which is purely economic in nature and not accompanied by
physical damage to a person and property. The case Hedley Byrne v Heller is the authority on
the recovery of economic loss which is incurred as a result of economic misstatements. Further
in the case Bryan v Maloney it was held by a majority of the High Court of Australia that
builders have a liability of to the owners of the house for latent defects existing in such building
and which result in diminishing the value of the property.
It can be stated that earlier a law of contract exclusively governed the liability of the builders;
however with the decision of the High court in the aforementioned case such liability of the
builders was also assessed by the law of tort. The decision of the case Bryan v Maloney
represents an expansion of the circumstances in which a plaintiff will be eligible to claim
damages and recover the pure economic loss which results from the negligent actions of the
defendant. Another important case which deals with a similar issue is BROOKFIELD
MULTIPLEX LTD (ACN 008 687 063) v OWNERS CORPORATION STRATA PLAN 61288
and Another - (2014) 313 ALR 408. In this case the Owners association started proceedings
against Brookfield Multiplex to recover the costs of rectifying the defects existing in the
common property from the aforementioned party. At first, it was held by judge Mc Doughall that

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no duty of care was owed by Brookfield Multiplex to Owners associations to avoid pure
economic loss as a result of the latent defects which were existing in the building. However,
upon being appealed in the New South Wales court, it was held by the court that a duty of care
was existing on the Brookfield multiplex to the Owners Associations.
Application
It has been provided through the facts of the given case study that the complex which was built
by Billy Jean had latent defects and Donald &Co sustained a pure economic loss due to the same.
Thus by the application of the principle of the Bryan v Maloney case it can be stated that Billy
Jean owed a duty of care to avoid the economic loss of the claimant. This statement can also be
substantiated by the decision of the BROOKFIELD MULTIPLEX LTD v OWNERS
CORPORATION STRATA PLAN case in which it was held that a duty of care was owed to the
Owners Associations by Brooke field multiplex due to the latent defects existing in the building.
Conclusion
Thus to conclude, it can be said that Billie Jean had a duty of care towards Donald & Co. to
avoid pure economic loss however she breached such duty of care.

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Reference List:
Donoghue v Stevenson [1932]
Vaughan v Menlove (1837) 3 Bing. N.C. 467
Blake v Galloway [2004] 3 All ER 315
Paris v Stepney [1951] AC 367
Roe v Minister of Health [1954] 2 WLR 915
Latimer v AEC [1953] AC 643
Watt v Hertfordshire [1954] 1 WLR 835.
Barnett v Chelsea & Kensington Hospital [1969] 1 QB 428
Chester v Afshar [2004] 3 WLR 927
Performance Cars Ltd v Abraham [1962] 1 QB 33
Wagon Mound no1 [1961] AC 388
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465 (HL)
Bryan v Maloney - [1995] HCA 17 - 182 CLR 609; 128 ALR 163
BROOKFIELD MULTIPLEX LTD (ACN 008 687 063) v OWNERS CORPORATION
STRATA PLAN 61288 and Another - (2014) 313 ALR 408