Legal notes Sainsbury’s brought unsuccessful proceedings against parties that didn’t owe it contractual obligations or tortious duties of care
Key point
The courts are reluctant to:
- allow a duty of care in tort between a subcontractor or consultant and a building’s owner; and
- look behind a corporate structure and hold an individual director responsible for the design and manufacturing carried out by their company.
Hindsight is a wonderful thing. But Sainsbury’s and its legal team are probably ruing the day that proceedings were commenced in Sainsbury’s Supermarkets Ltd v Condek Holdings Ltd [2014] EWHC 2016 (TCC); [2014] PLSCS 190.
The facts
In 2006, Sainsbury’s needed a new car park for its supermarket in North Cheam, Surrey. It decided to use the Condek system, a new design pioneered by Andres Pashouros (the third defendant).
Mr Pashouros chose to run his business affairs through a number of companies. Two were parties to the proceedings. Condek Holdings Ltd (“CHL”) – the first defendant – went into creditors’ voluntary liquidation in April 2013. Condek Manufacturing Ltd was named as the second defendant but does not appear to be involved in the car park project. It is also in administration and played no part in the litigation.
The fourth defendant – Capita Symonds Ltd – had, during 2008, acquired the share capital of a firm of engineers, Nickalls Roche McMahon Ltd (“NRM”). NRM had advised CHL on the design, but had not contracted with Sainsbury’s, or given it a collateral warranty. Because Capita had acquired NRM’s share capital, Sainsbury’s sued Capita but not NRM (which was still in existence and still trading).
Condek was a modular design that was prefabricated off-site and assembled on concrete foundations. The North Cheam project appears to be the first time that the design had been used and, by 2008, there were sufficient defects for Sainsbury’s to claim that the car park needed to be demolished and rebuilt.
Because CHL was insolvent, Sainsbury’s looked to Mr Pashouros and Capita for compensation. Both denied any responsibility in either contract or tort to Sainsbury’s and brought proceedings both to strike out the claims against them under CPR 3.4(2)(a) and for summary judgment against Sainsbury’s under CPR 24.
Stuart-Smith J accepted that the test he had to apply in order either to strike out the claims or award summary judgment was a significant one for the defendants to overcome. Adopting the guidance of the Court of Appeal in Hughes v Richards (t/a Colin Richards & Co) [2004] EWCA Civ 266, he decided that he had to be certain that the claims against Mr Pashouros and Capita were bound to fail at trial. The fact that he was able to amounts to a significant judicial criticism of the decision by Sainsbury’s to bring the claims.
The claim against Mr Pashouros
Sainsbury’s fundamental problem was that its contract was with CHL and not with Mr Pashouros. Mr Pashouros was a director of CHL and had given it a formal licence to exploit his inventions, including the Condek system.
To bring a claim against Mr Pashouros as an individual, Sainsbury’s either had to: (1) persuade the court that he was trying to avoid a personal liability by imposing a corporate entity between himself and Sainsbury’s; or (2) show that he had assumed personal responsibility to Sainsbury’s in relation to the design that, under the principle in Hedley Byrne & Co Ltd v Heller & Partners & Co [1963] UKHL 4, created a separate duty of care not to have caused it economic loss. Option (1) was not pleaded by Sainsbury’s and Stuart-Smith J held that Sainsbury’s failed to establish any assumption of responsibility by Mr Pashouros.
The judge stressed that it was perfectly common for traders to transfer a business to a limited company. Further, the fact that Mr Pashouros, as a director of CHL, was promoting the Condek system was not unusual and did not create a separate duty of care. Finally, Sainsbury’s chose to contract with CHL and did not ask for Mr Pashouros to be a party to the contract or provide a collateral warranty:
“There is nothing in the evidence… to suggest that Sainsbury’s relied (let alone reasonably relied) upon Mr Pashouros in his personal capacity rather than upon… [CHL]… with which it chose to contract.”
The fact that CHL was insolvent was also “a risk that Sainsbury’s chose to take. It could have hedged its risk… including the obtaining of insurance or a bond” and the fact that a “major, knowledgeable and sophisticated commercial organisation” now regretted that choice was not a valid reason to create a duty of care.
The claim against Capita
Sainsbury’s needed to show that NRM owed it a duty of care in tort which became a duty owed by Capita following its acquisition of NRM’s share capital. Both were insurmountable legal hurdles.
The relationship between NRM and Sainsbury’s was too remote. Stuart-Smith J relied on the (arguably obiter) comments of Lord Goff in Henderson v Merritt Syndicates [1995] 2 AC 145 that a subcontractor owed no duty of care not to cause economic loss to a building owner because the building owner was not a party to the subcontract. The subcontractor’s obligations – in tort as well as in contract – were owed only to the main contractor. Stuart-Smith J thought the same principles should apply to the relationship between a building owner and a sub-consultant such as NRM.
He also held that, even had Sainsbury’s been able to establish that NRM owed a duty of care in tort, it was not possible for that duty to be transferred to Capita:
“a personal liability in tort cannot be transferred so as to relieve the original tortfeasor of liability and to impose the original tortfeasor’s liability upon another person instead. This is settled law and there appears to be no prospect of the law changing…”.
Lessons to be learned
The lessons to be learned from the case depend on what role you play in the construction process.
For clients looking to claim against their main contractor’s supply chain, the warnings are clear: make sure that you have a contractual right to sue (either by collateral warranty or using the Contracts (Rights of Third Parties) Act 1999). If you don’t, the law of tort is unlikely to help.
For subcontractors, the reverse is true and they need to make sure that they are aware of which parties could have claims against them.
And businesspeople looking to market their ideas through a properly-established company can take comfort from the court’s very strong reluctance to look behind the corporate veil.
Stuart Pemble is a partner at Mills & Reeve LLP
