Hunt and others v Optima (Cambridge) Ltd and others1
On 31 July 2014, the Court of Appeal overturned the first instance decision of the Technology and Construction Court (TCC) and held that an action for negligent misstatement in respect of a number of Architects’ certificates failed as the claimants were unable to show reliance. Further, the Court of Appeal also held that the Architects’ certificates did not amount to collateral warranties.
Between 2001 and 2004 Optima (Cambridge) Limited (Optima), a property developer and the First Defendant in this case, constructed a new four storey block of flats in Peterborough. A number of the flats were sold ‘off-plan’ as long leases whilst others were retained to be rented out by Optima. Eight of the long leaseholders who purchased flats between 2003 and 2004 are named Claimants in this case.
Optima agreed with the leaseholders that the works would be completed to certain standards and requirements. In that regard, Optima appointed Strutt & Parker (S&P) to carry out periodic inspections with a view to producing architects’ certificates (the Certificates) for the benefit of the purchasers to certify that the works had been constructed to a satisfactory standard and in general compliance with approved drawings and the Building Regulations.
Following completion of the development in 2004, a number of defects and deficiencies emerged within the flats such that the Claimants issued proceedings against Optima and S&P in March 2010. In very brief terms, Optima was said to be in breach of its agreement and S&P was said to have been negligent by way of either negligent misstatement or breach of warranty for failing to properly inspect the properties and identify various defects. Accordingly, the Claimants alleged that S&P should have made Optima aware of the defects and should not have issued the Certificates until the defects had been rectified.
First instance decision
The TCC found in favour of the Claimants at first instance. In reaching his decision, Mr Justice Akenhead considered the following three key issues.
S&P’s duty of care and negligent misstatement
The Court considered that two duties of care were owed by S&P to the Claimants involving the duty to exercise reasonable care (1) in the performance of the services leading up to the issue of the Certificates and (2) in the issuing of the Certificates themselves. The Court found that S&P breached both of these duties and that the Certificates amounted to negligent misstatements.
Did the Claimants rely on the Certificates?
The Court considered the extent to which the Claimants relied upon the Certificates such as to create a cause of action for negligent misstatement (assuming that there were breaches and damage). It was accepted that the Claimants did rely on the Certificates despite the fact that four of the Claimants only received their Certificates after sale and completion – this being “immaterial in the circumstances”. The fact that the Claimants knew or believed that they were entitled to receive and would be receiving the certificates sooner or later was enough to establish reliance according to Mr Justice Akenhead.
Did the Certificates amount to warranties?
It was decided that the Certificates were enforceable warranties from S&P to the majority of the Claimants on the basis that there was a contractual intention within the wording of the Certificates and that there had been consideration for them (i.e. the Claimants in paying for their flats knew they were entitled to receive the Certificates).
Court of Appeal’s decision
Optima and S&P appealed the TCC’s first instance decision. Lord Justices Maurice Kay, Stephen Tomlinson and Christopher Clarke, sitting in the Court of Appeal, overturned the findings of the TCC, as explained below.
S&P’s duty of care
The Court of Appeal rejected the TCC’s finding that two independent duties of care were owed by S&P to the Claimants – i.e. to (1) take care in the work leading up to the issue of the Certificates and (2) the issuing of the Certificates themselves. The Court ruled that S&P owed one duty to take care in making the statements contained in the Certificates.
In light of the above, although S&P owed Optima a contractual duty in respect of inspection, the Court held that this does not necessarily mean that S&P owed future certificate holders a similar duty in tort:“To hold that S&P were under such a duty to persons who become recipients of Certificates after purchase would involve imposing on them a duty to inspect arising out of statements which, at the time when the duty arose, they had not made.”
As such, it was decided that S&P would only be in breach of duty if the Certificates were not “the product of both competent groundwork and drafting”.
In order to recover in the tort of negligent misstatement the claimant must show that he relied on the statement in question.
Did the Claimants rely on the certificates?
The Court of Appeal found that the Claimants cannot have relied on the statements contained in the Certificates, in committing themselves to the agreements to purchase, because those statements were not then in existence, “At best they could be said to have relied on an understanding either (i) that there was a Certificate already in place; or (ii) that they would receive a Certificate on or after completion”.
In light of the above, The Court of Appeal rejected the TCC’s first instance finding that it was enough to establish reliance on the basis that the Claimants knew or believed that they were entitled to receive and would be receiving the certificates sooner or later. Lord Justice Christopher Clarke, who provided the main judgment, stated:“... reliance must follow representation and cannot be retrospective. If the representation is the signed Certificate it cannot be relied on before it comes into existence. A cause cannot postdate its consequence”
As the Court of Appeal put it, “a way out of this dilemma” would be by construing the Certificates (as the TCC did) as a form warranty which would require an intention to create contractual relations. This is the next point the Court of Appeal turned to address.
Did the Certificates amount to warranties?
The Court of Appeal also overturned the first instance decision that the Certificates amounted to warranties. In reaching this decision the Court considered the following:
- The Certificates contained no reference to any consideration;
- There was no reference to any possible assignment of obligations in the Certificates;
- The Certificates should not be looked at solely from the perspective of a lay person. It was found relevant to consider how they would be viewed by a reasonable person with such knowledge as he could be expected to have (not least because most purchasers, such as the claimants, had legal assistance);
In short, the Court of Appeal found that the phraseology of the Certificates, taken as a whole, did not amount to warranties.
The Court of Appeal agreed that any liability arising out of the Certificates should be governed by the law relating to negligent misstatements. In that regard, the Certificates operated as statements upon which the Claimants, as purchasers, would rely in entering into their contracts which would give rise to a liability when they did so. However, as set out above, the Court of Appeal found that there was no reliance and therefore overturned the first instance decision that the Certificates amounted to negligent misstatements.
The Court of Appeal’s decision is good news for professional consultants, such as Architects and Surveyors, who provide certificates when designing and/or monitoring the construction or conversion of residential buildings.
It was made clear that professional consultants who provide certificates will only have one duty: to take care in making the statements contained in the Certificates. They do not have an additional tortious duty to purchasers to take care in the work leading up to the issue of the certificate.
Claimants bringing negligent misstatement claims against professional consultants must establish reliance. The Court of Appeal held that it was not enough that the claimants knew that that they would be receiving certificates “sooner or later”. However, the courts may distinguish between lay purchasers and sophisticated purchasers when deciding whether the purchaser has established reliance (the latter possibly facing a higher hurdle).
It was also found that the phraseology of certificates is a key factor in deciding whether or not they may amount to warranties. Accordingly, professional consultants should carefully check the wording of certificates they enter into.