Court of Appeal declares that the fall in property prices in 2008 was "reasonably foreseeable"

Court of Appeal declares that the fall in property prices in 2008 was "reasonably foreseeable"

John Grimes Partnership Limited -v- Gubbins [2013] EWCA Civ 37

In a decision that has shocked construction lawyers, the Court of Appeal has recently ruled that a developer is entitled to recover from a consulting engineer who caused delay to a residential development, losses relating to the drop in value of the houses which were completed after, rather than before, the 2008 property crash.

Mr Gubbins is a farmer who obtained planning permission in August 2006 to develop affordable housing on one of his fields in Cornwall. The value of the development was expected to be in the region of £3.8m. The planning permission came with requirements under s.38 of the Highways Act 1980 in relation to the road and drainage to serve the new dwellings. Mr Gubbins therefore engaged John Grimes Partnership (JGP) to design the road and drainage scheme for a fee of £15,000. It was agreed that they would produce the design by March 2007 and it was clear that these works were an essential part of the overall residential development scheme. In fact, with fees of just under £20,000 having been paid, JGP did not produce the designs until February 2008 and even then there was work outstanding. Mr Gubbins engaged an alternative engineer who completed the work within two months and the plans were approved, finally, in June 2008 some 15 months late.

Had JGP been on time with their designs, the development would have been complete by June 2008 but in fact it was not complete until July 2009, by which time the overall value of the houses had fallen by £398,000. JGP pursued Mr Gubbins for unpaid fees of just over £2,000 and he counterclaimed for the losses stemming from their delay, measured as diminution in value of £398,000.

The Court of Appeal confirmed the earlier Court’s decision that (a) it had been established that JGP caused Mr Gubbins’ loss and, most surprisingly, (b) the loss wasnot too remote. The Court said that the fact that the losses were disproportionate to the amount of JGP’s fees for the job was not relevant and that they were liable to Mr Gubbins for his losses of £398,000.

It seems fair to say that the property crash of 2008 clearly came as a shock to most ordinary people (even those of us working in the construction sector) and the fact that house prices fell by c.14% in 15 months was not widely predicted. The Court of Appeal’s finding that this fall was "reasonably foreseeable" will therefore no doubt shock and alarm construction professionals. Even if projects in 2008 went to plan, it seems that whenever we escape the current recession, when the inevitable bust follows the inevitable boom, this problem could become reality for construction professionals. No doubt PI insurers will predict this risk and start increasing premiums now!

So why did the Court think this was predictable and is there any light at the end of the tunnel? The Court looked at "fast moving" and "slow moving" markets - comparing the rapid changes in prices in the commodities markets with the slower changes in property prices. Both Courts who considered this case focused on the length of delay caused by JGP: in fact the County Court Judge described the delay as "egregious". It was perhaps the length of delay, which meant that the downturn in the property market resulted in a demonstrable and quantifiable loss for Mr Gubbins, that prompted the Courts to find against the consulting engineers. Perhaps a shorter delay and a smaller loss would have been treated differently but construction professionals must note that where they cause or contribute to lengthy delays on a project, they may find themselves compensating the developer for losses beyond their control.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.