Defects and negligence - how long will Hong Kong retain English common law principles?

Helen Kenyon reports from Cameron McKenna's Hong Kong office

There has been speculation following the handover of Hong Kong to the PRC on 1 July 1997 concerning how the common law in the Hong Kong Special Administrative Region (as it is now known) would develop and in particular the weight which the Hong Kong courts will attach in the future to English common law as opposed to that of other Commonwealth jurisdictions. However, a recent decision of the Court of Appeal in Hong Kong in Bank of Asia v. P&T suggests that the Hong Kong courts are, for the time being at least, reluctant to depart from English common law principles.

The appeal arose out of an order that P&T, an architect, pay the costs of rectification works to the cladding of the Bank's headquarters. The Court of First Instance made a finding of fact that the problems in the cladding were caused by P&T's negligent design and this was not disputed on the appeal. The appeal concerned the date on which the damage to the cladding occurred for the purpose of determining whether the Bank's claim in the tort of negligence was time barred.

Problems

The Limitation Ordinance in Hong Kong and the Limitation Act 1980 England both provide that a victim of negligence, if no personal injuries are suffered, must start an action to recover his loss within six years from the date when the cause of action occurs. In the English case of Pirelli v. Oscar Faber (1983) 2 ACI, the House of Lords decided that the cause of action in negligence accrues on the date when the physical damage occurred. This decision has caused problems in building cases where defects can remain latent for several years with damage not becoming apparent until many years after the negligent act.

In England this problem was resolved by the Latent Damage Act 1986. This Act was mirrored in Hong Kong by the implementation of Section 31 of the Limitation Ordinance Cap. 347 which came into force on 1 July 1991. Section 31 provides that, in actions for negligence where the date on which the plaintiff first has the knowledge required for bringing an action for damages in respect of the relevant damage and the right to bring an action falls after the expiry of 6 years following the date on which the cause of action accrued, the limitation period is 3 years from the date of knowledge of physical damage (subject to a long stop date).

However, the provisions of Section 31 are not applicable in cases where an action was statute barred when Section 31 came into force on 1 July 1991. Therefore, if the physical damage occurred before 30 June 1985, Section 31 would not apply. In the Bank of East Asia case, the Bank argued that the cause of action occurred after 30 June 1985 and based its arguments on a New Zealand case; P&T argued that the cause arose before 30 June 1985 and based its arguments on English case law.

The facts

Briefly, the facts in the case are that the cladding works were completed in July 1982 and practical completion of the building as a whole took place on 7 March 1983. Marks first appeared on the surface of the cladding in 1984. In 1989 the building managers carried out a survey of the building and concluded that no major or significant defects had been observed. It was not until June 1993 that extensive damage and the necessity of costly remedial works were established. The Bank issued a writ against the architect in June 1996.

P&T's submissions followed English common law principles. They argued that the Bank had a claim for economic loss at around the time when the cladding was completed in June 1982 and in any event no later than 7 March 1983 when the final certificate for the works was issued. The Bank had not got what it had bargained for at the time the building was handed over, namely a defect-free cladding system. Accordingly, Section 31 did not apply and the claim made by the Bank was time barred.

The Bank relied upon the principle laid down in the New Zealand Privy Council case of Invercargill City Council v. Hamlin [1996] and contended that the reasoning in Invercargill was preferred to English case law. In Invercargill, the New Zealand Privy Council found that where there is a latent defect in a building, a claim for economic loss does not exist in law so long as the market value of the building remains unaffected. The Bank submitted that the defects would not have been apparent at an early stage and that if the Bank had sold the building at that time there would have been no question of the purchase price being discounted to reflect the cost of reinstating the cladding. The cause of action did not occur until the market value of the building was depreciated by reason of the physical damage and this was when a reasonable owner would have called in an expert to examine the state of the building in respect of the defects which had been found.

The Court of Appeal in Hong Kong was not convinced that a compelling case had been made to depart from the English common law position. Accordingly, it decided unanimously that the Bank had a cause of action (in tort, for economic loss) which occurred when the construction of the building was completed or shortly thereafter i.e. in early 1983. This being the case, the Bank's claim against P&T was time barred.

Two of the three judges gave reasoned judgments. The first, Mayo JA, concluded that it was the common law in Hong Kong at the date of transfer of sovereignty that English case law was followed in this area of law and that this remains the law of the Hong Kong Special Administrative Region. He also mentioned that the Hong Kong Court of Appeal had, on one occasion, expressly followed the English line of authorities and he saw no reason to change course.

Differing approaches

Interestingly, in the other leading judgment, Rogers JA reached his decision on narrower grounds. Having concluded that, following English cases, the cause of action arose upon the completion of the building and payment for it by the Bank, he only rejected the Invercargill approach because of the existence of Section 31. He said that the Section was to cater for the injustice that would occur by reason of a rigid application of the reasoning in the Pirelli case. Section 31 only had meaning if a cause of action could arise at the time when a victim was ignorant that his cause of action had occurred. There was no corresponding provision in New Zealand and hence the New Zealand Courts had adopted a different approach to resolve the problem of defects which do not become apparent until several years after the negligent act. The judgment of Rogers JA suggests that the Courts in the new Hong Kong SAR may not, therefore, always follow English common law principles if they are not constrained from departing from them by ordinances or regulations. We will report further as soon as any such developments take place.