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You can rely on me...

It is not uncommon for a party who has prepared a report (say, for example, a surveyor or a soil consultant) to issue a simple letter to a third party stating that the third party in question is entitled to rely on the relevant report. Such letters are often referred to as "reliance letters" and are seen as a quick alternative to negotiating a detailed collateral warranty or relying upon the Contracts (Rights of Third Parties) Act 1999.

Whilst it is clear that a collateral warranty creates a direct contractual relationship with the third party, people in the industry very often talk about reliance letters merely extending their duty of care. So, what effect do reliance letters have - do they create a contract or do they simply extend a party's tortious duty of care? And, more to the point, does it really matter?

Given a choice between relying on tort or contract, the latter is preferable. Contract affords greater certainty than tort because the parties have the opportunity to state clearly their respective rights and obligations. If a party can prove that the other party has breached a term of the contract, strict liability is imposed so that the party in default will be obliged to pay the innocent party damages in accordance with the principles of Hadley v Baxendale (1854) (i.e. damages that arise naturally from the breach, or such as may be in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it). The parties can raise the standard of care owed (e.g. to a fitness for purpose obligation) and are free to set out the damages that they are likely to suffer as a result of a breach of the contract.

We are over 70 years on from the famous case of Donoghue v Stevenson and the snail in the ginger beer bottle, and the law is still trying to work out the extent of the law of negligence. Even if a party is able to establish that a third party owes him a duty of care, and the party is in breach of that duty, following the line of case law from Murphy v Brentwood DC (1990) he will not, except in very limited circumstances, be able to claim damages in negligence for pure economic loss. This means, for example, that a tenant will not be able to sustain a claim in tort against a negligent contractor in relation to physical damage just to the building itself.

One conceivable main advantage of making a claim in tort is that it may afford a longer limitation period due to the fact that the cause of action accrues when the damage occurs, as opposed to contract, where the cause of action accrues from the time of the breach of contract.

Whether a reliance letter amounts to a contract will depend on its terms. The normal rules of construction will apply, but in most cases the courts will be able to find that a reliance letter will establish a contract. This is due to the fact that, where one party relies on a promise to his detriment, this will be sufficient for a court to establish consideration and thus find the existence of a contract.

A reliance letter may allow a party to found a claim in both contract and tort. In these circumstances the scope of the duty of care will usually not be greater than that taken contractually. Given the preference for relying on contract as opposed to tort, the third party relying upon the letter should strive to ensure that it takes effect as a contract. As ever, clear drafting is paramount.