Authors: Amy Brown
In 2007, Mr Dhanoa, operating through his four companies (the “Claimants”), engaged Fosters (the “Defendant”) as architects to design a luxury 5-star hotel at London Heathrow. According to Mr Dhanoa, he told Fosters that the scheme must be designed within a budget of £70 million. Just a few months later, costs consultants EC Harris costed the design at £195 million. Mr Dhanoa then increased his budget to £100 million, allegedly in reliance upon Fosters telling him that the scheme could be ‘value engineered’ down to that figure.
Planning permission was obtained but it became apparent that it was impossible to reduce the cost of the design to £100 million and Mr Dhanoa failed to secure funding for the project. He (in the name of his companies) brought a claim for professional negligence against Fosters seeking loss of profits and losses incurred in procuring a new design that was capable of construction within budget. An alternative claim for restitution was also pleaded.
Fosters denied both that a budget existed and that they had advised, or even believed, that value engineering could succeed in achieving a costing of £100 million. The court found in favour of the Claimants on both these matters of fact. It then went on to consider whether Fosters had breached any duties that it owed to Mr Dhanoa and whether these had caused him any remediable loss.
The court found that Fosters had been professionally negligent in two respects. Firstly, in failing to ascertain and consider the budget in its design and secondly, in failing to advise Mr Dhanoa that its design could not be value engineered down to £100 million.
Failure to consider the budget as a key requirement or constraint
The Deed of Appointment between the parties imposed a contractual duty upon Fosters, in the performance of its duties, to
“…use all the skill, care and diligence to be expected of suitably qualified and experienced architects undertaking services the like of those undertaken by the Consultant in relation to projects of the scale and character of the Development…” (Clause 8.1)
In determining the scope of Fosters’ duties, the court interpreted the Appointment as requiring all of the RIBA Work Stages A-L. Stage A involved identifying the client’s requirements and possible constraints on the development. Stage B required the preparation of a Strategic Brief confirming those key requirements and constraints, either by the client itself or on their behalf. Fosters denied that the Strategic Brief was part of its obligations in this project and one was not prepared.
Whether or not Fosters had responsibility for the Strategic Brief did not matter to this court. It held that, in any event, Fosters were obliged to identify the key requirements and constraints of the project as part of the scope of its obligations. Mr Dhanoa’s budget was “plainly a constraint” and arguably a requirement too. The RIBA Architect’s Job Book, referred to by both expert architects, confirms that the budget is a key constraint. It states that an architect must “obtain from the client the project requirements, budget and timetable”. An architect exercising reasonable skill and care should have regard to this Job Book.
The court also found support for this analysis in the wording of clause 8.1 (set out above). In its view, the “scale and character of the Development” can only be established if the existence, or absence, of a budget is also established.
Fosters’ argument that it was not responsible for costs advice did not assist it. The court acknowledged that costs advice was to be provided by separately appointed quantity surveyors however, it would not allow Fosters to “excuse itself from performing the services required in Stages A and B by saying the budget equates to costs, and costs are nothing to do with them as an architect”. Further, the cost implications of Fosters compliance with its obligations did have to be taken into account in the design. If a particular element would increase the cost substantially, it had a duty to advise Mr Dhanoa of that.
The experts effectively identified two types of project. A “brief led” project which costs the scheme after it has been designed to brief and a “budget led” project which requires the design of the scheme to match the considered budget. The court stated that,
“…it does not matter which of those two routes is adopted for any particular project, but what cannot and should not be done by an architect exercising reasonable care and skill is that a key requirement and constraint of the client is simply wholly ignored”
The court found that this is what Fosters had done. It appeared to have skipped the early design stages A and B, failing to identify and then confirm Mr Dhanoa’s budget as a key constraint.
Negligent advice as to ‘value engineering’
The court did not consider value engineering to be a form of costs advice requiring a quantity surveyor. Rather, it is the making of changes to a design to reduce the cost of building it. The court found as fact that Fosters had advised Mr Dhanoa that the cost of the design could be value engineered down to £100 million. Both experts agreed that such advice was negligent since such a vast reduction of cost to this level would not have been possible.
Even if that finding was wrong, the court pointed to evidence that Fosters knew Mr Dhanoa intended to proceed with the hotel project on the understanding that it was possible. It held that Fosters had a duty to advise Mr Dhanoa that it could not be done. The court re-stated evidence by the Claimant’s expert witness that,
“…in failing to advise Mr Dhanoa that this cost reduction could not be achieved without substantially changing their design and/or reducing the amount and/or quality of the accommodation, [Fosters] failed to use reasonable care and skill.”
Causation and remedies
The court concluded that none of Fosters’ work was capable of being reused by newly appointed architects and the Claimants would have to start from scratch in procuring a design for the hotel. The sums expended were used as a measure of the sums that would have to be expended again to achieve the scheme. As a result, the court awarded Mr Dhanoa compensatory damages to the amount paid to Fosters under the contract (approximately £3.6 million).
The loss of profits claim, however, failed for a lack of causation. The court held that the effective cause of Mr Dhanoa failing to construct and open the hotel for business was the restrictions that were placed on borrowing following the financial crisis. From mid-2008, banks were no longer offering sizeable funds and instead requiring greater equity to be provided by the borrower. The amount Mr Dhanoa had already injected into the project was not sufficient to meet the new requirements such that even if Fosters had produced a design costing £100 million, Mr Dhanoa was unlikely to have secured the necessary funding.
The court reached the same conclusion by considering an alternative question – was the inability to obtain funding as a result of the financial crisis, a type of harm from which Fosters had a duty to keep the Claimants harmless? The court considered recent Supreme Court case Hughes-Holland v BPE Solicitors  2 WLR 1029 and its guidance on SAAMCO. It reiterated the point made by the Supreme Court that a defendant does not have legal responsibility for a client’s decision to enter a transaction where it is supplying material which the client will take into account in making its own decision on the basis of a broader assessment of the risks. In these circumstances, liability will only extend to the consequences of that information being wrong. Only where a defendant is advising against the full range of risks, could it be liable for the full losses caused by a transaction. In this court’s view, neither situation applied to Fosters. Although the professional services encompassed advice in some respects (e.g. value engineering), the scope of the retainer was to design the scheme and provide architectural services. Fosters were not engaged to advise on the business viability of the hotel, nor was the Fosters Scheme part of the information Mr Dhanoa was considering in deciding whether to proceed with the project. The Fosters Scheme was itself the project. There was no duty on Fosters to hold the Claimants harmless against a failure to secure funding.
Although it was not required to consider the alternative claim in restitution (given its award of damages for breach of contract), the court did comment on the possibility of a return of the sums paid to Fosters on the basis of no consideration. In its provisional view, “the failure of consideration [by Fosters] was total, given the budget was such a key requirement and constraint, and given the Fosters Scheme so spectacularly ignored this point entirely.”
This case stresses the importance of architects having regard to budget when scoping and designing a project. Even where there is no budget mentioned in the architect’s appointment, it is part of their duty to ascertain whether such a constraint exists and if so, to keep this in consideration when preparing the design. This duty extends also to correcting any known misconceptions that the client may have that their budget can be achieved. The appointment of independent cost consultants does not excuse architects from these duties.
Whether or not an architect is found to have acted negligently in their duties however will turn on the facts of each case. This judgment arises from significant findings of fact that Fosters both knew and wholly ignored Mr Dhanoa’s budget. The contemporaneous evidence was strong and concessions were made by Fosters’ own expert in the course of the trial. In addition, the court was critical of the attitude adopted by the defence which involved attacking the other side’s credibility.
Whilst this case provides helpful insight into the scope of an architects duty, it remains to be seen how readily these types of breach will be found and how far such duties may extend to other construction professionals.
 South Australia Asset Management Corp v York Montague Ltd  AC 191