Author: Justin Mendelle and Tola Odedoyin
It is common for parties to a construction contract to apportion risk and limit liability by specifying the damages that one party will be obliged to pay to the other in the event of a breach.  However, it is by no means straightforward to always capture commercial intentions with precise legal drafting, as demonstrated by the fact that the Court of Appeal took a different view to the High Court.

This case once again illustrates the risks associated with poorly drafted clauses and the impact this can have on recoverability.

Background

On 7 November 2011, the claimant, The Royal Devon and Exeter NHS Foundation Trust (the “NHS Trust”), entered into a contract with the defendant, ATOS IT Services UK Limited (the “Contractor”) for the provision of information management services (the “Contract”) for a period of five years with a total contract price of £4,939,207.00.  In 2016, unhappy with the performances of the system, the NHS Trust terminated the Contract and sought damages for wasted expenditure to the sum of approximately £7.9 million.  The Court had to consider the meaning and effect of the caps on liability.

The Contract contained within clause 8.1.2(b), a provision which sought to cap the Contractor’s liability for breach of all defaults under the Contract, with such limits not exceeding the amount stated in Schedule G.  Paragraph 9 of Schedule G provided:

“9.2:     The aggregate liability of the Contractor in accordance with sub-clause 8.1.2 paragraph (b) shall not exceed:

9.2.1:   for any claim arising in the first 12 months of the terms of the Contract, the Total Contract Price as set out in section 1.1; or

9.2.2:   for claims arising after the first 12 months of the Contract, the total Contract Charges paid in the 12 months prior to the date of that claim.

Paragraph 9 of Schedule G was a bespoke amendment negotiated between the parties and did not form part of the standard form contract.

The NHS Trust argued that the liability provision in paragraph 9.2.2 of Schedule G was not capable of being construed because it is “not clear whether there is a single cap calculated by reference to a claim or whether there is a separate cap for each claim that arises. Multiple caps for each claim arising is inconsistent with the concept of a cap”. Accordingly, the NHS Trust argued that the cap should be declared unenforceable.  The Contractor argued that the liability provision was valid and enforceable: the cap was to be determined by the timing of the first default, or in the alternative, there were two caps, the first cap applying to any claim arising in the first 12 months of the Contract and the second cap applying to any claims arising after the first 12 months.

The issue facing the Court was whether the wording in paragraph 9.2.2 was so uncertain and ambiguous, that it would render the liability provision unenforceable.

First Instance Decision in the Technology and Construction Court

HHJ O’Farrell did not agree with the arguments raised by the NHS Trust and found that clause 9.2.2 was enforceable.  In coming to her decision, she noted that the court is concerned primarily with ascertaining whether the intention of the parties would be readily understood “by a reasonable person, having all the background knowledge which would have been available to the parties.”  She went on to say that “the starting point is clause 8.1 which clearly states that the parties have agreed to limit their respective liabilities under the Contract. The wording of clause 8.1.2(b) indicates that the parties intended to impose a financial cap on the total liability of either party for all Defaults” and “although the language used in paragraph 9.2 is not helpful”, there was a clear intention between the parties to have a cap on liability. In her view, there was a singe cap on liability, which was dependent on the timing of the claims.

The NHS Trust appealed, abandoning its previous argument relating to the unenforceability of paragraph 9.2, and instead submitted that the TCC got it wrong when it suggested there was one aggregate cap for liability as opposed to two separate caps on liability.

Decision in the Court of Appeal

The Court of Appeal allowed the NHS Trust’s appeal on the basis that HHJ O’Farrell had erred in her findings that there was one aggregate cap for liability as opposed to two separate caps.

In coming to that decision, LJ Coulson considered which of the alternate views of the liability provisions made the most common sense.  On a proper construction of the provision, he found that “the language of paragraph 9.2 points emphatically towards there being two separate caps.”  He concluded that this made the most sense since paragraph 9.2.1 provided a higher cap on liability because the Contractor was carrying out high value work within the first 12 months, whereas paragraph 9.2.2 provided for a lower cap on liability due to the Contractor doing lower value work in years 2, 3, 4 and 5.  The court observed that there was “nothing surprising about this arrangement”.

The Court of Appeal considered that “the natural meaning, and the meaning which yields the least bizarre consequences” of clause 9.2 was the interpretation that provided “a high cap for defaults occurring in the first year and a separate, lower cap for defaults occurring in subsequent years”.  This they considered, made the most commercial common sense and was therefore to be preferred.

Implications

Liability clauses are often fiercely negotiated, with multiple versions of complicated provisions going back and forth between the parties. This case once again shows that a lack of clarity can have adverse consequences, leaving both parties to a contract uncertain as to the legal effect of bespoke drafting. Practically, one should always work through multiple scenarios to ensure that everyone has a shared understanding of what is being agreed – the drafting should then ‘simply’ implement that understanding.

 


Authors: Amy Brown

Background

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.

Decision

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 [2017] 2 WLR 1029 and its guidance on SAAMCO[1]. 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.”

Implications

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.

[1] South Australia Asset Management Corp v York Montague Ltd [1997] AC 191