Working for free can be costly!
Someone once said that sex began in 1963, and the following year the other staple of life (for contentious construction lawyers), the professional negligence claim in tort got new trousers too. The House of Lords decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 HL established that a duty of care could extend beyond someone other than a person with whom the relevant professional had a contract (in that case, potential investors), and that the duty could include avoiding causing them pure economic loss, or in other words, monetary damage, such as incurring a loss on a capital investment or lost profit. In Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 the House of Lords extended the duty to exercise reasonable skill and care to avoid economic loss further, beyond advice to other services (in that case the management of insurance names’ assets). Now, the key requirement is that a ‘special skill’ is being exercised.
Since 1964, a battery of tests for the existence of this duty in tort have been espoused in the higher echelons of the judiciary (‘reasonable foreseeability of the economic loss’, ‘proximity and fairness’, ‘justice and reasonableness’ etc.) Other phrases include whether a relationship existed which could be seen as ‘equivalent to contract’, and ‘an assumption of responsibility’ in circumstances in which, but for the absence of payment, there would be a contract, because the advice or service was understood to be relied on. The existence of a contract has become less essential to demonstrating liability and recovering economic loss, and this sometimes rears its head in the construction field too. During legal proceedings, the existence or otherwise of a duty of care is often established at a preliminary stage, or aired during procedural wranglings about the claimant’s statements of case, leading to the existence of the duty (or its likelihood) being ruled on, and such cases frequently then settle.
In the construction field, a common scenario in which the duty is relied on is where a contractual limitation period (6 years) has elapsed and the innocent party seeks a remedy in respect of latent defects in tort, so there is a contractual background, including limitation or exclusion clauses which will restrict tortious liability too if they are reasonable. However, now and again, out of goodwill, professionals and clients enter into relationships which are ‘equivalent to contract’, advice is given or a service undertaken negligently and we are in Hedley Byrne territory.
A recent example was Burgess v Lejonvarn [2016] EWHC 40 TCC, where an architect found a groundworks contractor for some friends to landscape their garden, in anticipation of subsequently being instructed to project manage the refurbishment of their property. The employers became ‘former friends’, and brought proceedings, claiming that the architect was legally responsible for the defective work and criticising her procurement, project management, budgeting and cost control. She denied that she was responsible for the defective work or for the provision of any of the alleged services. The existence of a duty of care was the subject of trial of preliminary issues; had the employers failed to demonstrate the existence of a duty, their claim would have stopped there.
The court found there was no discussion about payment, or the duration of services and they never discussed terms, and the architect only intended to seek specific payment for the second phase once the earthworks element had been completed, so there was no contract. “So wasn’t the architect just doing her friends a favour?” I hear you ask. The TCC said that the lack of payment did not mean that the services were informal or social in context; the architect had not given a piece of brief ad hoc advice of the type occasionally proffered by professional people in a less formal context. She had acted as a project manager and had assembled an experienced team and offered up their services over a relatively lengthy period of time and involved considerable input and commitment on both sides, as well as significant commercial expenditure by the employers. They had relied on her to properly perform the services she provided, which reflected skills which they themselves did not possess. The circumstances were such that it was appropriate for a tortious remedy to apply in law: the project was significant and was being approached in a professional way, and where an architect had assumed responsibility and the claimant had relied on them, in all the circumstances it was appropriate that there should be a remedy for negligence, including protection against pure economic loss.
It should be emphasised that the Burgess judgment only concerns the principle of whether the architect could be liable for breach of duty in principle, not whether there was a breach, and there have been no reports of how the proceedings developed from there. That decision concerned the residential construction sphere; where private homes are concerned, it might be tempting to suggest that judges look to who is best placed to bear the loss e.g. a professional’s insurer. Controversial? Perhaps, but it is interesting to contrast Burgess with a commercial case where greater rigour prevailed.
Galliford Try v Mott MacDonald [2008] EWHC 1570 (TCC), concerned the redevelopment of the former Birmingham Children's Hospital, a Victorian building, for commercial purposes for £35,375,000. The web of entities involved is confusing, but here goes; Morrison Construction Ltd (which became Galliford Try – ‘GT’ - the Claimant) owned Morrison Developments Ltd (‘MDL’). MDL part-owned Morrison Property Solutions (Birmingham Children's Hospital) Ltd (‘MPS’), which owned the hospital site. MDL wholly owned Morrison One Ltd (‘MOL’), which appointed Mott MacDonald as project engineers. While GT was actually at the top of this ‘family tree’, it was the main contractor to MPS and their relationship was an ‘arm’s length’ contractual one governed by JCT With Contractor's Design 1998 edition. It was envisaged that, at some point, MM’s appointment with MOL would be novated to GT, but despite negotiations on terms this did not happen.
GT maintained that it suffered substantial delays and losses because, after it entered into its contract with MPS, it transpired that MM had firstly allegedly given negligent advice concerning pile bracing forces, and secondly had represented to GT that the hospital façade could be retained without special measures to support it and that the row of rooms behind could remain and form part of the development. MM was wrong on both counts, and GT sought to recover the increased cost of the work and resulting delay on the basis that if MM had advised properly, the contract price and programme would have reflected the true cost and duration of the necessary work.
GT maintained that it had designed and priced the work in reliance upon MM’s design concept and what it had been led to believe by MM in the period leading up to their signing of their contract with MPS. MM’s appointment was never novated from MOL to GT, so there was no recourse against them in contract, and GT sought to demonstrate that MM had a duty to them in tort not to cause them economic loss. Unlike Burgess, the court dealt with all the ingredients of the claim together at trial.
GT’s claim primarily failed because the court concluded that MM's design concept was not negligent, and more importantly, GT had not in fact placed material reliance on MM’s advice. In particular, most of the alleged misstatements said to have been relied upon were oral and made at relatively informal meetings, and GT did not involve MM in any aspect of its contract pricing or programming. In reality, GT were dissatisfied with MM’s supply of information, i.e. their beef was a service issue rather than substantive negligence.
However, the court also went on to say why the relationship between GT and MM was not sufficient to give rise to a duty in tort. At no time prior to GT being retained as design and build contractor was there a relationship akin to a contract between GT and MM. MM was working as the engineer to the employer and did what that retainer required it to do, namely the design and production of information for the procurement of tenders for the project. The extent of MM’s liaison with GT during this period was not unusual for the performance of its contractual duties owed to the employer. The novation discussions never reached the stage where a relationship akin to a contract could be inferred.
What does this mean for you or your business?
Another crucial factor was that MM’s practice was to include disclaimers in its designs, which specifically said that it accepted no liability to any person other than the person by whom it was commissioned. These disclaimers helped to ensure that any suggestion that a ‘relationship akin to contract’ could be more easily rebutted.
An allied observation is that where a contractual relationship does exist, the courts have repeatedly ruled that the terms the parties specifically agree will prevail over and constrain the application of duties in tort. This means that after the contractual limitation period has expired, any residual duty in tort will be subject to the same limitations or exclusions of liability which governed the contract, provided that they are reasonable.
For the contractors amongst the readership, you can take comfort from the fact that the courts have traditionally been unwilling to extend the duty to avoid causing economic loss to contractors (unlike construction professionals). This is because contractors do not supply a service but a product or, as the law puts it, a ‘chattel’. As Lord Bridge put it in Murphy v Brentwood DC [1991] 1 A.C. 398 at 475: "…the manufacturer's liability at common law arises only under and by reference to the terms of any contract to which he is a party in relation to the chattel; the common law does not impose on him any liability in tort to persons to whom he owes no duty in contract but who, having acquired the chattel, suffer economic loss because the chattel is defective in quality." and "The chattel is either capable of repair at economic cost or it is worthless and must be scrapped. In either case the loss sustained by the owner or hirer of the chattel is purely economic." Even where there is a contract, the House of Lords decision in D&F Estates Ltd v Church Commissioners for England [1989] A.C. 177 tells us that a builder entering into a construction contract does not by reason of his contract alone assume tortious liability in relation to purely economic loss arising from latent defects in the structure he has built which transpire after the expiry of the contractual limitation period.
The rationale behind the confinement of the duty of care to contracting parties, and the refusal to recognise a wider duty to avoid causing economic loss, comes from public policy considerations; a fear of opening contractors up to liability for economic loss to a potentially unlimited number of people who might acquire a property they have built, which is a risk that may not economically insurable. With professionals, the relationship between the parties is closer and the test of ‘proximity’ or a ‘relationship akin to contract’ embraces fewer potential claimants, hence a more ‘generous’ view of economic loss liability in tort, and the risk of decisions like Burgess.
It should be noted that the considerations are different concerning non-economic loss, such as death, personal injury and damage to other property (e.g. existing structures and those owned by third parties). There, the serious consequences mean that the normal test of negligence, concerning the ‘neighbour’ principle and the reasonably foreseeable consequences of one’s actions, apply without the above threshold tests for a duty of care being the ‘gatekeeper’ to liability.
What should you be doing now?
Burgess indicates that if you are providing professional services, you should take care to establish a retainer even where fee receipts are likely to be nominal or even non-existent. Do not wait to ‘scope out the whole project’ before sending your terms; big things are best consumed in small chunks, so consider separate engagement letters for discrete parts of the task, and waste no item in issuing the first one to ensure your terms prevail, even if a formal appointment is anticipated at some point in future. We are happy to help prepare standard terms to accompany those letters, or formal appointments, where we will recommend methods for limiting or even excluding liability where appropriate. Take a leaf out of Mott MacDonald’s book, and ensure that your advice and/or designs state that they are only to be relied upon by those with whom you enter into a contract. Crucially, the fact that you intend to help others at minimal cost once in a while should not lull you into slacker ‘take on’ procedures for such clients; think of it like another form of ‘good works’ - First Aid – where the first rule is “Do not become a casualty yourself.”
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.