ReSolution | Feb 2017 16
Issues
The agreed list of issues between the parties was as follows:
• Was the works agreement made by Erith with MWL or with Murphy (in a personal capacity)?
• Did the parties enter into a revised works agreement?
• Did Murphy agree to be personally liable to pay for the services and, if so, was such agreement enforceable?
• Was the loan of £85,000 made by Erith to MWL or to Murphy and did it fall within the scope of any indemnity or guarantee by Murphy?
• Did Murphy's solicitors, on his behalf, acknowledge and admit in correspondence with Erith's solicitors that he personally owed any, and if so what, sums to Erith?
• Was Erith entitled to recover the sums claimed from Murphy:
• under, or for breach of, any of the agreements;
• pursuant to the alleged indemnity or guarantee; or
• by way of a claim for unjust enrichment?
Decision
Works agreement
The court found that the works agreement was entered into by Darsey on behalf of Erith and by Murphy on behalf of MWL. The court concluded that the fact that the invoices submitted in October 2014 by Erith in respect of the services provided were made out to MWL was "strong evidence" that both parties considered the agreement to be with MWL (not Murphy). This was despite the fact that the funds paid out to Erith from MWL were funds provided by Murphy which had been deposited into MWL's account. Further, Darsey had accepted in cross-examination that the initial agreement for waste removal services was with MWL.
Erith had relied on the terms of the sale and purchase proposal sent by Darsey to Murphy on October 27 2014 as evidence that Murphy accepted personal responsibility for payment. Erith stated that as owner of the site and the business, Murphy would have all purchase moneys paid to him. There was a provision in this proposal for £600,000 to be deferred for 12 months as a contingency against sums owed to Erith in respect of the waste removal services. Erith argued that the inclusion of such contingency in respect of sums otherwise payable to Murphy indicated that Murphy would be liable for such sums. If, as anticipated by the parties at that time, the sale
and purchase agreement was concluded, the costs of the waste removal would be deducted from the contingency. If the transaction did not proceed, Murphy would pay the sums due in respect of those services.
By late 2014 into early 2015, just before the parties' negotiations broke down and the sale fell through, the proposed agreement had been that Erith would purchase only the site as Darsey had concerns about the financial condition of the business. In an email from Mr Pini of HSBC dated December 5 2014 (which was not contradicted by Erith when received), it was stated that the contingency of £600,000 would be held against the purchase price for the business only and would not affect the purchase price of the land, which was £3 million. This was also reflected in the terms of a revised proposal for the sale of the land without the business in January 2015, which remained at £3 million (ie, it was not affected by any of the site clearance costs). The court therefore disregarded this aspect of Erith's claim.
Predictably, Mr Justice Fraser found a breach of duty in that Fosters had failed to identify a key constraint – the budget (para 153). This duty was ascertainable from the Royal Institute of British Architects (RIBA) Job Book, which the architects’ duty of reasonable care and skill required them to consider (para 154).
A second breach in Fosters’ advice that the project could be ‘value engineered’ down from £195m to £100m was found in two different ways. Firstly, the Fraser J found that Mr Stewart, the architect, had in fact told Mr Dhanoa that the design could be ‘value engineered’ down to £100m. This, the architectural experts agreed, was negligent (para 158).
Mr Justice Fraser also found that Fosters knew Mr Dhanoa expected the cost-reduction to happen by value engineering. That being the case, Fraser J found that Fosters were under an obligation to advise him that it could not be done regardless of whether they had advised him of the value engineering in the first place. One expert, that Fraser J chose to follow, gave evidence that failing to do so was negligent (paras 159-161).
On the questions of causation, Foster J found that there were three reasons why Mr Dhanoa’s companies could not complete the Fosters design: 1) the financial crisis leading to large sums becoming far less widely available; 2) the Fosters design was very expensive, and 3) lenders required a greater contribution from the borrowers after the financial crisis (Para 187).
Fosters argued, inter alia, that because Mr Dhanoa had separate advise as to costs, he had not relied upon Fosters. Fraser J held that this could not be said to break the chain of causation as it ignores the evidence that Fosters told Mr Dhanoa that value engineering was possible (paras 199-200). Foster J also held that it was not unreasonable to rely on Fosters’ statements, as they are a world-leading firm of architects (para 201), but because of the restrictions on borrowing resulting from the financial crisis Mr Dhanoa would have been unable to build even the hypothetical £100m design with his then-available funds (para 206). Consequently, Fosters were not liable for lost profits.
The same result could have been arrived at by an application of Hughes-Holland v BPE Solicitors [2017] 2 WLR 1029. Prima facie, Fraser J held that the SAAMCO case and Hughes-Holland would not apply to this case, as Fosters were not engaged to give advice on the business viability of the hotel scheme. However, if the principles were to be applied to the case, the operative question would be whether the inability to obtain funding, caused by the financial crisis, was a type of harm from which Fosters had a duty to keep the claimants harmless. The answer to this hypothetical question was in the negative.
The claimant companies therefore got compensatory damages to the amount that was paid to Fosters under the contract. This is because the claimant contracted with Fosters to have a project designed that would be a 500 bed, five-star hotel that could be built on site for £100m. The best estimate for the value of that performance was the money paid to Fosters as their fees (para 250). This amounted to £3,6m in round numbers.
The case serves to highlight important issues of the scope of construction professionals’ duty and the applicability of recent Supreme Court guidance on SAAMCO. As to the first issue, the case found that not only do architects have a duty to consider and find out key constraints of the project such as its budget, they must also inform the client if they know the client is under a misconception about how the budget could be achieved. Whether this is specific to architects, or even this particular case, remains to be seen. Generally, the architect were not under a duty to advise the client companies.
The fact that Hughes-Holland was found to be inapplicable to the case is of some significance, as the Supreme Court’s refinements of SAAMCO are quite recent and therefore subject to comparatively little guidance. In essence, after a long discussion on the principles, Fraser J held that Hughes-Holland/SAAMCO does not cover cases where the scope of the defendant’s duty was to provide material which the client will take into account in making their own decision on a broader assessment of the risks (para 210-211). In other words, the advice provided (or not provided) to the client must be absolutely essential for the client’s decision to trigger Hughes-Holland/SAAMCO.
These two aspects of the case could prove significant in very different contexts. Whether other High Court decisions choose to follow both or either line of reasoning is an issue that construction lawyers will do well to keep an eye on.
BuildLaw | Dec 2017 22
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