If a consultant causes a contractor economic damage, does it have to compensate the wrong party even if there is no contract between them?
The question of whether one party owes a duty of care to another, and to what extent, is important on projects that abound in mutually dependent relationships. When is, say, a consultant liable to a contractor it has no contract with and owes no duty to under another contract by way of the third-party rights act?
Much ink has been spilled on these pages in recent years over the confused law about when a duty of care is owed for pure economic loss.
In simple terms, this area of law usually comes into play when one party wants compensation for a loss caused by another with which it does not have a contract.
The question, then, is whether one party had a non-contractual duty to behave carefully so as to avoid causing the other a loss. The most difficult cases are where financial loss is caused by something other than personal injury or property damage – in these situations the law is far less ready to find there was a duty of care.
To exacerbate matters, a party that feels it has been wronged may not wish to seek compensation from someone it is in contract with because it has no clear contractual entitlement to do so, the other party is insolvent, or the other party is part of its group. The last of these was a factor in the latest case to shed some light on this dark area of the law.
Morrison Property engaged Morrison Construction (now part of Galliford Try) to design and build a development on the site of the Birmingham Children’s Hospital.
After the project Morrison Construction tried to sue consulting engineer Mott MacDonald for negligently underestimating the amount of work required before it concluded its contract with Property – it sought to claim the additional costs of carrying out the work.
Unfortunately for it, it had no contract with Mott. Mott’s contract did not require it to be novated to Construction, and while Construction’s contract with Property envisaged this, it never happened because Mott and Construction could not agree terms.
Mr Justice Akenhead concluded that, on the facts, Mott owed Construction no duty of care. It helped Mott that its drawings and specifications contained liability disclaimers which said it had no duty of care, even regarding information it provided in its letters and orally.
This case shows the risk of not attaching a draft novation agreement to the consultant’s appointment
The judge confirmed that, normally, a consultant engaged by a developer, when providing tender information and other pre-contract material, owes no duty of care to a contractor to prevent it underpricing.
The lack of something akin to a contractual relationship coupled with the matrix of contracts suggesting who owes whom what duty usually prevents one party on a project owing another a duty of care not to cause economic loss.
However, the law would not be what it was if contractors were not able sometimes to recover for pure economic loss from consultants they had no contract with. The contractor is liable to its client for defective works, so it may have a statutory right to a contribution from the client’s consultant whose negligent design partly caused the defect.
A contractor that wants recourse against a consultant (especially if it is reluctant to pursue its client, as Construction was) might have the consultant’s appointment novated to it. This case shows the risk of not attaching a draft novation agreement to the consultant’s appointment as well as the building contract.
Novation is not always appropriate. The contractor usually has no recourse against a contract administrator that negligently values the works or fails to grant an extension of time.
Although Construction’s claim failed, the judge addressed whether Construction might have been liable for contributory negligence. He said that where a contractor reasonably expects a consultant to be novated to it, it is reasonable to rely on that consultant and not employ an independent one to review the consultant’s design.
The overriding message to contractors is that if you are careless at the outset with third-party rights, collateral warranties and novations, do not rely on the law to fill a gap when you suffer financially later on from a consultant’s negligence.
Rupert Choat is a partner and solicitor advocate with CMS Cameron McKenna