In Blyth and Blyth vs Carillion Construction Limited, a decision of Lord Eassie (18 April 2001) in the Court of Sessions, Carillion was the design-and-build contractor for the Fountainbridge Leisure Complex in Edinburgh. The engineer was suing for its fees. Carillion counterclaimed for £2m for damages for breach of contract. This decision was on the counterclaim.
In the main contract, Carillion assumed responsibility to the employer for the design of the building and therefore for the work of the engineer that designed it. The engineer had originally been engaged by the employer to produce the design. Carillion then tendered to build the complex for a fixed price. Shortly after the work started and the main contract was signed (in that order), the employer, engineer and Carillion, entered into a "novation agreement".
Novation has a technical means in the law that both sides agreed was not what was meant here. Instead, the engineer was obliged to enter into an agreement with Carillion and the employer, but only the employer had the power to instruct the consultant to enter into the novation agreement. The engineer undertook that it would carry out its design function "with all proper professional skill, care and diligence".
In effect, the novation agreement provided that, whereas until then the engineer had been engaged by the employer, henceforth it was employed by Carillion and was deemed as always having been employed by Carillion.
Lord Eassie's decision deals with the second provision. Carillion pleaded that the engineer had breached its duties – for example, in not making calculation errors when designing the structure – where they had been owed to the employer at the tender stage, before Carillion became involved in the main contract and retrospectively assumed responsibility. Those duties were, Carillion argued, deemed to have been owed to it in terms of the novation. It had suffered losses because it had had to do extra work, and because the tender had been pitched too low. It argued that the extra construction costs it had had to bear as fixed-price contractor were recoverable from the engineer.
At the heart of the problem lies the fact that the employer, under a fixed-price design-and-build contract, does not have to pay for the extra costs arising from the engineer’s alleged failures
The judge's decision has potentially wide ramifications. Lord Eassie decided that Carillion was not entitled to recover its losses from the engineer. Carillion's adoption of the employer's position was at the root of his reasoning.
Look before you leap
At the heart of the problem lies the fact that the employer, under a fixed-price design-and-build contract, does not have to pay for the extra costs arising from the engineer's alleged failures. As Lord Eassie pointed out, the risk that the tender documents did not give a true picture of the project and its likely cost, lay with Carillion. It was entitled to have its own engineer check the employer's engineer's (as Blyth & Blyth then was) figures independently. Accordingly, there was no loss suffered by the employer, and the wording of the novation clause placed Carillion firmly in the shoes of the employer. Carillion argued that this was an unfair interpretation. The words of the novation clause had been known by the engineer, who in accepting its appointment, should be taken as extending its duty to Carillion.
Lord Eassie was asked to consider two questions: first, whether the performance by the consultant was to be judged by what was required by the employer, and second, whether in the event of defective performance, the losses or costs for which the engineer may be liable were those necessary to put the employer in the position of having received a satisfactory service, or as Carillion contended, those said to have been suffered by the contractor.
Lord Eassie's view was that the natural mirror of loss was that suffered by the recipient of the allegedly defective services. In this case, the recipient of the services (the employer) was not a party to the action and was not complaining about the activities of the engineer. Lord Eassie, therefore, rejected that part of Carillion's claim which sought to recover the lost profit on the fixed-price contract arising from design work done by the engineer before the date of the novation.
Where the problem lies
Every time one comes across a clause that provides that one of the three parties to a contract assume the position of another, alarm bells should ring. Saying that the change takes place and that the contract should be read with all necessary changes in mind will not cure all difficulties. Where, as in this case, the employer suffers no loss because it has a fixed-price contract, then giving the design-and-build contractor the same rights as the employer achieves nothing, for most if not all of the employer's potential losses will be soaked up by the design-and-build contractor.
John Stirling is a partner at Bennett & Robertson solicitors in Edinburgh.