Beware of the Budget
Summary
A Defendant firm of architects has recently been ordered to pay £3.6m to a Claimant for professional negligence arising out of a failure to advise on the cost of a design but were found not to be liable for loss of profits as the chain of causation was broken due to the global financial crisis.
Background
In 2007 Mr Dhanoa, through one of the Claimant companies, purchased land near Heathrow with the view to building a large 5* hotel on it. Foster + Partners Ltd (“Fosters”) were instructed as the architect and after being advised by them that the design for the hotel could be value engineered down from a cost of £195m Mr Dhanoa increased his budget from £75m to £100m. It then transpired that the cost of building the hotel could not be reduced and funding was not obtained by the Claimant due to the high build cost. Mr Dhanoa brought a claim for breach of contract against Fosters.
The claim
Mr Dhanoa claimed that Fosters had failed to take into account the budget in its design and were negligent in failing to advise that it was impossible to value engineer the design down from £195m to £100m. Damages sought were for professional fees incurred in producing the design and carrying out the value engineering exercise and loss of profits.
Issues
The two main issues in the case were first, whether Fosters had an obligation to give advice on the budget and secondly, what impact the global financial crisis had on the claim.
Obligation to advise
Fosters argued that there was no budget and if there was, this had not been communicated to them. They also submitted that they were under no obligation to find out if there was a budget nor to give advice on costs. It was accepted by Fraser J that the budget of £70m – £100m had been communicated to Fosters and that this was a key constraint that should have been identified by them. The duty to identify a fundamental and critical constraint arose from the RIBA Job Book; the Royal Institute of British Architects’ long-established and recognised standard reference for construction projects containing key obligations of an architect. By ignoring the budget in producing its design Fosters had not shown the required skill and care and had therefore breached that duty.
In addition, Fraser J found that Fosters was under a duty to warn that the value engineering exercise to reduce the cost of building the hotel down to £100m was impossible. It was accepted that they had advised the Claimant that this was possible and therefore they were negligent for failing to warn otherwise.
Impact of the global financial crisis
Fraser J identified three factors relating to causation;
- the global financial crisis
- lack of cash available to Mr Dhanoa
- cost of the design
It was decided that even if the hotel could have been constructed for £100m, the financial crisis and lack of cash available as a result of this would have prevented Mr Dhanoa from borrowing the amount he needed to fund the project in any event. This was the cause of lost profits.
Decision
The Court found that Fosters had been professionally negligent in failing to identify and consider the budget in its design of the hotel and in failing to advise that the cost of the design could not be value-engineered down to £100m. Fosters were therefore ordered to pay compensatory damages in the round sum of £3.6m. However, the chain of causation was broken due to the global financial crisis and a £100m hotel would not have been possible to build due to a lack of funding at the time. Therefore, the Claimant’s claim for professional fees succeeded but the claim for loss of profits amounting £16m failed.
Although specific on its facts, this case is a reminder to construction professionals that budget is a key consideration in the design of a project, although an architect will not necessarily be negligent if the costed design exceeds the budget. The scope of service to be provided by the professional should be reviewed and tailored for each specific project. It is also equally important to manage client expectations regarding what is and is not achievable and to communicate effectively with others throughout a project’s lifetime.
This article should not be taken as definitive legal advice on any of the subjects covered.
