The 2001 case of Payne and Others -v- John Setchell Limited confirmed that (as a matter of policy) in the absence of contractual provision to the contrary, any person negligently performing work or services in the course of a construction process was ordinarily only liable for non-economic losses.
In the law of tort professionals have a duty to their clients to exercise the reasonable care and skill of a qualified person in the matter with which they are dealing. Professionals are negligent when they are proven to have fallen below this standard.
In the construction industry, non-economic losses are those losses caused by negligent design or construction that results in damage to other property or personal injury to individuals.
Economic loss is the financial loss suffered by a party that is caused through a web of economic relationships in which the party is involved.
Examples of economic losses include, (1) those losses incurred where a negligent design results in a building being worth less than anticipated; and, (2) where delay is caused to the contractor's programme as a result of having to rectify a negligent design that results in the contractor failing to meet the project deadline and incurring losses to the employer.
Where we were
In the Payne case, Payne claimed damages from Setchell for negligence for breach of duty for the design and installation of new raft foundations with fixed steel reinforcement for a cottage. The cottage was built in reliance upon a specification that was prepared by Setchell. Payne subsequently obtained a structural engineer's report which stated that the raft foundations of the cottage had tilted, and that each required substantial underpinning. The Court ruled that Setchell was only liable for the diminution in value of the cottages measured by the cost of remedial works and not the further economic losses claimed by Payne.
Therefore, as a result of the decision in the Payne case, a designer was not liable to an employer for economic losses unless a contract, such as a collateral warranty, provided otherwise.
Where we are now
The Mirant Asia decision appears to have changed this. Ove Arup, a designer, was found to have breached its duty of care to Mirant Asia by negligently designing the foundations of a boiler house in the . Ove Arup was found to be liable to Mirant Asia, the employer, for both economic and non-economic losses.
Designers
So the designer's pre-novation position is clear, the negligent designer is liable in tort to the employer for economic losses. The negligent designer is also liable in tort to the employer for economic losses in those situations where the designer has single point responsibility and is effectively acting as contractor.
Contractors
What is the position of a contractor undertaking a construction project under the JCT (With Contractor’s Design) Contract? One interpretation of the decision in Mirant Asia is that the design and build contractor is not liable to the employer for economic loss because it is not considered to be a "professional" whereas the designer is. It seems unreasonable to make this distinction because the design process is as likely to be undertaken by contractors as by designers (be they architects or consultants).
Further, it is the standard practice in projects procured under the JCT (Design and Build) Contract that the designer agrees to be novated from the employer to the contractor in return for the contractor assuming responsibility for the design and construction of the project. Following the decision in thiscase, the position may be that even though the contract has been novated the designer remains liable to the employer for economic losses whereas the contractor is not.
Engineers
What is the position of the engineer? Is the engineer considered a "professional" and therefore should it be treated in the same way as the designer once the contract has been novated? Like the designer, under a JCT (Design and Build) Contract the engineer agrees to be novated to the contractor in return for the contractor assuming responsibility for its designs. Would the Courts impose a duty of care on the engineer to the employer for economic loss despite the fact the contractor has agreed to take responsibility for the engineer's designs at novation? Unfortunately as a result of the Mirant Asia decision the position of the negligent designer or engineer, post-novation, is now unclear.
Practical advice
Drafting
The duties outlined above are only likely to be relevant in situations where, (1) there is no contract; (2) the contract is silent as to, or does not adequately define the relationship between the parties (in respect of liability for economic losses); or, (3) a contractual limitation date to make a claim has passed. Should a dispute arise, the precise wording of the contract could be very persuasive to a Court. Therefore, when drafting contracts designers should attempt to exclude liability for economic losses. This may not necessarily be acceptable to contractors or employers.
Disclaimer
A designer is unlikely to be found to be negligent, and therefore be liable to the contractor or employer for losses if his designs contain a disclaimer that the designs should not be relied upon. Once again such a disclaimer is unlikely to be acceptable to either a contractor or an employer.
First published in Construction News, Spring 2005.
