Application of a contractual liability to a third party in tort and use of the Part 8 procedure

The court was recently asked to determine, via the Part 8 procedure, whether the nature and scope of a consultant's duty of care in tort was limited by the terms of its appointment with a third party.

Background

RSK was appointed by Skillcrown Homes Ltd to act as geotechnical consultant in respect of a development site. RSK’s fee proposal enclosed its terms and conditions containing a number of limitations of liability and a net contribution clause, which were accepted by Skillcrown. RSK’s geo-environmental report, issued in April 2014 included and identified a third party, Hexagon Housing Association Ltd, as its joint client (along with Skillcrown). This was at the request of Hexagon, who later went on to purchase the site.

In May 2016 there was a ground collapse at the site, considered to be the result of an underground void.

Hexagon subsequently intimated a tortious claim against RSK, alleging that, in purchasing the site, it had relied upon the report which failed to identify the risk of voids in the ground. When RSK replied that any liability would be limited by the terms in its appointment, Hexagon contended that such contractual terms could not limit liability in tort in respect of an assumed duty of care at common law. Given the alleged quantum of the claim, RSK issued a Part 8 claim seeking a declaration that the tortious claim could be subject to the contractual limitations of liability in the contract between Skillcrown and RSK, thus limiting any claim by Hexagon against RSK to £1m (along with other limitations) i.e. if and insofar as they were under a common law duty of care to Hexagon in respect of the ground investigation and report, the nature, scope, and extent of such duty was restricted by the terms and conditions in its proposal. Where a third party has expressly requested to be named as a client of RSK on the report and the report specifically referred to RSK’s appointment terms as governing the scope of the report, it seems unjust that that third party (having relied upon the report) could have better and unlimited remedies against the consultant than the party who contracted to appoint them in the first place.

Hexagon opposed the claim arguing it was an inappropriate use of the Part 8 procedure; that they were not bound by the limitations of liability contained in RSK’s appointment because they were “unusual and onerous” and were not brought to Hexagon’s attention.

Decision

For the purposes of the Part 8 claim, the court was asked to assume that there was no contract and was not asked to interpret the meaning and effect of the contractual terms themselves. The proposition was helpfully summarised by Mrs Justice O’Farrell as “[t]he claimant’s [Part 8] claim depends on the proposition that even where there is no direct contract between A and B, the nature and scope of A’s common law duty of care to B may be determined by the terms of A’s professional retainer with C.”

Mrs Justice O’Farrell considered that “A bare finding that a party owes another a duty of care is meaningless in the absence of a finding as to the nature and scope of such duty. … The cases all serve to emphasise the importance of the factual matrix when considering whether any common law duty of care arises, including the nature and scope of any such duty.”

As a result, Mrs Justice O’Farrell considered that “as the contractual matrix is in dispute … the court does not have before it the evidence needed to resolve that dispute.”

The court held it could not determine the issues in a vacuum and without considering the existence of any contract between the parties, the terms and conditions of any such contract and the proper construction of such terms . Accordingly, it was unable to make the requisite determination by way of Part 8 proceedings and RSK’s claim for relief was not granted.

Comment

The court took the view that it required further information and evidence to determine whether the terms of a contract can govern the nature and extent of a tortious duty of care owed by a consultant to a third party. Rather than being a negative outcome, it requires RSK to introduce the relevant information to enable the court to determine the issue, which will (based on the facts which the court did not have before it at first instance) only serve to bolster the proposition that in this case, Hexagon should be bound by the contractual limitations of the Skillcrown contract (either because Hexagon was a party to that contract, or alternatively because Hexagon was a commercial party that was aware of the existence of a contract likely to be limited by terms in order for it to be bound by those terms). This will have a significant impact generally in the construction industry and shows the importance of ensuring contractual terms are carefully considered prior to entering into an appointment.

Watch this space.

Kennedys acted for the claimant geotechnical consultant and instructed Paul Cowan of 4 New Square.

Read others items in Construction and Engineering Brief - November 2020