Architects’ duties, claimants’ remedies, and the impact of the global financial crisis

The recent High Court decision in Riva Properties Ltd & Ors v Foster + Partners Ltd [18.10.17] dealt with a host of legal and evidential issues which regularly emerge in professional negligence claims.

In analysing the decision, we focus on the following key issues:

  • What is the scope of an architect’s duty of care to its client in relation to the project budget?
  • What is the scope of a claimant’s remedy where the budget has been exceeded and where additional funds cannot be raised by the developer, but where the financial crisis has contributed to this?

The facts

In 2007, internationally acclaimed architects, Foster + Partners Ltd (Fosters), were engaged by Mr Dhanoa (who controlled the claimant companies) to design a new, iconic, 500 bed, five star hotel, close to Heathrow Airport.

The budget for the project was in the range of £70 million to £100 million.

Fosters produced an elaborate scheme. The scheme was costed in early 2008 by Mr Dhanoa’s cost consultant at £195 million. Fosters told Mr Dhanoa that the scheme could be ‘value engineered’ down to £100 million. In reliance on that, Mr Dhanoa proceeded to obtain planning permission in early 2009.

However, Mr Dhanoa was unable to obtain funding for the scheme, the cost of which he alleged could never have been value engineered down to £100 million. Without funding for the scheme, it could not be built. By the time Mr Dhanoa appreciated that, he had incurred £4 million in professional fees alone.

Mr Dhanoa sued Fosters, including a £16 million claim for loss of profits.

The judgment

Mr Justice Fraser held that Fosters was in breach of duty and ordered it to pay damages of around £3.6 million. That figure was equivalent to Fosters abortive professional fees and costs. The loss of profits claim failed.

Duties in relation to the client’s budget

The Judge found that:

  • Fosters had a contractual duty to “confirm key requirements and constraints”. A client’s budget is clearly one such constraint. The RIBA Job Book confirms this.
  • Fosters had a duty, at an early stage in the project, to establish the budget for the project. It could not be assumed by Fosters that the budget had no limitations at all.
  • Fosters knew that Mr Dhanoa relied on its advice that the project could be value engineered. This gave rise to an obligation to advise Mr Dhanoa that this could not be done.
  • Although Fosters’ duty did not extend to providing costs advice to Mr Dhanoa, this did not mean that Fosters had no duty in relation to their client’s budget.

Breach

Mr Justice Fraser found two breaches of duty: first, a failure to identify the key project constraint – the budget; and second, negligent advice that the scheme could be value engineered down to £100 million, which was impossible.

Causation and loss, and the impact of the financial crisis

The Judge held that the cause of the failure to build the hotel, and the failure of it to open for business so it could generate profits, was not the negligence of Fosters, but the financial crisis and resulting lending restrictions. Mr Dhanoa would not have been able to build the hotel even if the design had matched the £100 million budget. Therefore, the loss of profits claim (£16 million) was not recoverable.

An identical result on causation and loss could have been arrived at by the application of the principles in Hughes-Holland v BPE Solicitors [2017] and SAAMCO [1997]. Whilst the Judge did not apply those cases to this situation (since Fosters was not engaged to give advice on the business viability of the hotel scheme), he did go onto state that if the principles were to be applied then “the question posed for the court would be whether the inability to obtain funding, caused by the financial crisis, was a type of harm from which Fosters had a duty to keep the claimants harmless? In my judgment, the answer to that is in the negative too.”

Comment

This case demonstrates that the financial crisis can be an important causation defence - although there are unlikely now to be many more cases arising from that period.

The judgment also serves to reinforce the need for architects to ensure that they establish and confirm key project constraints (including budget requirements) early on in the project, and ensure that the design matches those constraints. If a design exceeds the budget, the architect should ensure that their client’s expectations are carefully managed in terms what is realistically achievable within their budget.

Related item: 

SAAMCO affirmed: BPE Solicitors v Hughes Holland

Read other items in the Professions and Financial Lines Brief - December 2017