Budget? You might begrudge it, but don’t fudge it!
Riva Properties Limited –v- Fosters + Partners Limited [2017] is arguably one of the more quotable judgments to be handed down by the TCC this year. Mr Justice Fraser’s 98 page judgment makes for extremely interesting reading and is, in the author’s opinion at least, worthy of a short series of articles.
In addition to the scathing comments about the Defendant this judgment contains a useful insight into and recap of architects’ duties to their clients on the matter of project budgets, and how losses are calculated when that duty is breached. This first piece looks at the crux of the claim between Riva and Fosters and should be of interest not only to architects and their clients but also other construction professionals.
The second and third articles in this series will be published in eary 2018 and will look in more detail at the recoverability of losses on the “expectation basis” as explored by the Court under their heading “the Panatown basis” (referring to Alfred McAlpine Construction Limited –v- Panatown Limited [2001]), and then at the Court’s criticisms of some of the expert witnesses. The third article will look more generally at the TCC’s comments regarding CPR Part 35 expert witnesses.
Background
By way of a brief summary, the Claimants in this case were four companies owned/controlled by the same businessman, Mr Dhanoa, and were together referred to as “Riva”. In 2007 Mr Dhanoa approached Fosters with a view to instructing them as project architect for a c.500 bed 5 star hotel to be built near Heathrow airport. The scheme designed by Fosters had an estimated overall budget of some £195m and the case turned on whether or not Fosters was (or ought to have been) aware of Riva’s project budget of £70-100m and, if they were so aware, what the consequences were of their failure to work within that budget: not so much “fudged” as arguably “blown” entirely! It should also be noted that, on Fosters’ advice, Riva applied for and obtained planning permission for the £195m scheme, believing that it could be “value engineered” to within their original budget.
By March 2009 it became clear that the Fosters scheme could not be value engineered and Riva was neither willing nor able to fund the Fosters scheme at the estimated £195m scheme. Riva was therefore left with planning permission for a scheme it could not afford to build, having spent approximately £4m on professional fees (including those of Fosters and over 30 other advisors).
Riva’s claim was for three heads of loss: (1) loss of profits; (2) additional fees and expenses that would be incurred in procuring a design for a scheme capable of construction within the original or revised budget; and (3) fees that had been incurred on the Fosters Scheme "which were abortive", and which "included wasted or additional fees incurred seeking to value engineer and re-cost the project"
Fosters’ duty of care and scope of services
Under the terms of their appointment, Fosters had a very standard duty of care, namely to “…use all the skill, care and diligence to be expected of a suitably qualified and experienced architects undertaking services the like of those undertaken by the Consultant in relation to projects of the scale and character of the Development…” (the full clause is quoted at paragraph 63 of the judgment).
As with any professional appointment though of course, the duty of care is nothing without a carefully drafted scope of services. Fosters’ appointment, like undoubtedly a vast majority of architect appointments in this jurisdiction referred to the RIBA Works Stages (and readers will note that the appointment was signed in 2007 so we are looking at the old “letter” stages). Whilst the parties made different submissions regarding the detail of the scope of services, Mr Justice Fraser was most persuaded by the fact that the appointment referred to “Full Service A-L”. It is worth noting that the project stalled at Stage D. The Court found that a key element of a “full service A-L” service was the Stage B “Strategic Brief” and further that Fosters had failed to prepare a Strategic Brief. Furthermore, Mr Justice Fraser noted that even if Fosters’ scope of services had not included preparation of a Strategic Brief, they were nonetheless obliged to confirm “key requirements and constraints” which, the Judge found, necessarily included the budget. The Court did also consider the duty of care clause quoted above and in particular the words “”projects of the scale and character of the Development” and found that in order to comply with that duty, Fosters should have made efforts to ensure it was aware of the client’s budget.
Budget
Mr Justice Fraser acknowledged that, largely speaking, architects’ projects are either “budget” or “brief” led. Whilst Mr Dhanoa had referred to a desire to build an “iconic” hotel, the Judge rejected Fosters’ submissions that the budget was therefore not material, instead finding that the budget was a key constraint.
Considering the point of the “budget” in more detail the Court looked at the different ways in which the words “budget” can be interpreted in the context of commercial developments: for example does the client intend to include FFE in their “budget”? What about contingency? One key lesson, particularly for professionals who sense (or indeed ought to know) that, as Mr Dhanoa was, their client is ‘stepping up a level’ with a project, is that it is important not only to establish a figure (or range) for the project budget but also to have clarity on what the client intends to include within the budget discussed.
Notwithstanding that it found that, as a matter of fact, Fosters was indeed aware of Riva’s budget, the Court also found that the onus was not on the client to confirm a budget, rather that it was part of the generally implied duties on any architect to understand, and advise within, the client’s own constraints.
Value Engineering
The fact that Fosters’ first design had exceeded Riva’s budget, does not in itself mean that they had failed to deliver in accordance with the appointment. Efforts were made to value engineer the Fosters scheme and had those efforts succeeded then perhaps no dispute would have arisen. Ultimately, as perhaps could or should have been obvious from the start, it proved impossible to halve the estimated build cost of a £195m hotel. The question was then put to the Court of how that affected Fosters’ liability to Riva.
The value engineering issue was dealt with the Court fairly swiftly. They accepted Mr Dhanoa’s evidence that Mr Stewart (of Fosters) told him that the £195m scheme could in fact be value engineered down to £100m. The parties had each appointed expert witness architects, who agreed that the scheme could never have been value engineered to such an extent and that therefore such advice was negligent. The Court followed the expert witnesses.
Causation and Damages
As a reminder, Riva’s claim was for three heads of loss: (1) loss of profits; (2) additional fees and expenses that would be incurred in procuring a design for a scheme capable of construction within the original or revised budget; and (3) fees that had been incurred on the Fosters Scheme "which were abortive", and which "included wasted or additional fees incurred seeking to value engineer and re-cost the project".
The loss of profits claim depended entirely on the submission that Fosters had caused 6 months’ delay to the project (i.e., that 6 months was the minimum amount of time that a re-design would have taken and so the minimum amount of delay to start on site). In order to assess the recoverability of lost profits, the Court considered why it was that Mr Dhanoa had not been able to proceed to build out the Fosters scheme – i.e,. had Fosters failure to design within budget (thus resulting in delay) been the sole or dominant cause? Mr Justice Fraser found that the expense of the scheme was one of three key factors, the other two being different negative influences stemming from the financial crisis which unfolded at the same time as the scheme was being developed. The Court found that those latter two factors would have been the case even if Fosters had designed a £100m scheme in the first place.
Further on causation, Fosters ran an argument that, since Riva had engaged EC Harris as costs consultants, it was upon them, rather than Fosters, that Riva had relied for costs advice. Mr Justice Fraser did not accept this submission: “Just because EC Harris were providing “the costs figures” does not mean that Fosters can escape the consequences of the breach of duty in respect of value engineering”. In fact, the Court found that Mr Dhanoa had every right to rely on Fosters’ assertions that the scheme could be value engineered [down to £100m] and in reliance upon those assertions he continue to expend money on other professional fees.
Riva’s claim included professional fees incurred with some 35 different companies, including Fosters. The Court allowed Riva’s claims for damages in 29 of these, and awarded limited damages for a 30th. What may be of particular interest is that the £150,000 “non-refundable” deposit/mobilisation fee paid by Riva to Fosters was found by the Court to be as refundable as the other £2,099,999 of fees paid by Riva to Fosters for the scheme. The Court found that the deposit was in fact an advance payment of fees.
It should be noted that a considerable amount of the losses were awarded on the “expectation” basis and this is something that will be considered more fully in the second article in this series, due to be published early in 2018.
Fosters was ordered to pay damages of £3,604,694.36 to Riva. Whilst this is clearly a not insignificant award, it should be noted that Riva’s unsuccessful loss of profit claim was for in excess of £16m and so, in light of the findings on breach of duty, Fosters may feel that contrary to the tone of the judgment, this was, for them, a better day in Court that it might otherwise have been.
Conclusions
Upon reading the judgment of Mr Justice Fraser, one could not help but be reminded of the old construction sector joke: Q: What does RIBA stand for? A: Remember, I’m the Bl**dy Architect! Whilst acknowledging that Fosters is deserving of its excellent reputation, Mr Justice Fraser was clearly unimpressed by the individuals who had taken the lead on the Riva development noting that they “seemed to see Mr Dhanoa as somewhat beneath them as a client”. He went on to say that those individuals’ written evidence was “entirely self-serving, and seemed to have been drafted regardless of the facts.”
However, when one strips this case back down to the findings of fact and law, the conclusions which apply to all construction professionals are:
- Always take steps to clearly establish your client’s brief and the constraints on their project
- Once established, work within that brief and its constraints
- Continue to check for changes to the brief and constraints
- Do not expect to charge (and keep) fees for carrying out work which does not meet the client’s brief.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.