Considering architect's fees

In the recent case of Johnston -v- WH Brown Construction the Inner House of the Court of Session in Scotland had to consider whether architect's fees were recoverable as consequential losses from a builder, in circumstances where the architect had been engaged to prepare a schedule of defects.

The parties had entered into the Scottish Building Contract incorporating the conditions of the JCT Standard Form of Building Contract which Contractor's Design. Design and build contracts do not operate with a contract administrator or architect in the sense of a traditional form of contract.

However Johnston, the employer, had instructed a firm of architects to report on the condition of the completed building.

The architect's report was submitted to Brown, the builder, as a schedule of defects. Brown remedied the defects without admitting liability, complying with the terms of clause 16.2 of the contract which provided "any defects which appear within the defects liability period and which are due to a failure of the contractor to comply with his obligations under this contract shall be specified by the employer in a schedule of defects which he shall deliver to the contractor as an instruction of the employer not later than 14 days after the expiration of the said defects liability period, and within a reasonable time after receipt of such schedule the defects therein specified shall be made good by the contractor at no cost to the employer".

Having concluded the correction of the defects list the builder might have thought that this would bring an end to the matter. However the employer, Johnston, sent to them a bill for the fees rendered by the architect in preparing the defects schedule. Brown refused to pay or allow these costs.

The Court held that if defects were discovered before the expiry of the defects liability period the remedy available to an employer was to give instructions to the contractor to remedy such defects. If these were duly remedied, there was no further redress for an employer under clause 16.



The remedy provided under the clause was for the employer to issue a schedule of defects to the contractor and an instruction that these defects be remedied. That did not in principle differ in any way from any other instruction which the employer was entitled to give to the contractor under the terms of the contract.

Nothing in clause 16 however, excluded claims to which an employer would normally be entitled arising out of a breach of contract. Those were separate from the right of the employer to have the defects remedied. If there was consequential loss such as damage to equipment arising out of leaks caused by the defects, that would be recoverable. The question therefore to be answered was whether the architect's fees would fall under the category of recoverable consequential loss.

The Court held that if an employer chose to enter into a building contract without employing an architect to supervise its construction he had to be taken to be acting as his own supervisor of the works. If he then chose to employ a third party to examine the building to see if there were any defects, then he did so at his own expense. It was concluded that the cost of preparing a schedule of defects by a third party was therefore not true consequential loss and accordingly was not recoverable.

This term "consequential loss" causes considerable difficulty in the construction industry, in particular when a contract attempts to exclude liability for consequential loss. It is often difficult to determine the ambit of such an exclusion.

In the case of British Sugar Plc -v- NEI Power Plant Projects Limited, the Court of Appeal had to consider the effect of a term which provided that the seller's liability for "consequential loss" would be limited to the value of the contract. The contract value was £106,000, but as a consequence of alleged design and installation failures British Sugar sought damages in excess of £5m.

It was considered that the proper way to examine this question was by reference to the 1854 case of Hadley -v- Baxendale. This case establishes a distinction between damages which arise naturally and according to the usual course of things, and damages which "may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract". The Court of Appeal decided that the clause in question, and in particular the term "consequential loss", did nothing to limit the seller's liability for damages which directly and naturally resulted from the breach of contract.

In the more recent case of Hotel Services Limited -v- Hilton International Hotels (UK) Limited, the Court of Appeal found in exactly the same manner that a clause which sought to exclude "indirect or consequential loss" would be ineffective to exclude damages (including loss of profits) which were direct and natural consequences of the breach.



BOXTEXT: INBRIEF The Case: Johnston -v- WH Brown Construction (Dundee) Limited Inner House, 1 June 2000.

The Issue: Whether architects' costs in preparing defects lists under design and construct contracts are recoverable as consequential loss.

The Implication: The cost of preparing a schedule of defects by a third party is not true consequential loss as that term is understood in Hadley -v- Baxendale.