BLYTH AND BLYTH LIMITED v. CARILLON CONSTRUCTION LIMITED
| OUTER HOUSE, COURT OF SESSION |
| | OPINION OF LORD EASSIE in the cause BLYTH & BLYTH LIMITED Pursuers; against CARILLION CONSTRUCTION LIMITED Defenders: ________________ |
Pursuers: Reid, Q.C., Ellis; Dundas & Wilson, C.S.
Defenders: Scott, Q.C., Upton; MacRoberts
18 April 2001
[1]The pursuers in this action are consulting engineers and the summons seeks payment of fees in respect of professional services rendered by them. The defenders are a building and construction company, formerly known as Tarmac Construction Limited. They counterclaim against the pursuers for the sums said to have been suffered by them in consequence of certain alleged breaches of contract on the part of the pursuers and the relevance of the counterclaim, or at least some of it, is challenged by the pursuers.
[2]The contractual provisions said by the defenders to have been breached by the pursuers are contained in a Deed of Appointment (No.6/2 of process) executed on 13 May 1998. The parties to that Deed of Appointment were the pursuers and a company called THI Leisure (Fountainpark) Ltd - "THI" - who are described as the employers in the Deed of Appointment and are also the employers in a building contract entered into between THI and the defenders for the design and construction of a leisure development building at Fountainbridge, Edinburgh. The building contract was executed on 30 April 1998. Although the Deed of Appointment was executed only on 13 May 1998, its provisions include Clause 2.2 which provides that
"The appointment of the Consultant [the pursuers] shall be deemed to have begun with effect from the date upon which the Consultant shall have begun to perform the Services or from the date of this appointment whichever shall be the earlier"
It is averred by the defenders in the counterclaim that the pursuers began work for the employers (THI) in about January 1997 and continued to work on the project throughout 1997 and 1998. The execution of the building contract was preceded by a provisional contract letter of 16 March 1998.
[3]Section 6 of the Deed of Appointment is headed "Novation Agreement" and contains provisions whereby the employer was empowered to instruct and require the consultant to enter into what is there termed a "novation" agreement. The Deed of Appointment states that the form of that agreement is annexed to it. The "Services" to be provided by the consultant under the Deed of Appointment are set out at some length in Schedule 1 thereto. The first section of the schedule is general in its terms. Part 2 of the schedule is headed "Pre-Construction Services" and includes detailed provisions relating to such matters as the advice to be given to the employer on various matters such as the need for site investigations or other investigations, the provision of information to enable outline design proposals to be developed and information for inclusion in the employer's requirements. The third section relates to services to be required under the Construction (Design Management) Regulations 1994. The fourth section is headed "Construction Services (following novation to the Contractor)". It contains further detailed provisions relating to the preparation of drawings for the "Main Contractor" and the giving of advice to the contractor.
[4]As thus foreshadowed in the Deed of Appointment, a tri-partite agreement, referred to as the "Novation Agreement" (No.6/3 of process) was entered into by the pursuers, the defenders and THI on 29 June 1998. It is by virtue of that agreement that the defenders include in their counterclaim certain claims against the pursuers for alleged breaches of contractual duties owed by the pursuers under the Deed of Appointment occurring before the date of the Novation Agreement. Put shortly, the central issues in the debate revolve around the meaning and effect of the Novation Agreement as read with the Deed of Appointment and against the background of the building contract.
[5]The issue of the proper interpretation of the Novation Agreement arises because many of the losses claimed by the defenders are claims which were referred to at debate, by way of a convenient shorthand expression, as "pre-novation losses" or "pre-novation breaches". Although there are a number of heads - relating to different aspects of the construction works - in which such breaches or losses are claimed, it is sufficient to take one example with which to illustrate the central issue in the debate. Head (ii) of Statement 7 of the counterclaim relates to "Bar Reinforcement". It is averred that in certain drawings, followed by faxes and telephone conversations in April 1997, the pursuers provided information regarding the amount of steel bar reinforcement involved in the project, the quantities so indicated being less than the amount in fact required. The claim in relation to this head is for the cost of providing the additional amount of bar reinforcement. Accordingly, put perhaps more shortly, the contractor's claims, so far as relevant to the eventual scope of the debate, are for the additional costs to them arising from alleged inaccuracies or insufficiencies in the information provided to them either as part of the "Employer's Requirements" or other information supplied to them on behalf of the employer, prior to their tender, of supplying the materials eventually found necessary as additional to the quantities of which they were expressly or impliedly advised before tendering.
[6]It may be noted that according to their own tender documents, the defenders recognised that, at that time, the design was not finalised and would require to be developed and adapted. However, for the purposes of the debate, one has to proceed on the assumption that the claims do not arise from the development of the design or changes made to it but from inaccuracies or deficiencies in the pre-tender information contained in the employer's requirements or in other information supplied prior to the making by the defenders of their tender. It also has to be assumed for these purposes that the errors or deficiencies alleged to have existed were errors or deficiencies which would have been avoided by a competent designer taking care to pay attention to those particular matters.
[7]It may also be observed that what is claimed by the defenders are particular amounts of costs attributed to various individual heads of claim. It is not said that, had the desiderated accurate information been provided, the defenders would in fact have made a tender of a different amount.
[8]By way of further introductory exposition, it must be noted that the building contract between the defenders and the employers was in the JCT Standard Form of Building Contract with Contractor's Design 1981 Edition incorporating amendments 1-7 and 9-11 along with, and subject to, the other amendments set out in No.6/1 of process. So far as adverted to at the debate, the material provisions are to the effect that the contractor (the defenders) assumed responsibility for the design of the works. In particular, in terms of the substituted Clause 2.5.5.2 -
"any mistake inaccuracy, discrepancy or omission in... the design contained in the Employer's Requirements... shall be corrected by the Contractor but there shall be no addition to the Contract Sum in respect of such correction or in respect of any instruction of the Employer relating to any such mistake, inaccuracy, discrepancy or omission."
Article 2 of the recitals was also amended so as to impose upon the contractor responsibility for any design of the works which had already been carried out.
[9]In section 3 of the Deed of Appointment the Consultant (the pursuers) gives certain undertakings to the employer (THI) in relation to performance of the services, described in Schedule 1. The particular provisions of those undertakings said by the defenders to have been breached are, first, the undertaking given in Clause 3.2.1. However, since that sub-sub-clause is but part of a longer, largely unpunctuated, sentence it is appropriate to set out Clause 3.2 in its entirety:
"The Consultant undertakes to the employers as follows:
...3.2That it has carried out and will continue to carry out its obligations under and pursuant to this Appointment:
3.2.1with all proper professional skill care and diligence and in accordance with the standards applied by skilled and fully qualified persons in the execution of work in connection with a project of similar size value complexity and quality to the Project
3.2.2to the reasonable satisfaction of the Employer
3.2.3promptly diligently efficiently and expeditiously and in due order and sequence so as to:
(i)facilitate completion of the Project in a manner satisfactory to the Employer and
(ii)give the Main Contractor no legitimate cause for action complaint or claim against the Employer pursuant to the Building Contract and
(iii)to use all reasonable endeavours to see that no loss, expense, damage, cost or liability is caused to the Employer
3.2.4In accordance with the Brief to Consultants (if any)"
The duty undertaken by the Consultant in Clause 3.2.1 is relied upon by the defenders in the majority of the heads of claim.
[10]Additionally, in respect of other heads, the defenders allege breaches of the duties accepted by the Consultant under clauses 3.10 and 3.12 of the Deed of Appointment namely -
"3.10To liaise at all appropriate times with the Professional Advisers and use all reasonable skill and care to co-ordinate and integrate all aspects of its services with the services carried out by the Professional Advisers to see that the proper integration of all activities (including but without limitation the integration into the overall design for the Project of designs provided by each of the Professional Advisers, and the timely completion of the Project
......
3.12To use its reasonable endeavours to comply with any master programme or other programmes prepared in connection with the Project arising from or relating to the performance of the Services"
As already mentioned, Schedule 1 to the Deed of Appointment sets out at some length the Services to be provided by the Consultant and distinguishes in terms of its parts and headnotes between "Pre-Construction Services" and "Construction Services (following novation to the Contractor)". The particular pre-novation services invoked by the defenders are these:
"2.3Advise the Employer on the need for arrangements to be made for the carrying out of topographical and dimensional surveys of the Site, surveys to obtain details of construction in existence on or adjacent to the Site, special investigations or model tests, arrange as agent for the Employer for such works when authorised by him, recommend the amount of any payments to be made by the Employer to the persons or firms carrying out such investigations under the Consultant's direction, and communicate to the Employer the results of such works
.....
2.11Prepare sufficient drawings, estimates of reinforcement, and final specifications of the Project for inclusion in the Employer's Requirements
.....
2.15Consider the Employer's Requirements and assist in the production of the Contractor's Proposals"
[11]The particular clauses of the Novation Agreement on which the defenders found are clauses 4 and 5, which are in these terms:
"4The liability of the Consultant under the Appointment whether accruing before or after the date of this Novation shall be to the Contractor and the Consultant agrees to perform the Appointment and to be bound by the terms of the Appointment in all respects as if the Contractor had always been named as a party to the Appointment in place of the Employer
5Without prejudice to the generality of clause 3 of this Novation the Consultant agrees that any services performed under the appointment by the Consultant or payments made pursuant to the Appointment by the Employer to the Consultant before the date of this Novation will be treated as services performed for or payments made by the Contractor and Consultant agrees to be liable to the Contractor in respect of all such services and in respect of any breach of the Appointment occurring before the date of this Novation as if the Contractor had always been named as a party to the Appointment in place of the Employer"
[12]In their written pleadings the defenders advance two alternative approaches to the effect of the Novation Agreement insofar as it relates to pre-novation losses or claims. One approach, treated in the pleadings as the primary case, is encapsulated in the averments in Statement 5 of the counterclaim in which, following a short reference to the pursuers' having given certain undertakings to the employers in terms of clause 3 of the Deed of Appointment, it is averred:
"In terms of cls. 4 & 5 of the Novation Agreement, the pursuers agreed, inter alia 'to be bound by the terms of the Appointment in all respects' and 'liable to the Contractor in respect of all such services and in respect of any breach of the Appointment occurring before the date of this Novation as if the Contractor had always been named as a party to the Appointment in place of the Employer'. The pursuers have accordingly agreed that the Appointment in general, and cl. 3 in particular, are to be read as if the defenders had always been named as party thereto in place of the Employers. They have thus agreed that cl. 3 is to be read as if the words in square brackets below had been substituted for the original words of the clause."
There is then set out what might colloquially be termed a "re-write" of the terms of clause 3 substituting "[the defenders]" for "Employer". Thus the opening line of clause 3 is reproduced as - "the Consultant undertakes to [the defenders] as follows:". Thereafter the terms of sub-clauses 3.1, 3.2, 3.4, 3.7 and 3.8, are all rehearsed with the similar textual substitution of "[the defenders"] for "the Employer".
[13]The second approach is to be found in Statement 6 of the counterclaim where it is said -
"Separatim. Further and in any event - regardless of the pursuers' agreement (in the Novation Agreement) that the terms of their Appointment by the Employers should be retrospectively amended 'as if the Contractor had always been named as a party to the Appointment in place of the Employer' - the pursuers breached the terms of their Appointment, even in its unamended, pre-Novation terms. In other words, they were in breach of contract by failing in duties that they owed to the Employers in terms of their Appointment, even absent the subsequent agreement to treat references to the Employers as references to the defenders."
The defenders' pleadings then refer to paragraphs 1.1, 2.11 and 2.15 of Schedule 1 to the Deed of Appointment and relate those to clause 3.21, all of which have already been quoted.
[14]In the opening speech in the debate Mr Ellis, junior counsel for the pursuers, naturally directed his attention towards the primary approach advanced in the counterclaim of treating the effect of the Novation Agreement as requiring the Deed of Appointment to be retrospectively re-written by substituting throughout the word "Contractor" for "Employer". Mr Ellis was readily able to point to examples of that approach producing nonsensical results. Thus to take but some of his examples, with the claimed substitution, para.2.12 of Schedule 1 to the Deed of Appointment would read thus:
"Assist the Architect in advising [the Contractor] as to the technical suitability for carrying out the project of firms tendering for the main contract."
And para. 2.13 would read:
"Assist the Architect and Quantity Surveyor in advising [the Contractor] as to the relative merits of tender, prices and estimates received for carrying out the project."
Such textual substitution would result also in the recitals to the Deed of Appointment being absurd. Thus recital B would read "The [Contractor] proposes to enter into a building contract with a main contractor...".
[15]Perhaps more fundamentally, Mr Ellis pointed to the practical difficulties involved in a retrospective re-writing of the duties owed by the consultant in the event that novation were to take place. From the consultant's viewpoint there was a conflict of interest depending upon whether the engineer be advising an employer or a contractor. The conflict was discussed in standard textbooks such as Hudson on Building Contracts (11th ed) §2-101, 2-105 ff. There being a conflict of interest between advising on the one hand an employer and on the other hand a contractor, Clause 3.3 of the Deed of Appointment would inevitably result in the consultant being in breach of contract were the re-writing approach to be adopted. It would in any event be inherently unlikely that parties should intend the effect of the Novation Agreement to be that of re-casting a duty owed and performed to the employer as being a duty owed to the contractor retrospectively.
[16]It is however unnecessary to give further narration of that submission since in the event counsel for the defenders did not seek to support or advance the primary position set out in their written pleadings involving the re-writing of the Deed of Appointment and consequently the scope, content and destination of the duties owed by the consultant prior to the "novation". The position which counsel for the defenders adopted was, on the contrary, that the Novation Agreement did not effect, and had no need to effect, any re-writing of the Deed of Appointment by substituting "contractor" for "employer". All that occurred on novation was that the contractor became the creditor in the obligation but the content of the obligation owed by the consultant, namely to provide advice or services to the employer, remained unaltered. The result was that the defenders retroactively became a party to a contract whereby they, as creditors in the obligation, had contracted with the pursuers for the provision of services to a third party - the employer - and if those services were not properly performed the defenders were, it was said, entitled to claim for their losses. Senior counsel for the defenders accepted that the position thus adopted was effectively a reliance on the alternative rather than the primary case in their pleadings and he did not seek to support that primary case.
[17]It may be observed at this point that in the course of his speech senior counsel for the pursuers remarked that since much of his junior's argument had been directed to the contention that, on a proper construction of clauses 4 and 5 of the Novation Agreement, no retrospective change in the content of the pre-novation duties was effected and that the working of the Novation Agreement might be seen as akin to an assignation of the employer's claims, the parties might therefore not be so widely apart as had been thought.
[18]It is also convenient to mention at this stage that in advancing his submissions Mr Ellis had sought to demonstrate that although the Novation Agreement was so intituled, it did not constitute novation in the proper sense of that term, as discussed in certain authorities (Walker on Obligations, 3rd ed., para.34.16, 34.17; W J Hart Construction Ltd v Scottish Homes 1992 S.C. 99). Particularly, the Novation Agreement did not provide for the extinction of the employer's rights and obligations since, inter alia, clause 3 allowed the employer to retain rights, including the employer's ability to restore the appointment (clause 3.5). Clause 6 of the Novation Agreement also envisaged the Deed of Appointment remaining in force. Again, in the event, it was not suggested by counsel for the defenders that anything turned on the label or title given to the Novation Agreement or that consequences in law followed from the use of the word "novation" by way of any implication that the term "novation" was used in its proper sense. As I understood parties' respective submissions, ultimately neither contended that the Novation Agreement fell to be allocated to or definitely categorised by the standard concepts of assignation or novation.
[19]The debate having thus narrowed, the submission for the pursuers was to the effect that neither clause 4 nor clause 5 of the Novation Agreement contemplated recovery of the type of loss now sought by the defenders. What was now asserted by the defenders was that, the content of the duty to the employer remaining unaltered, and the employer having expressed no dissatisfaction with the - for these purposes assumed deficiencies in the standard of performance provided to him - the defenders could yet recover a loss suffered, not by the employer, but by them. However the natural and obvious way in which to measure a loss for a substandard performance of a service was to consider the extent to which the person for whom the service was actually performed had suffered loss by reason of that deficiency. The person for whom the pre-novation services were to be performed was the employer. So it was his loss which was properly in issue.
[20]The language of clause 4 of the Novation Agreement did not alter that approach. The opening words of clause 4 - "Liability of consultant accruing before novation" could only refer to a breach of duty owed to the employer prior to novation and loss resulting therefrom. In saying that such a liability should be owed to the consultant, the clause effectively envisaged an assignation of the employer's claim. Insofar as the clause went on to refer to liability after novation, that could only refer to breaches of a duty owed directly to the contractor and the continuing narrative that the consultant agreed to perform the Appointment and to be bound by its terms looked to the future. There was perhaps an overlap in language between agreeing to perform and agreeing to be bound. Respecting the reference to the contractor being named in place of the employer, counsel submitted that it could not change the nature of the pre-novation losses and its use in clause 4 - and in clause 5 - was entirely consistent with the intention of what was effectively an assignation of the employer's claims.
[21]Adverting to clause 5, counsel observed that it was dealing with past performance and past payment. Accordingly, past breach and loss are to be determined by the duty owed in the past. The duty therefore must be to someone in the position of an employer, and not a contractor. For example, the duty to advise the employer on the need for a geo-technical survey could only be seen as a duty owed to the employer. Counsel accepted that there was an overlap between clause 4 and clause 5 and that some of the language might be seen as superfluous. However, it was not necessary to give a meaning to every word. Superfluous language was not uncommon in private contracts - cf. Beaufort Developments Ltd v Gilbert Ash Ltd [1999] 1 A.C. 266, 273.
[22]Both clauses of the Novation Agreement assumed a prior breach of duty to the employer giving rise to a liability to the employer. While under the "design and build" building contract the contractor assumed responsibility for design, including prior design, if deficiencies in the design attributable to fault on the part of the consultant by reason of his having failed in his responsibilities towards the employer were to emerge the employer might sue either the contractor or the consultant. The effect of the Novation Agreement was accordingly to enable the contractor to recover from the consultant the damages which would be recoverable from the consultant at the instance of the employer. It was not intended to provide the contractor with a guarantee that certain elements of the "as built" construction would not be more costly to build than the contractor had envisaged in his evaluation of the concept design.
[23]If, as the defenders now appeared to recognise, the service was to be performed for the employer, the adequacy of that performance must be tested by reference to the extent to which the employer did not receive proper performance and the measure of any loss for which the consultant might be liable was the amount required to make good that deficiency to the employer. Consistently therewith it was to be noted that the consultant's duties were variously cast as being "to the reasonable satisfaction of the employer" clause 3.2.2. Similar formulations were to be found in clause 3.2.3 (i) and (iii) of the Deed of Appointment.
[24]As a final submission, it was argued by senior counsel for the pursuers that even if it were ever appropriate to consider the loss arising to the contractor, as creditor in the obligation of the consultant to provide services to the employer, one required to look at the position in which the contractor would have been had that pre-tender obligation been performed. That would involve averring a difference between the tender price actually offered and that which would have been submitted, had the desiderated advice been given. The defenders' counterclaim was not advanced on that basis.
[25]For these reasons, substantial parts of the counterclaim were irrelevant and in the event that the argument for the pursuers were to find favour, counsel requested that an opinion be issued to that effect and the case put out By Order in order that the particular averments relating to the irrelevant items in the claim might be more precisely identified. Counsel for the defenders did not dissent from the adoption of that procedural course on the hypothesis on which it proceeded.
[26]As already indicated, in the course of his speech, particularly at the resumed diet of debate, junior counsel for the defenders made plain that notwithstanding the apparent primary contention advanced in the pleadings the true contention for the defenders was that following execution of the Novation Agreement its terms had the effect that the contractor came to be regarded as the creditor, that is to say the party engaging the consultant, but the duties and obligations of the consultant were not altered retrospectively. The responsibility of advising the employer was not changed, but the party deemed to have engaged the consultant to give that advice to the employer was now the contractor. In other words, the definition of "employer" remained unaltered throughout the substantive text of the Deed of Appointment. The only change was to the name of one of the parties to the Deed of Appointment. Counsel for the defenders went on to dispute the notion that there was ever any conflict of interest between advising the employer and having duties towards the contractor. However, on the approach which the defenders now adopted, the consultant was not made to serve two masters, either at the same time or retrospectively. It was not apparent that the content of the duty to design properly altered depending upon whether the person instructing the design were the employer or the contractor. Both parties had an interest in the designer's producing a competent design and it could not be said that, while acting for an employer, it was the duty of a designer to under-estimate the amount of, say, the bar reinforcement. As was observed in Sutcliffe v Thackrah [1974] A.C. 727, 736, 752 architects and engineers commonly had to have regard to conflicting interests in such matters as certification and required to go about that task in accordance with the duty to act fairly. Similar observations had been made in Merton London Borough Council v Stanley Hugh Leech [1986] 32 B.L.R. 51, 78-9. It was not, said Mr Upton, evident that while working for the employer the designer could not be under a duty also towards the potential contractor or tenderer. The existence of such a duty had been recognised in two Canadian cases - Edgeworth Construction v N.D. Lea & Associates 66 B.L.R. 56; Auto Concrete Curb v South Nation River Conservation Authority (1994) 10 Const. L.J. 39. Counsel accepted that these cases had sometimes been the subject of criticism (particularly Hudson p.168ff) and that they were based on delictual responsibility for a negligent mis-statement. However, given the existence of the Canadian position it could not be said that the parties to the present case could not have intended to bring about a similar result. The whole scheme of a "design and build" and "novation" arrangement was with a view to having but one engineer and that meant that the contractor ought to be entitled to found on any negligent mistake made by the engineer.
[27]Having adopted his junior's submissions, senior counsel for the defenders laid stress upon the general contractual background. While the employer (THI) had engaged the pursuers to provide advice, it was important to appreciate that the employer had later contracted with the defenders on the basis that the defenders would take over responsibility for the pre-tender design. Thus, with the amendments effected to the JCT Standard Form, Article 1 of the Building Contract included the provision that the contractor shall "be responsible for any design of the Works which has already been carried out and shall complete the design of and shall execute the construction of the whole of the Works." Article 13 obliged the defenders to enter into the Novation Agreement and the amended conditions of the Building Contract (particularly clauses 2.5.4 and 2.5.5) placed onerous responsibilities on the defenders. The designer - the pursuers - would be aware of the basis upon which they would be "novated". Further, the "Employers Requirements" communicated to the defenders made it clear that the prospective tenderer would require to accept such a novation.
[28]After novation, the employer "dropped out" relying solely, it was said, on the duty of care letter envisaged in clause 6.2 of the Deed of Appointment. The contractor thus became the creditor in the consultant's obligations under the Deed of Appointment, with retrospective effect. The content of the duty did not change but the person contractually entitled to call for its performance became the contractor. Accordingly the assumption to be made after novation was that while the person to whom the consultant was to provide the service or give the advice was still the employer, the person contractually entitled to require performance of those duties to the employer became the contractor. Assuming the service or advice provided to the employer to have contained errors - amounting to a breach of contract - then, in the pre-novation situation, the employer would be contractually entitled to have the errors corrected or the consequences made good. After novation, if the duties had thus not been performed, the contractor was the party entitled to call for their correction and for the making good of their consequences. Accordingly, said counsel, the contractor was thereby entitled to claim for his own losses.
[29]Counsel for the defenders further submitted that the pursuers' argument was fundamentally misconceived because it failed to recognise that in light of the terms of the Building Contract, whereby the contractor assumed responsibility for design, the employer would not suffer any loss which could then transfer by assignation, or something akin to assignation, to the contractor. If the pursuers' argument were correct, the risk of inaccuracies or deficiencies in the pre-novation design work transferred to the contractor at his sole expense. The more inaccurate the information in the tender information, the better for the employer who would thereby get a cheaper building. That, said counsel, would not be a sensible result. Therefore, the intention must be that the contractor would have the same relationship with the engineer as if he had employed him all along and could assume that he had properly performed his duties.
[30]In relation to the text of clauses 4 and 5 of the Novation Agreement, counsel for the defenders did not, I think, closely address Mr Reid's invitation to specify precisely which clause and which part thereof was truly invoked, but he submitted in relation to clause 4 that the "liability" of the consultant could only mean the obligation to give performance. The latter part of that clause, whereby the consultant agreed to be bound, also had only retrospective effect since there was an assumption that, ab initio, the contractor had been named as the party to the Deed. Clause 5 plainly addressed pre-novation transactions and treated them as performed for the contractor, whereby the contractor was deemed or assumed to be the creditor in the obligation ab initio. Counsel for the defenders went on to submit that the text of clauses 4 and 5 of the Novation Agreement were destructive of the pursuers' argument that they operated as akin to an assignation for the reason that, since the assumption to be made after novation was that the employer had never at any time been a creditor, no employer's claim could ever be transferred by way of assignation, he requiring to be a creditor in the obligation to advance any such claim.
[31]Counsel for the defenders accordingly moved that a proof before answer be allowed in respect of the whole averments in the counterclaim.
[32]As has already been stated, counsel for the defenders departed from the first approach suggested in their pleadings of construing the terms of clauses 4 and 5 of the Novation Agreement - and especially the phrase "named as a party to the appointment in place of the employer" - as having the effect of retrospectively re-writing the Deed of Appointment so as to require duties to be performed for the employer, and in his interests, as being duties expressed to be performed for the contractor, and in his interests. That departure is no doubt understandable given the evident and inescapable problems of endeavouring to substitute the word "contractor" for the word "employer" throughout the Deed of Appointment and in particular the material parts relating to the performance of services. In my view, the difficulty is not simply textual but also reflects an underlying tension between on the one hand the designer's duties to the employer and on the other the conflict of interests between an employer and a contractor.
[33]The alternative analysis offered by the defenders was to the effect that the Novation Agreement did not alter the scope or content of the duties to be performed by the consultant for the employer. They remained services and advice provided to the employer for his purposes. What was retroactively altered was the identity of the other party to the contract with the consultant. Accordingly the position deemed retroactively to have existed was that the contractor engaged the consultant to provide to the employer the services described in Schedule 1 to the Deed of Appointment, to the standards set out in clause 3 of the Deed of Appointment.
[34]In the course of their submissions, counsel for the defenders submitted under reference to the dictum of Lord Upjohn in Spalding v Tarmac Civil Engineering Ltd [1967] 1 W.L.R. 1508, 1526 that such a deeming had to be carried through to all its logical results. Spalding concerned conditions agreed ab ante in standard conditions for the hire of plant, deeming the driver of the machine let out on hire and employed by its owner to be the servant of the party taking the machine on hire. As such, it is in my view not of great relevance to the present case other than indicating that the logical consequences of a deemed situation should normally be applied.
[35]One ought, accordingly, to examine the legally logical position of the defenders' analysis to the effect that the Novation Agreement produced an essentially three-sided relationship whereby A (contractor) engages B (consultant) to perform services for, and give advice to, C (employer). Accepting for the moment that analysis to be correct, the questions which arise are whether the sufficiency of the performance by B (consultant) is to be judged by what is required by the destinee of the services C (the employer) and whether in the event of defective performance the losses or costs for which B (consultant) may be liable in damages are those reflecting the need to put C (employer) in the position of having received satisfactory service or, as the defenders contend, those said to have been suffered by A (contractor).
[36]Counsel for the pursuers submitted that on the analysis and argument ultimately advanced by the defenders, the natural measure of loss was that suffered by the recipient of the services said to be defective. It appears to me that such will normally be the case. If a husband contract with a surgeon for the treatment of his wife, the liability of the surgeon for negligently treating the wife will be the loss sustained by her. If a father engage a garage to repair his son's small, elderly car by a particular date and the garage fails timeously to repair it, the liability of the garage would be measured by the cost of hiring a replacement small car and not, say, the cost of the father's hiring a large limousine because the son has borrowed the family saloon.
[37]Additionally, it must be observed that the deemed arrangement contended for by the defenders may logically involve the conferring by A and B of rights on a tertius C. It is not hard to see that in these deemed arrangements there might exist a deemed enforceable right - a jus quaesitum tertio on the employer. Indeed, I think it difficult to see that in the deemed situation the deemed tertius would not enjoy a deemed jus quaesitum. The claim by the tertius, enforceable by him, would naturally be for his own losses. No authority was cited to me, and I am not aware of any, in which the liability of the party liable to make performance to the tertius was to be assessed other than in terms of the consequences for the tertius. Moreover, if the tertius were to discharge the provider of the services from responsibility, it is hard to see that a claim would yet open up to a principal contracting party. For example, in the present case, clause 3.2.2 of the Deed of Appointment adverts to the provision of services to the reasonable satisfaction of the employer. If the employer had expressed his satisfaction with a particular performance it is, to my mind, difficult to see that it could subsequently be said that the consultant was in breach of his obligation to the employer and therefore liable to the contractor. Further, were the consultant negligently to have advised the employer to incur expense on a wholly unnecessary site investigation, but the Employer had expressly waived any claim for reimbursement of that unnecessary expense, it is equally hard to see how any claim could then arise in the hands of the contractor on the ground of the consultant's breach of contract which could not be wholly met by the waiver.
[38]It therefore appears to me that there is an inherent inconsistency or conflict between the defenders' acceptance in their submissions that the Novation Agreement did not alter in any way the scope or content of the services to be provided by the consultant to the employer and their contention that on the retrospective creation of a tri-partite arrangement, they became entitled to recover losses which cannot be categorised as any loss suffered by the destinee (the tertius). Such losses are at best, an indirect, incidental or collateral result of the alleged deficiency in the service to the tertius and, if recoverable, would to my mind involve the retrospective recasting of the scope of the performance or duty owed by the consultant which I understood to have been disclaimed by counsel for the defenders.
[39]One of the bases upon which counsel for the defenders sought to justify the contention that the deemed alteration of the identity of the parties to the Deed of Appointment gave rise to a valid claim for the defenders' losses (and not an employers' loss by way of assignation or quasi assignation) was the contention that in view of the terms of the building contract, whereby the defenders undertook responsibility to the employer for design, the employer could never suffer any loss, he having a contractual claim against the defenders. It was said that, since no loss could thus accrue to the employer, there was nothing to be assigned to the contractor. Accordingly, so ran the argument, the relevant provisions of the Novation Agreement would lack content and lead to a result which the parties could never have intended. The inability of the employer, in the context of the contractual arrangements, to suffer any loss was, said counsel for the defenders, a fundamental misconception in the argument for the pursuers.
[40]In addressing this submission, I would observe, as a perhaps minor preliminary, that this argument assumes in the first place that the design undertakings in the Building Contract are entirely co-extensive with the obligations owed by the pursuers to the employer. I am not persuaded that such is the case. There appear to me to be provisions in the Deed of Appointment which are different from and go well beyond the scope of the design undertakings in the Building Contract. I mention, at random, paragraphs 2.2, 2.3, 2.4 and 2.13 of Schedule 1 to the Deed of Appointment.
[41]Secondly, and more importantly, even in relation to the design obligations ultimately undertaken by the defenders so far as co-extensive with the design obligations of the pursuers to the employer, the argument for the defenders - as I understood it - assumed that the existence of a contractual claim by the employer against the defenders for defective design precluded the existence of any claim by the employer against the pursuers. That assumption was disputed by counsel for the pursuers. No authorities on this matter were cited to me, but in principle it appears to me that a valid claim by the employer against the engineer on the basis of defective design is not defeated by the employer's having the possibility of making a valid claim on a similar basis against the contractor by virtue of the design obligations undertaken by the contractor in the building contract. Thus, if defects were to emerge in the leisure centre requiring the execution of repairs and its closing down, and if the defects arose from defective design the genesis of which lay in what was done for the employer before the date of the tender, one would readily think the employer to have a perfectly prestable claim against the designer. The fact that the terms of the building contract might also give the employer a claim against the contractor by reason of his having effectively underwritten the pre-construction design, would not discharge or destroy the liability of the designer to the employer. Further, applying the litmus test of insolvency of the contractor, the employers' claim against the consultant must persist. There being such liability in solidum it may well be of course that questions of relief or apportionment between the two obligants would arise.
[42]I am accordingly not persuaded that the pursuers' argument on the construction of the Novation Agreement to the effect that the agreement operates as akin to assignation of the claims prestable at the instance of the employer suffers the radical misconception asserted by counsel for the defenders, namely lack of content, on the view that by reason of the contractor's liability under the building contract there can never be a transmissible loss upon which such assignation could operate.
[43]Indeed, it appears to me that in the situation in which the employer would otherwise have the choice of proceeding against either of two obligants, namely the consultant under the Deed of Appointment, or the contractor under the Building Contract, the pursuers' analysis of the meaning and effect of the Novation Agreement produces the result that in meeting its liability to the employer for losses sustained by the employer through the contractor's breach of its contractual design obligations under the Building Contract, the contractor will always obtain full contribution from the consultant, even if the defects had their origins wholly or partially in the pre-novation design work or activity.
[44]A further consideration urged upon me by counsel for the defenders was, broadly, that if a contractor were to take over the design - so far as it had proceeded - and any errors in it, he would - it was said - require to have a direct contract with the designer to give him protection against the consequences to him of errors in the design. It was clear from Pacific Associates Inc. v Baxter that the engineer or architect would not usually be liable to the contractor for the consequences to the contractor of defects in the design or tender information. The purpose of the Novation Agreement was thus to overcome that "liability gap". It had always been envisaged, said counsel for the defenders, that only one engineer would ever be employed on the project and the contractor was required to accept the novation of that engineer. Accordingly, it was said, the assumption must be that the consultant became directly liable to the contractor for any losses suffered by the contractor by reason of deficiencies in the pre-tender design or information.
[45]In large measure, this consideration, which effectively involves a recasting of the engineer's duty, is a further reflection of the tension or inconsistency in the defenders' argument to which I have already adverted. However, the assumption of responsibility by a contractor for the pre-contractual design elements in an employer's requirements, upon which the contractor tenders, may not uncommonly be a feature of any design and build contract - cf. the discussion in O'Reilly on Civil Engineering Construction Contracts, p.155, a text to which I was referred by Mr Upton. As senior counsel for the defenders accepted, there was nothing in this case to prevent the defenders from obtaining the advice of their own engineering staff, or an independent engineer, to examine what was being put forward by the prospective employer and to evaluate that in light of their own tendering requirements. However there was, said counsel, no need for the defenders to consider adopting that course because they could, rely upon the engineer being "novated".
[46]While I have little doubt that from its point of view the employer envisaged "novation", thereby maintaining the influence of and some control, through its chosen consultant, and thus included in the Deed of Appointment contractual provisions enabling that to happen and while the employer similarly preserved its position as against the contractor by stipulating that the contractor might be required to accept the chosen engineer, I was not pointed to any contractual provision (particularly prior to tender) whereby the contractor was entitled to require execution of the Deed of Novation in defiance of the wishes of the employer and the designer. In other words, while the employer might instruct the consultant to enter into the Novation Agreement, and could require the contractor to accept the novation, there is no equivalent provision whereby the contractor was entitled to demand that instruction. It may further be observed that clause 3.5 of the Novation Agreement enables the consequences of the Novation Agreement to be reversed. It provides:
"To the extent that the Appointment is terminated for any reason whatsoever or the Consultant wishes to determine the Appointment or is entitled to treat it as having been repudiated by the Contractor, the Consultant shall so notify the Employer who will then have a period of 14 days from its receipt of such notification in which to issue a notice in writing to the Contractor and the Consultant to the effect that it wishes to enter into a further Novation Agreement to reverse the terms of this novation with effect from the date of such notice and the Contractor and Consultant shall do all that may be required by the employer to execute and complete such an agreement."
It may further be noted that the preceding sub-clause provides that the appointment may not be suspended or terminated by the contractor without the prior written consent of the employer.
[47]One may see that the employer - who has selected the consultant - may wish to see that he be involved throughout, provided the employer remained satisfied with the consultant. In my view the contractual provisions are primarily conceived with that in mind. I do not consider to be sound the contention that the defenders were, ab initio, and prior to tendering, entitled to rely upon the pursuers being novated and that consequently they would be entitled to found on defects in the designer's efforts which affected the preparation of their tender.
[48]A further argument advanced by the defenders, particularly through their junior counsel, was the argument founded on a textual examination of clauses 4 and 5 of the Novation Agreement to the effect that the pursuers' contentions did not allow for any material content being given to clause 5 of the Novation Agreement and, it was said, the latter part of clause 4. My impression was that this argument was put forward by junior counsel as a prelude to advancing the "re-writing" argument contained in the pleadings, but ultimately not advanced, particularly when the debate resumed.
[49]On my reading of clause 4, it falls into two parts. The first being the words - "the liability of the Consultant under the Appointment whether accruing before or after the date of this Novation shall be to the Contractor" and the second being the succeeding words "and the Consultant agrees to perform the Appointment and to be bound by the terms of the Appointment in all respects as if the Contractor had always been named as a party in place of the Employer".
[50]In my view counsel for the pursuers are correct in their approach to the second part as constituting effectively an acknowledgement that the consultant agrees to perform the appointment for the future treating the contractor as his true client. The first part, in its reference to liability accruing before the date of the novation can only refer to a prior breach of duty owed to the employer and is thus, in my view, consistent with the pursuers' position of the effect of the Deed of Novation being effectively the assignation of a claim prestable at the instance of the employer. The wording clearly envisages the possibility of a liability having accrued and in my view is incompatible with the suggestion made at one point in his submissions by senior counsel for the defenders that there could never be any liability to the employer because the Deed of Novation deprived the employer, retrospectively, with the quality of being a creditor in the contractual obligation.
[51]So far as Clause 5 is concerned, on the approach adopted by counsel for the pursuers, there is no doubt - as counsel recognised - a degree of redundant language. It also appears to me that the ultimate approach of counsel for the defenders also involves a degree of redundancy. As was put by Lord Hoffman in Beaufort Developments, 274 "the argument from redundancy is seldom an entirely secure one." He then went on to point out that private law contracts commonly contain much that is repetitious or redundant. I would also observe that it seemed to me that at the end of the day and in the light of the manner in which the debate developed no great assistance was to be obtained from a very minute examination or dissection of the internal parts of these particular contractual provisions.
[52]In these circumstances I have come to the conclusion that the pursuers are correct in their submission that the defenders cannot claim for their own losses, not losses conceived as having been suffered by the employer, based on an alleged breach of duty by the pursuers committed prior to the date of novation and in relation to the duties then owed to the employer.
[53]I would also add that I would be in agreement with Mr Reid's subsidiary submission that, assuming the contractor to be able to claim for his own losses in respect of deficiencies in the pre-tender documentation or design, the proper approach would be to consider the effect, if any, which the provision of the desiderated, correct information would have had on the tender price.
[54]Since parties were agreed that in the event of my reaching a view favourable to the pursuers, it would be appropriate to put the case out By Order I shall do that.
[55]For completeness, I would add that in addition to the authorities which are mentioned in this opinion I was also referred to the cases in the list appended hereto.
APPENDIX
Bank of Scotland v Dunedin Property Investment Co 1998 S.C. 657.
Bulmer & Co v Scott & Sons (1874) 1 R. 379.
Esso Petroleum Co v Hall Russell & Co 1988 S.L.T. 874.
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 W.L.R. 896.
McAlpine Construction v Panatown [2000] 3 W.L.R. 946.
Scottish Homes v Inverclyde DC 1997 S.L.T. 829.
Thompson v T Lohan (Plant Hire) Ltd [1987] 1 W.L.R. 631.
Try Build Ltd v Invicta Leisure Tennis Ltd [1997] 71 Con. L.R. 140.
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