A judgment last Thursday shed light on the confused law as to when a duty of care is owed for pure economic loss. That is, when a non-contractual duty is owed to another to behave carefully to avoid causing a loss that does not arise as a result of personal injury or property damage (in which cases the law readily implies a duty of care). This is important on projects where parties abound but there is no contract, for whatever reason, between claimant and defendant.

A party who suffers a financial loss may not, perhaps, want to pursue those he is in contract with because he has no clear contractual entitlement, the other party to the contract is insolvent, they are both companies that are part of the same group or other corporate arrangements. The last of these seems to underlie this latest case.

MPS engaged MCL to design and build a development on the site of the former Birmingham Children's Hospital. MCL sued MM for negligently underestimating the amount of work in communications to MCL before it concluded its contract with MPS. MCL sought its additional costs of carrying out the work.

Unfortunately for MCL, MM's contract was not with it but another company that MCL wholly owned through another company. While MM's contract did not require its novation to MCL, MCL's contract with MPS did envisage a novation. However, the novation never occurred because MM and MCL could not agree its terms.

Mr Justice Akenhead usefully summarised the law on duty of care for pure economic loss (go to paragraph 190 at the link below if you wish to read it) and held that, on the facts, MM owed MCL no duty of care. It helped that MM's drawings and specifications contained liability disclaimers. These disclaimers suggested no duty of care even regarding information MM provided in its letters and orally.

Of greater importance, the judge confirmed that normally a consultant engaged by a developer, when providing tender information and other pre-contract material, owes no duty of care to a contractor to prevent it under-pricing. The lack of something akin to a contractual relationship coupled with the matrix of contracts set up by the parties (suggesting who owes whom which duties) would usually prevent a duty arising.

This case reinforces consultants' disclaimers and should comfort both them and their professional indemnity insurers. The contractual matrix on a project will rarely permit one party to owe a duty of care to another that it is not in a contractual relationship with. Contractors should ensure, if they wish to have recourse against consultants (especially if claiming against the developer may not appeal, as it did not for MCL) that they are novated over to it and not just, say, a wholly owned subsidiary. This case also shows the risk of not attaching a draft novation agreement to the consultant's appointment as well as the building contract.

While the claim therefore failed (even though "some aspects of MM's performance ... was unimpressive"), Akenhead J addressed whether, if in fact MM had breached a duty of care to MCL, MCL was liable for contributory negligence. He said that where a contractor reasonably expects a consultant to be novated to it on its appointment as the contractor, it is reasonable to rely on that consultant and not employ an independent consultant to review the design. Contractors may take something away from this, although it perhaps does no more than recognise the existing practices of many.

Reference: Galliford Try Infrastructure Limited v Mott MacDonald

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 22/07/2008.