Architect’s professional negligence – must you keep to a client’s budget?

Looking at the case of Riva Properties and others v Foster + Partners

If a firm of architects is engaged by a client to design a building to a certain budget, will the architects be negligent if their design is significantly in excess of that budget and no amount of “value-engineering” can bring the likely cost of the design down to within budget?

In a nutshell, these were the key questions for the Technology and Construction Court to decide in Riva Properties Ltd & Ors v Foster + Partners Ltd [2017] EWHC 2574 (TCC) (18 October 2017).

Here, the question related to the design of a five star hotel close to Heathrow airport by world renowned architects, Foster and Partners (“F+P”), for a businessman, Mr Dhanoa, and his group of companies, known as the Riva Group.

The key facts were hotly disputed throughout the case, with the court eventually being highly critical of much of F+P’s evidence following cross-examination.  Riva Group’s case (accepted by the judge) was that:

•  it had given a budget of around £70 million, rising to £100 million, for the project, namely the design of a 500 bedroom 5 star hotel that could be built within the budget on a site it had acquired at Heathrow;

• the design put forward by F+P would have cost £195 million;

• F+P advised the Riva Group that this £195 million design could be value-engineered down to around £100 million; and

• Riva Group believed this advice.

The expert evidence for both sides accepted, in fact, that there was no way in which a £195 million design could be value-engineered down to be within budget. Value-engineering, here, meant reducing the cost of the scheme through changes in the method and type of construction, or specification, without making major reductions in scope.
Much of the detail of the Riva case is fact specific. However, there are some useful points arising from it for architect’s practices (or, indeed, those who are perhaps unhappy with the service received from their architect) to take on board.

We highlight the following.

• Riva’s case was that a budget for the project had been set and that F+P had been told of it. F+P’s case, essentially, was to deny that there was any budget. While factually this point was resolved resoundingly in Riva’s favour (after careful analysis of the email correspondence, there was a budget and F+P knew of it), the wider contractual question was the scope of F+P’s retainer and their duties under it. Specifically, Riva’s budget was not referred to within the contract and the contract did not state, in terms, that F+P needed to design within the parameters of Riva’s budget. However, this did not assist F+P. The contract had required, amongst other things, that F+P confirm Riva’s “key requirements and restraints.” The court had little difficulty in accepting that Riva’s budget was plainly a “constraint” and, indeed, quite possibly a “requirement” as well. Generally, therefore, the absence of specific reference to a client’s budget within a contract with an architect, will not necessarily absolve an architect of the need to design to a budget, if the contract contains other more general words, such as the client’s key requirements and restraints, of which the architect must take account. F+P had failed to do so.

• F+P were also negligent in failing to warn Riva Group that it was impossible to cut costs so dramatically without losing value and in failing to advise him that this cost reduction could not be achieved without substantially changing their design and/or reducing the amount and/or quality of the accommodation. The contract had included an obligation on F+P to use reasonable skill and care and this failure was a breach of the reasonable skill and care obligation. Generally therefore, architect’s practices should be aware of this likely need, depending on the nature of their contracts with clients, to give such clear advice in appropriate circumstances.

• As far as loss was concerned, a claim for loss of profits failed, the judge finding that: “The effective causes of the failure to construct the hotel, and the failure of it to open for business such that it could generate profits, were the unavailability or restriction of what had previously been widely available borrowing from a variety of institutions (the so-called “credit crunch”), together with Mr Dhanoa’s lack of other available liquid funds to satisfy the new more stringent LTV ratios being demanded by lenders. This would have been the case, even had Fosters produced a design for a hotel that was costed at £100 million in early 2008. In the more cautious lending market from about mid-2008 onwards, although borrowing costs were cheaper, banks were no longer prepared to be almost the sole funders in respect of projects. The amount of equity which Mr Dhanoa had already injected into the project was not sufficient to match the amounts required by borrowers under the more stringent LTV ratios. Accordingly, given these effective causes, the [Riva Group] cannot, in my judgment, recover any loss of profits from Fosters.”

• However, the Riva group was entitled to damages relating to professional fees incurred. The general principle is that common law damages are compensatory for loss or injury. In a claim for breach of contract, the damages should be such as to place the claimant in the position he would have been in if the contract had been performed.

• Effectively, the judge found that the majority of professional fees (in excess of £3.6 million) would be expected to have to be incurred again in any successor scheme, and hence those sums already spent on the Fosters Scheme were abortive. F+P’s expert’s opinion that some of the work carried out by F+P could be used by another architectural practice was rejected. The judge found that: “the claimants would indeed be required to start again from scratch. Accordingly, the expectation loss …. is the amount of fees (professional and others) in fact expended on the Fosters Scheme.”

Overall, the judgment is highly critical of F+P’s attitude to Riva Group and, particularly, its attitude to the businessman, Mr Dhanoa, who owned the Riva Group, in terms of its management of the client relationship. Not really a legal point, but in short, the F+P partners were found to have felt that acting on the project was beneath them. As a world renowned practice used to dealing with far more expensive architectural projects, F+P had often been dismissive of Mr Dhanoa’s wishes and aspirations.

In the judges’s words: “ F+P embarked upon designing the project with no thought or consideration for the budget at all…… The expert architectural evidence was to the effect that a project can either be what was called “brief led” or it can be “budget led”. The former means you start with the type of building you want, design it (“fulfilling the brief”), and then work out how much it will cost. The latter means you consider the budget, and design the building or project to match that. In a sense, it does not matter which of those two routes is adopted for any particular project, but what cannot and should not be done by an architect exercising reasonable care and skill is that a key requirement and constraint of the client is simply wholly ignored. In this case, [F+P] did that.”