Designer’s Liabilities for Economic Losses

Designer’s Liabilities for Economic Losses

The case of Payne and Others v John Setchell Limited [2001] confirmed that (as a matter of policy) in the absence of contractual provision to the contrary, any person negligently performing work or services in the course of a construction process was ordinarily only liable for non-economic losses.

In the law of tort professionals have a duty to their clients to exercise the reasonable care and skill of a qualified person in the matter with which they are dealing.  Professionals are negligent when they are proven to have fallen below this standard.

In the construction industry, non-economic losses are those losses caused by negligent design or construction that results in damage to other property or personal injury to individuals.

Economic loss is the financial loss suffered by a party that is caused through a web of economic relationships in which the party is involved.

Examples of economic losses include, (1) those losses incurred where a negligent design results in a building being worth less than anticipated; and, (2) where delay is caused to the contractor’s programme as a result of having to rectify a negligent design that results in the contractor failing to meet the project deadline and incurring losses to the employer.

In the Payne case, Payne claimed damages from Setchell for negligence for breach of duty for the design and installation of new raft foundations with fixed steel reinforcement for a cottage.  The cottage was built in reliance upon a specification that was prepared by Setchell.  Payne subsequently obtained a structural engineer’s report which stated that the raft foundations of the cottage had tilted, and that each required substantial underpinning.  The Court ruled that Setchell was only liable for the diminution in value of the cottages measured by the cost of remedial works and not the further economic losses claimed by Payne.

Therefore, as a result of the decision in the Payne case, a designer was not liable to an employer for economic losses unless a contract, such as a collateral warranty, provided otherwise.

The Mirant Asia decision appears to have changed this.  Ove Arup, a designer, was found to have breached its duty of care to Mirant Asia by negligently designing the foundations of a boiler house in the .  Ove Arup was found to be liable to Mirant Asia, the employer, for both economic and non-economic losses.

So the designer’s pre-novation position is clear, the negligent designer is liable in tort to the employer for economic losses.  The negligent designer is also liable in tort to the employer for economic losses in those situations where the designer has single point responsibility and is effectively acting as contractor.

What is the position of a contractor undertaking a construction project on a design and build basis? One interpretation of the decision in Mirant Asia is that the design and build contractor is not liable to the employer for economic loss because it is not considered to be a “professional” whereas the designer is.  It seems unreasonable to make this distinction because the design process is as likely to be undertaken by contractors as by designers (be they architects or consultants).

Further, it is the standard practice in projects procured under many design and build standard forms that the designer agrees to be novated from the employer to the contractor in return for the contractor assuming responsibility for the design and construction of the project.  Following the decision in this case, the position may be that even though the contract has been novated the designer remains liable to the employer for economic losses whereas the contractor is not.

What is the position of the engineer?  Is the engineer considered a “professional” and therefore should it be treated in the same way as the designer once the contract has been novated?  Like the designer, under a design and build contract the engineer agrees to be novated to the contractor in return for the contractor assuming responsibility for its designs.  Would the Courts impose a duty of care on the engineer to the employer for economic loss despite the fact the contractor has agreed to take responsibility for the engineer’s designs at novation?  Unfortunately as a result of the Mirant Asia decision the position of the negligent designer or engineer, post-novation, is now unclear.