Duty Of Care And Novation Difficulties

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...