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Construction costs: The architect's obligation to advise and warn

Insurance Law & Litigation
Architect sitting at desk drafting a design on blueprint paper.

The recent NSW Court of Appeal decision in Morris v Leaney [2022] NSWCA 95 is an important reminder for architects of the risks associated with advising clients on likely building costs, or failing to correct a client's misapprehension of what can be achieved on their budget. The decision also considers the proper measure of damages in claims where a party enters into a building contract in reliance on a representation as to construction costs.

Background

In Morris, the respondent was an architect engaged to design the renovation of a house owned by the appellants. The owners alleged that the architect breached his duty and contract and engaged in misleading and deceptive conduct, as he had led them to believe that they could achieve their dream home within their financial limits.

At first instance, the owners' case under the Australian Consumer Law failed on the basis that the alleged representations as to costs were not made and, even if they were, they were not misleading. The owners succeeded on their breach of duty and contract claims, including because despite knowing their budget, the architect did little or nothing to advise them on the impact of their particular decisions or the likelihood of them achieving their objectives within budget.

The owners ran a "no transaction" case. They stated that, had the architect not breached his obligations, they would not have proceeded with the renovations. However, the primary judge concluded they did not suffer any loss because "they got exactly what they paid for". Accordingly, the claim in negligence failed as damage is an element of that cause of action. The primary judge awarded nominal damages of $1,000 for the breach of contract claim.

Appeal

There were two grounds of appeal ─ first, having found the architect breached his contract, whether the primary judge erred in finding that the owners did not suffer any loss and failing to assess their damages on a no-transaction case. Second, the owners argued that their loss was $451,000 in circumstances where:

(a) had the architect not breached his duties, the owners would not have entered into the building contract because they would have known they could not achieve their objectives within their budget;

(b) the owners had a home worth $555,000 before entering into the building contract; and

(c) the owners spent $781,000 under the building contract and, as a result of that work, had a home worth $885,000.

The Court of Appeal was not satisfied that a no-transaction case was proven, because the owners had acknowledged under cross-examination that they had proceeded with the works after receiving an initial builder's quote of more than their budget, which excluded some of their significant desired alterations.

However, the Court of Appeal concluded that had the owners proven their no-transaction case, it would be proven that they did suffer a loss as they would have been worse off as a result of the architect's breaches, having spent $781,000 on their home, with the proper measure of damage being the difference between that figure and the increase in value of only $330,000.

Key takeaways for architects

Architects need to be wary of giving cost estimates, and of failing to warn clients that a desired outcome cannot be achieved within their budget.

Morris highlights that, to fulfil their obligations under the Architects' Code of Professional Conduct, an architect should monitor and update any earlier opinion on probable costs by reference to changes and design choices as the project progresses. While the court in Morris acknowledged that an architect may not have the ability to give an accurate cost estimate, given that expertise is usually held by quantity surveyors, that does not excuse an architect from a duty to advise on the costs consequences of their design.

Given the extent of damages that architects are exposed to if a no-transaction case succeeds, architects should make it clear in their retainer that they are not qualified to provide costs advice, that any indication they may give cannot be relied upon, and that their client should obtain an estimate from a properly qualified professional. Even then, an architect will still be exposed to a misleading and deceptive conduct claim as they cannot contract out of these consumer protection provisions.

A full copy of the decision is available here.

For more information on the topics raised above, please contact a member of our team.

Photo by Daniel McCullough on Unsplash

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