Negligent Design

Introduction

The decision of Justice Johnstone last Friday in CPB Contractors v WSP [2023] NZHC 640 provides welcome analysis of a designer's liability for negligent design, specifically on the following points:

• contract interpretation
• assessment of damages
• interpretation of the exclusion clause

It is not often that design negligence in the construction industry gets judicial consideration.

Background

CPB was engaged by Waka Kotahi to design and construct the upgrade of Auckland's southern motorway between the Manukau and Papakura off-ramps in 2014 (SCI Project).  For its part, CPB engaged WSP to carry out the design of the works under a tender services agreement, under which WSP was to provide designs "relevant to the tender", and "necessary ... to submit" the tender.

WSP made an error in calculating the pavement design in the 30% tender design, with the result that CPB incurred considerable additional cost in meeting the "Principal's Requirements", a performance specification common in design and construct contracts.  Effectively, the design had to be re-worked, and additional work undertaken, but the cost of that element of the works remained unchanged from CPB's tender.

Contract Interpretation

At issue was whether or not WSP's tender design should have met the Principal's Requirements under the tender services agreement.  CPB argued that the obligation to provide services "necessary" to submit the tender included meeting the contract requirements, and alternatively that such an obligations should be implied.  WSP responded that the plain words of the tender services agreement did not include reference to the Principal's Requirements, and in any event did not meet the requirements for implication restated by the Supreme Court in Bathurst Resources.

On this point, applying Vector Gas v Bay of Plenty Energy, Firm PI 1 v Zurich Insurance and Bathurst Resources v L & M Coal Holdings, Justice Johnstone confirmed that while the plain words of a contract must be objectively interpreted, they must be so interpreted in the context of the knowledge and understanding of the parties.  That was effectively part of the process of giving the words their plain meaning, and as outlined by Tipping J in Vector Gas, it is not necessary to establish ambiguity to have regard to the surrounding circumstances.

The court concluded on this point that no implication was required as WSP was to provide compliant tender designs, upon which CPB could then price its tender for pavements and surfacing.  WSP failed to meet this contractual obligation, and was therefore liable to CPB in damages.

Assessment of Damages

The traditional measure of damages for breach of contract is one of:

• restitution - an equitable concept of the restoration of a valuable benefit, based on the prevention of unjust enrichment
• reliance interest - restoration of the innocent party to the pre-contractual position
• expectation interest - restoring the innocent party to the position they would have been in had the contract been performed.

On this issue, the court accepted CPB's position that the breach by WSP was in not providing a compliant design upon which CPB could then have properly priced the work in its tender.  This was a critical point as it captured the immediate consequences of WSP's breach, rather than working through the cost and delay of the abortive work (if any) and the increased cost of carrying out the compliant work out of sequence.

Exclusion Clauses

The tender services agreement included the industry standard liability for "reasonably foreseeable claims, damages, liabilities, ... losses or expenses caused directly by the breach" but excluded  indirect, consequential or special loss, or loss of profit.  The maximum liability was also limited to five times the fee payable to WSP.

While this formulation may be an industry standard, that does not excuse it from the obvious problem that all losses flow in consequence of the breach (as discussed extensively in construction cases in the UK's Technology and Construction Court), and that all losses flowing from negligent design are arguably not only consequential, but are also indirect.

Finding that WSP had caused CPB's losses directly, Justice Johnstone commented on the exclusion clause as follows (at paragraph [217}:

... I consider that [the clause] provides for liability for losses arising "directly" from a particular breach, and for the exclusion from liability of losses which upon examination, as better described as arising "indirectly" from the breach.  Separating the form of outcome contemplated by [the clause] into two distinct categories - direct outcomes and indirect outcomes - is in my view the only proper way in which the clause can be made to make sense.

The issue of the limitation of liability was not discussed.

Conclusion

The case provides a clear and sensible analysis of liability for negligent design.