GOOD FAITH AND THE This paper attempts to give an
DUTYTO WARN-THE overview of recent trends in
construction law towards applying
NEW PROACTIVE concepts of good faith and the duty
APPROACH OF THE to warn. The paper deals with each
COURTS TO in turn. The cases mentioned are
CONSTRUCTION referenced and summarised in lists,
CONTRACTING one at the end of the first section of
the paper on good faith, and the
Irene Wales second at the end of the second half
Partner, Construction & of the paper, on the duty to warn.
Transport Group
GOOD FAITH
PricewaterhouseCoopers The development of the duty of
Legal, good faith is one of the most
Sydney significant developments in the
body of Australian contract law of
recent times. The courts have spent
a considerable amount of time
addressing the operation of the duty
and the circumstances in which it
can be implied, and have identified
the issues which have the capacity
to disrupt the long established
principles serving the interests of
contractual certainty. The cases
cover a wide range of factual
commercial situations outside the
construction industry, but given the
important general nature of the
principle, it will doubtless be
applied to construction contracts in
equal measure to other kinds of
commercial agreements. Its
application to joint venture and to
tendering and process contracts
makes it especially relevant to
practitioners in the construction
industry.
Before 2001, the circumstances in
which an obligation to act in good
faith was implied were generally
described as falling into particular
categories or classes; for example,
leases, motor dealership contracts,
tender process contracts etc.
However, a milestone in NSW
occurred in 2001 when the NSW
Court of Appeal, comprising
Sheller, Beazley and Stein JJA
delivered its joint judgment in
Burger King Corporation v Hungry
Jack's Pty Ltd. The judgment
upheld the decision of Rolfe J in the,
court belowwhich confirmed the
existence of a general implied duty
6 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003
of good faith and reasonableness in
contract performance [as distinct
from contract formation) in
Australian contract law. The case
also adds to the categories of
agreement to which the duty
applies.
The duty of good faith creates
obligations on contracting parties
both at formation and in
performance of the contract. The
issue of practical relevance is that
the duty of good faith may disturb
the settled principles of contract
law as they relate to contract
performance by imposing a cap on
the parties' capacity to exercise
their contractual powers. This paper
reviews the development of the
duty of good faith and
reasonableness as a duty arising in
both contract formation and
performance, and highlights the
present concerns and challenges
facing both the courts in refining the
duty, and contracting parties who
must operate within its constraints.
BURGER KING
The Facts
In an attempt to strengthen its
Australian presence, Burger King
entered into a series of
development agreements with
Hungry Jack's. Burger King then,
however, used its contractual power
to impede Hungry Jack's capacity to
perform its obligations by refusing
to approve development proposals
and withdrawing its financial and
operational support. Burger King
then purported to terminate the
contract. Hungry Jack's
commenced proceedings seeking
orders that Burger King's conduct
lacked good faith and that its
termination of the contract was
wrongful.
The Finding
The court found Burger King's
termination was indeed wrongful
and resulted from its deliberate
attempts to impede Hungry Jack's
capacityto perform its contractual
obligations. Specifically, these acts
were held to be in breach of the
duty of good faith and
reasonableness which the court
implied into the contract. The court
said that terms requiring good faith
and reasonableness were implied
into the development agreement in
this case, and that they were
implied as a matter of law. They
acknowledged that the
development agreement did not
fall into any of the traditional
classes of case where these terms
had hitherto been implied, and the
decision therefore extends the
principle into this 'new' class of
agreement.
Underlying Fairness
Inherent in Contractual
Justice
The court's rationale in Burger King
for its findings appears to be that
the law of contract should be
developed to embrace notions of
good conscience and good faith in
an attempt to strengthen and
encourage the use of contracts as a
means of sound commercial
practice. This can be gleaned from
comments made by the judges in
their decision. The history of these
attempts by the courts to govern the
practice of contracting have, over
time seen the introduction of
defined rules and standards as to
the manner of both entry into and
performance of commercial
contracts. A good example of this
behaviourwas the introduction of
the Trade Practices Act.
The problem with such an approach
by the court is that it may have
some unwanted consequences. For
instance, because the common law,
as distinct from legislation,
develops graduallywith each new
decision, the absence of defined
rules and standards of what does or
does not constitute good faith
increases the risk that otherwise
certain contract terms may become
uncertain of operation. This is
particularly so because the
decisions of the courts which have
contributed to the formation of the
duty of good faith appear to indicate
a willingness by the courts to depart
significantly from the well-
established principles of contract
law when deciding the extent to
which one party can or may behave
pursuant to their contractual rights.
If this is the case, it is not
inconceivable that contracting
parties might in proceedings assert
a breach of the implied duty of good
faith in order to seek relief from
otherwise clear contractual
obligations. Indeed it is not
inconceivable that the implied duty
of good faith might be used by one
party to suggest the 0 the r party has
misused, or is intending to misuse,
its contractual powers as a way of
increasing commercial pressure in
contract negotiations or during
performance of a contract.
Notwithstanding these concerns,
the courts do appear to be
committed to maintaining a stable
basis for contractual activity.
The Integrity of the
Contractual Objective Takes
Prominence Over
Contractual Certainty
The need to provide a stable basis
for contractual relationships is of
primary importance. The recent
good faith decisions appear to
potentially downplay the
importance of certaintywhere
unfairness may otherwise result
from its enforcement. The need for
a set of defined rules and standards
rather than an indeterminate
standard of conduct that nobody
entirely grasps was something that
Gummow J addressed in Service
Station Association Ltd vBerg
Bennett & Associates Pty Ltdin
1993. This has not, however,
deterred the courts from imposing
the duty where fairness requires it
in the more recent cases.
AUSTRALIAN CONSTRUCTlpN LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003 7
The Scope and Operation of
the Duty of Good Faith
Having indicated that certainty in
contract may be at risk, we turn to
examine what is of known about the
scope and operation of the implied
duty of good faith and
reasonableness.
In previous cases, where the duty of
good faith was imposed, it was
restricted to particular classes of
contract or conduct so that the
presence or absence of good faith
could be determined by reference
to the standard of conduct which
can be reasonably required in those
particular circumstances. However,
by extending the duty to
development agreements of the
type considered in Burger King, the
court has taken another step
towards the point where eventually
courts will apply the duty generally
in contract law. This development
heightens the importance of
articulating the defined rules and
standards as to what the duty of
good faith requires of contracting
parties.
The court's willingness to impose
the duty of good faith on contracting
parties is clear: What is less than
certain is what that duty actually
demands.
The duty of good faith has proven
difficult to define and has resisted
attempts to describe the standard
of conduct which will meet its
requirement and that which will
offend it. A starting point is Mason
J'Sl attempt to define the duty by
reference to the characteristics
which will support it. That
formulation required the parties'
loyalty to the contractual promise
and their honesty and
reasonableness in its performance.
However, Mason J did not
particularly articulate the conduct
which would demonstrate
compliance with the duty.
The difficultywith imposing a
standard by reference to qualities
such as honesty is that they are
The courfs willingness to
impose the duty of good faith
on contracting parties is
clear. What is less than
certain is what that duty
actually demands.
8 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003
notions of personal character
ratherthan standards of conduct
which can be tested objectively.
Einstein J in Aiton v Transfield
considered the operation of the duty
both internationally and within
Australian law before attempting to
define the scope of the duty. That
attempt produced a useful guide as
to the standard of conduct which
will see the duty breached,
however, did not contribute much to
the definition of what the duty
requires in orderto avoid its breach.
Burger King's contribution to the
formulation of a standard is that the
implied duty of good faith and
reasonableness is there to ensure
thatwhile powers underthe
contract may be exercised to
achieve a party's legitimate
contractual interests, they may not
be exercised for a pu rpose
extraneous to the contract. In other
words, it may be a breach of the
duty of good faith where a party
exercises its powerto pursue an
objective which the parties did not
enter the contract to achieve. The
result of this appears to be the
emergence of a duty to act
reasonably in pursuit of the
contractual objectives. Such a view
of the duty does not limit the
parties' capacity to use reasonable
pressure in commercial practice,
however, itwould appearto require
the parties to act reasonably in
pursuit of their contractual aims.
Where a party contracts for a
particular purpose and
subsequently changes its goal,
good faith may bind it to the proper
performance of the contract, by
reference to the original goal or
goals.
Parallels Between Good
Faith and Unconscionability
Acting fairly, reasonably and in
good faith are terms often used
interchangeably in Australian
contract law. The duty of good faith
is a dutyto refrain from conduct
which is capricious or
unconscionable. Since lack of good
faith resembles unconscionability at
equity, it is a natural extension of
the law that the duty of good faith
be moulded by the standards of
conduct identified as
unconscionable. It is interesting to
note at this point that
unconscionabilitywithin the
common law and under the Trade
Practices Act is a concept confined
to particular classes of contract.
The class limitation facilitates the
imposition of an objective standard
of conduct bywhich to measure any
misconduct by the parties because
a comparative examination of the
behaviour complained of and the
behaviour required by the duty can
be undertaken.
Withdrawing the class limitation
makes the task of defining the
standard of conduct which will show
the parties have acted in good faith
more difficult. An objective standard
cannot be applied to a landlord and
tenant relationship in the same way
it would to joint venturers. Clearly
the commercial relationships
involved create different obligations
requiring the importation of
subjective standards. The
established principles of
unconscionability may however
assist in identifying the obligations
which the duty of good faith and
reasonableness create. For
example, section 51AD of the Trade
Practices Act requires compliance
with relevant Industry Codes. The
benchmark forthe conductwhich
will not contravene these
unconscionability provisions is
determined on an industry-specific
basis.
When Will the Duty Apply
and What Conduct Amounts
to a Breach?
The following overview of some of
the recent cases may give some
guidance on what behaviour might
put a part at risk. This list is by no
means exhaustive, and is intended
as a sample only.
OVERVIEW OF RECENT
CASES-GOOD FAITH
1. Renard Constructions (ME) Pty
Ltd v Minister for Public Works
(1992) 26 NSWLR234
Type of Agreement: Construction
Contracts.
Finding: Showcause clauses-duty
to act reasona bly in:
(a) identifying breach which would
activate clause; and
(b) considering whether or not
adequate cause shown-here the
dutywas breached.
Comment: The duty has
subsequently been extended to
other clauses in construction
contracts, e.g. clauses reserving
valuation powers to employers,
clauses empowering a contractorto
value progress claims by a
subcontractor.
2. HughesAircraftSystems
InternationaL vAirservices
Australia (1997) 76FCR 151
Type of Agreement: Tender
'process' contracts.
Finding: Duty on public bodies who
are party to a tender process
contract to:
(a) conduct tender evaluation
process fairly; and
(b) deal fairly with tenderers.
Did not considerwhetherthese
terms breached here as case
decided on breach of express
process contract terms.
Comment: The judge said
nevertheless that there was
'evidence enough to warrant
Hughes' allegation of a breach of
the fair evaluation/fair dealing
terms'.
3. Aiton v TransfieLd[1999] NSWSC
996
Type of Agreement: Construction.
Finding: Express obligation to make
'diligent and good faith efforts to
resolve all disputes' was
unenforceable as tied to an
unenforceable mediation
agreement.
However, per Einstein J: 'To my
mind, a notion of good faith is
implicit in any alternative dispute
resolution procedure, as without it
there is no chance of reaching a
mutually satisfactory conclusion'.
The judge then spelled out the core
content of the obligation:
(1) to undertake to subject oneself
to the process of negotiation or
mediation (which must be
sufficiently precisely defined by the
agreement to be certain and hence
enforceable); and
(2) to undertake in subjecting
oneself to that process, to have an
open mind in the sense of:
(a) a willingness to consider
such options for the resolution
of the dispute as may be
propounded by the opposing
party orthe mediator, as
appropriate; and
(b) a willingness to give
consideration to putting forward
options for the resolution of the
dispute, L........ J.
Comment: In this case, the judge
held that a fu rther ba r to the
plaintiff being successful was the
fact that it had not invoked the
dispute resolution procedures
consistently itself.
4. Garry Rogers Motors (Aust) Pty
Ltd vSubaru (Aust) Pty Ltd(1999)
ATPR41-703
Type of Agreement: Motor
dealership agreements.
Finding: Held that there was an
implied duty of good faith in such
agreements, but the franchiser had
not breached it. In fact the
franchisee was in breach of its own
obligations, such that the franchiser
was entitled to terminate.
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003 9
5. Burger King vHungryJacks
[2001] NSWCA 187
Type of Agreement: Franchising
development agreement.
Finding: Held that the development
agreement was subject to implied
terms of cooperation, good faith
and reasonableness. Burger King
had breached those terms by:
(1) imposing a freeze on awarding
of franchises to third parties;
(2) withdrawing financial approval;
and
(3) withdrawing operational
approval.
6. ALcateL Australia Pty Ltd v
Scarcella (1998) 44NSWLR 349
Type of Agreement: Lease.
Finding: Held that a duty of good
faith could by implication be
imposed as part of a contract; in
this case a lease. However, it was
held not to be a breach of good
faith forthe lessorto pressure
council to issue fire orders with
respect to demised premises which
were more stringent than those
which the tenant would otherwise
have had to complywith. 'The
respondents had a legitimate
interest in ensuring the building
was properly protected.'
7. Advance Fitness Corp Pty Ltd v
Bondi Diggers MemoriaL &
Sporting CLub Ltd[1999] NSW
SC264
Type of Agreement: Lease.
Finding: Also involved a fire order-
head lessee used the fire order as
an excuse to close the premises
and terminate the sublease.
Nevertheless it was held that the
club's conduct was not
unreasonable.
Comment: This was despite the fact
that the club had an ulterior motive
in wanting to accept an attractive
development proposal.
8. Forklift Engineering Australia
Pty Ltd vPowerlift (Nissan) Pty Ltd
BC 200007795
Type of Agreement: Machinery
dealership contract.
Fi nd ing: Ad uty of good fa ith was
implied, and found to be breached
on both sides. It was not open to
one party to allege a breach of the
duty of good faith when it had
engaged in actions that constituted
a breach of the duty on its own part.
Comment: The judge drew a
pa,rallel with the equitable concept
of clean hands'.
9. LMIAustraliaPtyLtdv
BauiLderstone Hornibrook PtyLtd
BC 200106393
Type of Agreement: Heads of
agreement for stadium
management.
Finding:Adopted BurgerKing
principle that there are terms of
good faith and reasonableness
implied by law in virtually every
commercial contract. However
here no contract emerged out ~f the
heads of agreement and therefore
no occasion for such terms to be
implied.
Comment: The judge also stressed
that the implied terms are not
capable of rising above express
terms.
10. Cubic Transportation Systems
Inc &Anor vState ofNewSouth
WaLes &2 Drs [2002] NSWSC 656
revised-27/02/2003
Type of Agreement: Government
tender process contract.
Finding: Judge held that there was
an implied term of reasonableness
and good faith but found that the
plaintiff tenderer had itself been
guilty of gross breaches of its own
obligations of honesty, and thus its
claim failed.
Comment: This is another example
of the courts insisting that a plaintiff
alleging breach of good faith must
himself come to court with 'clean
hands'.
10 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003
THE DUTY TO WARN
Scope of Duty
The 'duty to warn' has emerged
gradually but inexorably over the
last 30 years into a well-recognised
concept in construction law in
common law jurisdictions, and has
been applied in a variety of
situations and to a variety of players
in the industry.
Though its genesis and foundations
are still the subject of some debate,
it is clear that it straddles both
contract and tort. The obligations it
imposes mean that not only must
parties look to protect those with
whom they have a direct
contractual relationship, but they
must also be concerned about
potential harm to others from
whom traditionally they have been
one step removed.
Hence, subcontractors have been
found liable to principals in respect
of the faulty design of the principal's
own engineer, project managers to
principals in respect of design which
theywere not themselves
employed to provide, and
contractors to principals where
faulty information or design was
provided by the principal's own
consultant.
The result is to throw the spotlight
on the interdependence of roles in
an ever more sophisticated industry.
It seems likely that this continued
trend will have effects on insurance
the drafting of contractual
indemnity clauses and more
practically, the extent to which
parties may feel encouraged or
obliged to take on the role of
'whistleblower' on site.
At the end of this paper is a
summary of nine cases in this area,
several of which are referred to in
the course of this paper. Those who
wish to read further may find the
remaining cases of assistance.
Foundations of the Duty to
Warn
The courts have viewed the duty as
arising in various ways, of which
three main ones are apparent:
1. Some of the earlier cases
discussed in this article seem to
suggest that the duty is grounded in
a kind of 'fitness for purpose'
obligation, where a party (generally
a contractor) enters into a contract
with an ownerwho has in some way
placed reliance on the contractorto
ensure that the resulting building
(or other structure) fulfils the
intended purpose. Hence,
notwithstanding that the contractor
himself may not be contractually
responsible forthe particular
defective design orwork, he may be
found liable for the consequences
of not warning the owner of the
risks of the substandard design or
work in question.
2. Other cases see the duty to warn
as arising out of either an express
or an implied contractual obligation
to act with the skill and care of a
reasonably competent contractor
(or project manager etc.). This
approach is more common in
recent cases.
3. Thirdly, there are some cases
where the duty has been identified
as arising in tort, as an extension of
a duty to exercise due skill and
care. The tort approach has,
however, encountered difficulties in
the jurisdictions where it has been
'
attempted. This is partly because of
the principle that that duty will only
extend to acts and omissions which
are liable to cause injury to persons
or damage to property other than
the building being constructed, and
partly because damage which
amounts only to pure economic
loss is irrecoverable in tort. As the
law on both those principles has
developed somewhat differently in
Austra lia, however, it wi II be
interesting to see whetherthis area
develops in this country.
What Conduct will
Constitute Failure to Warn?
Although space will not permit of a
detailed review of all nine cases, a
brief review of five representative
samples of the cases will provide
an idea of the range of conduct
which has been held to be a breach
of the duty.
1. Brunswick Construction Ltd v
NowLan (1974) 21 BLR27
The contractor in this case entered
into a contract for the construction
of a house according to a design
specified by architects employed by
the owner. Although the contract
contemplated that an engineer
would be appointed to supervise the
works, no engineerwas appointed
and the contractor was to carry out
the work on his own. The contract
specified that 'the contractor shall
give efficient supervision to the
work using his best skill and
attention' .
The house developed serious leaks
and eventually required major
repairs. The problem appeared to
be that there was inadequate
ventilation in the roofwhich led to
rotting of the timbers.
The owner took out proceedings
against the contractor for breach of
contract. He lost at first instance,
but this was reversed on appeal.
The contractor further appealed to
the Supreme Court of Canada.
The Supreme Court upheld the
decision of the Appeal Court in
favour of the owner, saying that:
(a) a company of the experience of
the contractor should have detected
that the design of the house was
bad;
(b) since no engineer or architect
was appointed to supervise, it was
clear that the owner relied on the
skill and attention of the contractor;
(c) since the contractor knew of the
reliance which was placed on him,
he was under a duty to warn the
owner of the danger inherent in
executing the architects plans,
particularly in relation to the The ~duty to warn' has
inadequate ventilation; emerged gradually but
(d) the contractor's obligation was inexorably over the last 30
to carry out work which would years into a well-recognised
perform 'the intended duty or concept in construction law
function' and that obligation
in common law jurisdictions,
overrode the obligation to comply
with the plans and specifications; and has been applied in a
and variety of situations and to a
(e) the contractorwas liable forthe
variety of players in the
failure of the work even though it industry.
was carried out in accordance with
the plans and specifications.
It is clear that in this case reliance
was an important factor. But forthat
factor, the implications of the
judgmentwould be ratherstartling;
that a contractorwho is engaged to
perform work on the basis of design
prepared by another forwhom the
owner is responsible, can be liable
forthe failure of that design. Later
cases, particularly Plant
Constructions, make it clearthat
findings such as this are to be
interpreted very much within the
confines of the facts of the
particularcase.ln otherwords,
such findings are not to be taken as
applying necessarily to other
similar cases.
2. Victoria Unj1~·ersity ofManchester
vHugh Wilson (1984) 2 Const LR 1
The case concerned defects
appearing in tiled cladding to
buildings owned by the University.
The University commenced action
against the architects, the
contractors and nominated
subcontractors. Proceedings were
settled against the architects but
one of the questions which arose
was whether the contractors had a
duty to warn the architects of
defects in design. The judge said
that:
In this case I think that a term was
to be implied in each contract
requiring the contractors to warn
the architects as the University's
agents of defects in design, which
they believe to exist. Belief that
there were defects required more
than mere doubt as to the
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003 11
 correctness of the design, but less
than actual knowledge of errors'.
In reaching this conclusion, the
judge relied on the case of Duncan
v Blundell (1820) 3 Stark 6, and on
Brunswick Construction Limited v
Nowlan, both of which
acknowledged reliance to be a
factor in finding that the duty
existed.
This case goes a little further,
however, than Brunswick, in that Mr
Justice Judson in Brunswickfound
that:
A contractor of this experience
should have recognized the defects
in the plans which were so obvious
to the architect, Arnoud,
subsequently employed by the
respondents ...
In other words, the defects were
obvious. In this case, however, the
duty is said to extend to defects in
design which the contractors
'believe to exist'. This is a much
lower th reshold.
Again, however, the more recent
decision of Plant cautions that
cases such as this should be
restricted to thei r facts.
3. Palermo Nominees Pty Ltd v
Broad Construction Services Pty
Ltd[1999] 15 Bel 20
The defendant project manager
was employed to design and
construct a nightclub. The internal
acoustics were found to be
defective. The contract provided
that the project managerwas to
'furnish the necessary professional
skills, superintendence ... · to ensure
that the project was completed 'in a
thorough and workmanlike
manner' The project manager
failed to identify the need for an
expert acoustics consultant for the
interior of the nightclub. The judge
said:
/ am also persuaded that a
competent builder and project
manager in the circumstances then
existing would have made such a
request !i.e. to appoint an expert
acoustics consultant]. Further, had
12 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003
the plaintiffs been hesitant or
reluctant to agree to the request, a
competent builder and project
manager would have sought to
impress upon them the importance
of obtaining such a report for
ensuring the achievement of the
plaintiffs objectives and compliance
with the defendant's contractual
obligations.
The judge held that had a report
been obtained, the likelihood was
that itwould have recommended
the correct solution to solve the
problem.
However, the judge did not
specifically address the issue of
whether or not the ownerwould
have acted on the warning given. It
appears that the judge merely
assumed that that would have been
the case. The judge found that the
project manager had been in
breach of contract.
4. Plant Constructions Plc vClive
AdamsAssociates andJHM
Construction Services Ltd[2000]
BlR137
In this case the Ford Motor
Company employed Plant
Constructions to design and
construct two pits for engine mount
rigs. Plant engaged JMH as a
subcontractor It was part of the
subcontract that JMH was to
complywith instructions given by
Ford's senior engineer, Mr Furley.
Clive Adams Associates were
engaged as consulting structural
engineers by Plant.
During the project, Mr Furley for
Ford instructed JMH to support the
roof trusses by mea ns of fou r Acrow
props at specified positions. The
propping was inadequate and
collapsed.
The judge held that the temporary
roof su pport works were obviously
dangerous and were known by JMH
to be dangerous. It was further held
that JMH had an implied obligation
to perform with skill and care which
carried with it an obligation to warn
of the dangerwhich they perceived.
Such warnings were not given.
The Court of Appeal referred the
matter to the trial judge on the
issue of causation. The trial judge's
findings on that question are
contained in a later section of this
paper and will not be repeated
here. However, the Court of Appeal
made the following important
comments on the extent of the duty:
Any analysis of implied terms in a
building contract must start with
and take proper account of express
terms. Subject to the express terms,
there will normally be an implied
term that the contractor will
perform his contract with the skill
and care of an ordinarily competent
contractor in the circumstances of
the actual contractor. In my
judgment, the factual extent of the
performance which this term
requires, will depend on all
relevant circumstances which may
vary enormously. I shall not attempt
to make a comprehensive list of
possible circumstances.
Although in this case the
subcontractor ought to have
warned of such an obvious danger,
the court went on to say:
I would expressly reserve for future
consideration circumstances
where:
fa} the contractor did not know, but
arguably ought to have known, that
the design was dangerous; and
fb} there was a design defect, of
which the contractor knew or ought
to have known, which was not
dangerous.
5. Pride VaLLey Foods Ltd vHaLL and
Partners [2000] EWHC Technology
106
Hall & Partners were engaged as a
project manager for the
construction of a bread factory.
Because of the use of certain
flammable insulating panels, fire
spread throughout the factory and
destroyed it. The claim against the
project managerwas that it caused
the fire by failing to discharge its
contractual duty of care. By the
contract, Halls were under an
obligation to exercise reasonable
care and skill in relation to the
duties which they agreed to
undertake. It was accepted that this
included the giving of appropriate
safety advice to Pride Valley.
There was a direct conflict on the
evidence as to whether the project
manager had in fact given a
warning to the owner of the dangers
concerned with utilizing the
particular insulation panels which
the ownerchose.ln the event, the
judge found that the project
manager had not given the warning
which it was claimed to have been
given.
The judge set out the detailed type
of information which he believed
the project manager should have
included in its warning. This
information was based on
knowledge of the product which the
court found the project manager
had at the time. The court also
found that the project manager's
knowledge of the danger of
installing these particular panels:
went beyond that which was
generally accepted by fire officers
and others in the industry for whom
the use ofsuch panels was
acceptable. If Hall had such
knowledge at the time they should
have communicated the nature and
extent of the risk of the use of EPS
panels to Pride Valley.r... JIf Halls
had given Pride Valley this advice
and it had been accepted I find that
on the balance ofprobabilities the
fire would not have occurred.
As can be seen from extracts
contained in the following section
on the question of causation, the
judge in fact found that the owner
would not have followed the advice
given. The court did find that the
project managers, as a competent
and prudent firm of quantity
surveyors and project managers,
should have given the advice in
writing. However, the court did not
consider how much further the
warnings should have been taken.
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003 13
The Question of Causation
One of the more interesting aspects
of the duty to warn is that it carries
with it an essential subsidiary
question: Would the party receiving
the warning have acted on it? In
other situations where a duty of
care or a similar duty is being
considered, whether arising in
contract or in tort, the particular
breach usually involves some
visible consequences which can
readily be examined to see whether
they have caused the loss
complained of. In most cases, the
question of causation can be
disposed of by hearing expert
evidence, from which a judge can
often readily arrive at a conclusion.
However, in the case of a duty to
warn, quixotic aspects of human
nature intervene. Just as one may
lead a horse to water but not make
it drink, one may warn a party but
not oblige him to heed that warning.
Many of the cases gloss over this
aspect, or assume that the party
being warned would have acted in a
way which, with hindsight, would
have appeared sensible and logical.
However, some of the more recent
cases, in particular, Plant
Constructions and Pride Valley
Foods Limited, examine this issue
more directly.
In Plant Constructions, His Honour
Judge Hicks of the Technology and
Construction Court examined what
the consequences of adequate
warning might have been:
Again it would be difficult and is
unnecessary to make detailed
findings as to the course which
events would then have followed. It
would be difficult because the
contingencies are so varied. Plant
might or might not have instructed
MrAdams to carry out the
necessary calculation to
demonstrate the inadequacy of Mr
Furley's scheme or to design an
adequate and safe one. If they had
done so, Mr Adams would, on his
evidence, have required an
14 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003
additional fee, which Plant might or
might not have been prepared to
pay. If the calculations had been
done they would have shown that
the scheme was unsafe but might
or might not have persuaded Mr
Furley of his error. If so, and if Mr
Adams had produced a safe design,
Mr Furley might or might not have
accepted it, and in the latter event
might or might not have produced a
new and safe scheme of his own.
Despite this considerable degree of
uncertainty, the judge went on as
follows:
It is unnecessary to make such
findings because whatever the
detail of the route there were, on
my findings above as to what JMH
should have done, only two possible
destinations. Either there would
have been a new design which JMH
could consistently with its safety
responsibilities accept orJMH
would have declined to execute
what it believed to be an unsafe
scheme. f. ..J It is in my view a
legitimate, and indeed inevitable,
inference that on the balance of
probabilities there would have been
no collapse had there been a
design which JMH, on the above
basis, accepted.
It is notable that the judge did not
considerwhether or not there
would have been any collapse had
JMH not been presented with any
design with which it was happy.
Indeed, elsewhere in the judgment,
thejudgeasked howfar JMH
should have gone in carrying
through its warning:
The crucial question is whether
JMH could and should, in the last
resort, have refused to continue
work if the safety of workmen was
at risk, as it had done in the case of
the ring main. I am clear that it
could and should have done so.
It is clear from this that the judge
accepted that there was no
certainty that the warning would be
accepted, but he seemed to be
clear in his own mind that if worst
came to worst, JM H could simply
refuse to work further (whether or
not that might have been in breach
of contract) and that to that extent
the duty to warn would have been
discharged, whether or not the
collapse eventually occurred.
Although this seems rather
extreme, it is, I submit, the logical
conclusion which that line of
enquiry eventually reaches. The
judge no doubt considered such
evidence as was put before him as
to the likely conduct of the parties
being warned, and has bravely
tackled head on the uncertainty
which that evidence produced.
It is submitted that whilst every
case will be different on its own
facts and there may well be cases
where evidence of what the warned
party would have done is
compelling, in many cases the duty
to warn will continue to suffer from
the shadow of this subsidiary
question.
In Pride Valley Foods Limited, an
even more interesting situation
arose. The judge in that case was
asked to directly address the
question of whether the advice
would have been followed. He dealt
with it in this way:
Mr Rezaei says that if the advice
had been given in clear terms he
would have accepted it even if it
meant that the cost of the building
was substantially increased.
I find that Mr Rezaei was an honest
witness who nowgenuinely
believes that if Halls had given the
advice in the terms in which they
say they did he would have
accepted such advice and the fire
would never have occurred.
I do not find that he would have
done so. I have come to the
conclusion that Mr Rezaei would
have rejected Hall's advice unless it
was supported by a requirement
from the Planning or Fire
Authorities and/or was required by
his insurers.
/ do not regard this attitude as
unreasonable ....
Here the judge had ample time to
assess the witness and form his
own conclusion. Interestingly, the
judge did not consider this question
under the heading of causation, and
instead examined causation in a
different way, namelywhetherthe
use of the defective materials in the
way in which they were used in this
case involved a foreseeable risk of
fire. In otherwords, the judge
examined the physical chain of
causation but considered the
question of whether or not the duty
to warn would have been acted on
as a separate issue. He summed up
his thinking as follows:
/ conclude on all the evidence that
the loss, i.e. damage by fire was
entirely foreseeable and that the
failures of Halls to warn Mr Rezaei
of the nature and the extent of the
risk of which they were aware
would have been an effective cause
of the loss if / had concluded that
Pride Valley would have accepted
and acted upon the advice.
Contributory Negligence
Another interesting feature of the
cases involving a duty to warn is the
extent to which contributory
negligence has been a feature of
the decision. Space in this paper
will not permit of an exhaustive
analysis of how this issue has been
dealt with in the cases, but the
summary at the end of this paper
provides a check-list for readers
interested in considering this issue.
Possible future directions
Whilst the duty to warn has not
reached far into Australian case law
as yet, Palermo Nominees Pty
Limited has already meant that the
concept has a robust foothold in this
country. The obligations imposed by
that case on project managers go
further than a requirement to
merely give a simple warning, and
places an onus on a class of
construction industry participants
who are not even recognized as a
separate profession, and must give
them pause forthought as to their
potential liabilities and the
inevitable effect it will have on their
insurance requirements.
Given that robust beginning, it
seems likely that Plant
Constructions and Pride Valley
Foodswill find some resonance in
Australian courts when the matter
next arises for consideration.
Hitherto, there is little to suggest
that the concept of the duty to warn
will take on a life of its own
independent of a basis in contract
ortort, but given the direction being
taken in the area of good faith, it is
not out of the question that a similar
philosophical approach might not
be applied. Inth e cas e 0 f the duty to
warn, its environment is further
affected by increased regulation in
the areas of environmental
protection and occupation health
and safety. At all events, the
message to industry participants is
to watch the development of this
concept with a wary eye, and most
certainly to err on the side of
caution where defective design or
da ngerous construction methods
come to light. It seems safe to say
that integration of responsibility for
safety and defects on construction
sites is the most likely direction for-
this area of the law to take, rather
than a return to strict and narrow
contractual interpretation of
res po nsib ility.
OVERVIEW-DUTY TO
WARN CASES
1. Brunswick Construction Ltd v
Nowlan (1974) 21 BLR27
Allegation: Breach of contract by
contractorwhere the house is
virtually uninhabitable, despite
being constructed in accordance
with plans prepared by owner's
architect.
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003 15
Contract/1o rt: Contract (empmasis
l
on reliance-owners did not employ
architectto supervise construction).
Finding:,lhe contractor undertook
to carry out the work to 'pe,rrform a
certain duty or furnction', irm
accordance with plans and
specifiications.The works
constructed in accordance with the
plans and specifications could not
perform that duty or function. The
contractor was in breach of a duty
towarn the owners of the danger
inherent in executing the architect's
plans.
Causation: Not directly considered.
Contributory Negligence: Not
relevant.
2. Victoria University ofManchester
v Hugh Wilson (1984) 2 Canst lR 1
Allegation: That contractor had a
duty to warn the architect (as agent
of principal) of defects in the
architect's own design.
Contract/Tort: Contract-reliance
appeared to be an issue.
Finding: A term was to be implied
into contract requiring the
contractor to warn the architect (as
the university's agents) of defects in
design, which they believed to exist.
'Belief required more than mere
dou bt as to the correctness of the
design, but less than actual
knowledge of errors.
Causation: Not directly considered.
Contributory Negligence: Not
relevant.
3. Triple A Investments Ltd vAdam
Brothers Ltd(1985) 23 DlR (4 th )
Allegation: Breach of obligation to
perform work in a proper and
workmanlike mannerwhere the
contractor knew that, because the
site was not properly compacted,
the building would not be fit for its
purpose.
Contract/Tort: Contract-reliance
an Issue.
Finding: Contractor must be taken
to have known that fill had not been
properly compacted. Contractor
16 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003
had a duty to warn the owner that it
was impossible to erect a building
on the site as it existed without
resulting in damages.
Causation: Not directly consi'dered.
Contributor)' Negligence:: N'ot
relevant.,
4. UniveJfSityCourt ofGiasgowv
Whitfie,IdandJohn Laimg
(Construction) Ltd(19fJ8) 42 BlR 66
J
Allegation: Architectsclaimed
against the contractor in third party
proceedings, alleging negligence in
construction or failure to warn the
university or architect of defects in
the architect's design of art gallery.
Contract/Tort: Both.
Finding: Re. University-Contract
had no liabilityforcontribution
based on any liability to the
university in contract, as statute-
ba rred by Civil Liability
(Contribution) Act 1978. Also, no
duty in tort, as that would be limited
to avoiding damage to property
otherthan the building.
Re. Architect-Could only be in tort
as there was no contractual
relationship. Here-no duty to avoid
what could only be economic loss to
the arch itect.
Causation: Not relevant.
Contributory Negligence: Not
relevant as between contractor and
architect.
5. Edward Lindenburg v Joe
Canning(1992) 62 BlR 147
Allegation: Contractor in breach of
an implied term to work with skill
and care and in good and
workmanlike mannerwhere he
demolished load-bearing walls,
which were marked 'non-load-
bearing' on plan by the owner's
surveyor.
Contract/Tort: Contract.
Finding: Contractor in breach of
duty. Contractor should have:
(a) realised wall likely to be load-
bearing;
(b) raised doubts with surveyor (i.e.
duty to warn); and
(c) even if surveyor had given
assurances, should have put up
temporary propping.
Causation: Not directly considered.
Contributory Negligence: Yes-
surveyor 75% responsible and
CGJHl1ltractor 25%.
Ii. Bow Valley Husky (Bermuda) Ltd
v'SaintJohn Shipbuilding Ltd
(Supreme CaurtofCanada,
judgment deliM!red December
1997)
Allegation: Supplier alleged to
have breached duty to warn owner
about flammability of therm!al
wrapping.
ContractlTort: Tort.
Finding: Supplier found liable to the
owner for breach of duty to warn,
despite the fact that the supplier
warned the contractor and despite
the fact that the owner knew as
much about the product as did the
supplier and contractor (owner had
selected supplier-contractor had
not).
Causation: Addressed-held that
the owner would have either
declined to use thermal wrapping
or taken steps to deal with its
inflammability had it been warned.
Contributory Negligence: Owner's
claim reduced by 60% to take
account of the owner's negligence.
7. Palermo Nominees Pty Ltd v
Broad Construction Services Pty
Ltd[1999] 15 BCl 20
Allegation: Project manager
alleged to be in breach of
contractual duty as competent
builder and project manager, to
warn the owner of the dangers of
not securing a report of an expert
on internal acoustics of the
nightclub.
Contract/Tort: Contract.
Finding: Project manager in breach
of contract in failing to recommend
to the ownerthe appointment of an
expert consultant on internal
acoustics. Had the owner been
reluctant, a competent builder and
project ;managerwould have sought
to impress upon the owner the
importance of doing so.
Causation: If a report had been
obtained, the likelihood is that it
would have recommended a
correct solution (no analysis of
whether ownerwould have acted
on itl.
Contributory Negligence: Not
addressed.
8. Plant Constructions Plc vClive
Adams Associates [2000] BLR 137
Allegation: Subcontractor in breach
of an implied term to perform the
contract with the skill and care of
an ordinarily competent contractor
by not warning the owner of
dangerous temporary roof support
works.
Contract/Tort: Contract.
Finding: Held the subcontractor in
breach of an implied term. Factual
extent of the performance which the
implied term requires will depend
on all relevant circumstances in
each case. The duty to warn was not
a contractual duty, but arose out of
the implied duty of skill and care.
The trialjudge said the
subcontractor should have pressed
objections, which should have been
progressively more formal and
insistent if not met, including
reporting to regulatory authorities.
If necessary, should have 'downed
tools'.
Causation: Addressed-either a
new safe design would have been
adopted orthe subcontractorwould
have declined to carry out unsafe
scheme; therefore on the balance
of probabilities, there would have
been no collapse.
Contributory Negligence: Not
addressed.
9. Pride Valley Foods Ltd vHall and
Partners [2000] EWHC Technology
106
Allegation: That fire was caused in
a bread factory by the project
manager failing to discharge a
contractual duty of skill and care to
the owners.
Contract/Tort: Contract.
Finding: Projectmanagerwas
under duty to prepare a schedule of
requirements which to their
knowledge did not constitute an
unacceptable fire risk. If the owner
specified materials which were an
unacceptable fire risk, the project
manager had a duty to warn. This
dutywas breached. The project
manager had knowledge of the
danger of the materials which went
beyond the knowledge of the fire
department and others in the
industry. He should have
communicated this to owner but did
not.
Causation: Judge held that the
owner would have ignored the
advice, and therefore the owner
was not entitled to recover (this
amounted to a finding of break in
the chain of causation, although not
characterised that way by the
judgel.
Contributory Negligence: Had the
owner been entitled to recover,
would have reduced it by 50% due
to contributory negligence.
REFERENCE
1. Contract, Good Faith and
Equitable Standards in Fair Dealing
(2000) 116 LOR 66.
Irene Wales' paperwas presented
at the seminar Recent Issues in
Building & Construction Law,
presented by Legalwise Seminars
Pty Ltd, held on 28 October 2003 in
Sydney. Reprinted with permission.
Irene Wales acknowledges the
assistance of Helena Golovanoff,
and Andrew Wallis & Melanie
Maslem with regard to the section
on Good Faith.
AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #93 NOVEMBER/DECEMBER 2003 17