In recent years, the cost of construction and building materials has increased in an unprecedented manner, causing more parties to work with cost estimates where a lump sum price cannot be provided or agreed. However, the NSW Court of Appeal's decision in Morris v Leaney  NSWCA 95 demonstrates some of the dangers that arise when cost estimates are utilised.
Mr. Leaney, the respondent architect, was engaged to design the home renovations of Mr. and Mrs. Morris, the appellant homeowners. The owners initially informed the architect that their budget was AU$300,000, but the architect advised that the budget was not achievable and provided the owners with a probable cost estimate of AU$590,000, excluding GST and other items. The owners revised their budget to AU$600,000. A builder was engaged on a cost-plus basis and the renovations ultimately cost AU$780,000, but only increased the value of the house by AU$330,000. The owners, among other things, claimed that the architect neglected to advise them as to whether their objectives could be achieved within their budget. The owners sought AU$450,000 in damages from the architect, being the difference between the cost of the building work and the rise in the value of the house as a result of those works.
In the first instance, the primary judge found that the architect had breached his duties under the contract and tort, noting that "if the [architect] felt himself unable or unqualified to give an accurate estimate of costs, he should have warned of that in writing and advised the [owners] to obtain an estimate from a properly qualified professional". Notwithstanding this finding, the primary judge held that the [owners] did not suffer any loss (as there was no evidence that, had the duty been discharged, they would not have pursued the renovations) and only awarded nominal damages.
The two grounds of appeal were:
- Having correctly found that the architect breached the contract and negligently failed to advise the owners about the likely costs of the building, and, in relation to the selection of an appropriate building contract, by permitting the owners to enter into a costs-plus contract with a builder who had not given a price, whether the primary judge erred:
- In finding that the owners did not suffer any loss
- In failing to assess the owners' damages on the basis of a "no transaction case"
- Whether the primary judge erred in failing to find that the owners suffered a loss of approximately AU$450,000
The Court of Appeal found that the primary judge had erred in finding that the owners did not suffer any loss. However, their Honours held that while the primary judge's approach to assessing damages was erroneous, they were unable to conclude on the evidence before them that, had the architect not breached his contractual and tortious obligations, the owners would not have undertaken the renovations. As such, the Court of Appeal rejected the second ground and dismissed the appeal. Critically, had there been sufficient evidence, the architect would have been liable for the difference between the cost of the building work and the rise in the value of the land. This aspect of the decision is likely to be cause for concern for industry consultants, likely resulting in a greater reluctance to provide cost estimates.
Morris v. Leaney serves as a timely warning to architects, and other industry consultants alike, of the inherent risk associated with advising clients on expected or estimated building costs, as well as neglecting to rectify a client's misunderstanding of what may be achieved within their budget. In light of the decision, consultants should consider including terms in their contracts that prohibit reliance on their cost estimates and direct owners to acquire estimates from qualified professionals if they feel unable or unqualified to give an accurate estimate of costs.