Breaking the chain: when breach is not the cause of loss

By designing a hotel for twice the budget, Fosters breached the contract. But, this was not the reason the developer could not secure funding for the project and therefore Fosters was not liable for the developer’s lost profits: Riva v Foster + Partners.

The developer engaged Fosters to design a hotel for £70 million pounds; Fosters designed one for £195 million. Fosters then told the developer that the design could be “value engineered” down to £100 million; it could not. The court found that by this conduct Fosters had breached the contract and been negligent.

The court acknowledged that the fact Fosters’ design was so expensive meant that lenders could see that “the numbers simply could not be made to work”. Additionally, although the developer believed (on the advice of Fosters) that the build could be value engineered down to £100 million, lenders were hesitant.

The developer claimed that if Fosters had designed a hotel for £100 million in late 2007/early 2008, funding would have been obtained and a profitable hotel would have been built. The court disagreed and found that by that time, banks were less willing to lend and required borrowers to put more equity into projects, with the consequence that even if the build had been priced at £100 million, the developer would not have been able to obtain funding in that climate. Fosters’ breach was therefore not the effective cause of the developer’s loss of profits and the developer could not recover from Fosters.