Blyth & Blyth Ltd v Carillon Construction Ltd

Factual and Procedural Background

The Plaintiff, a consulting engineering firm, brought an action seeking payment for professional services rendered. The Defendant, a building and construction company formerly known as Company A, counterclaimed for losses allegedly suffered due to breaches of contract by the Plaintiff. The relevant contractual provisions were contained in a Deed of Appointment executed between the Plaintiff and Company B (the employer) related to a leisure development project. The Defendant had entered into a building contract with Company B, assuming responsibility for design under amended standard form conditions.

The Deed of Appointment included provisions for a Novation Agreement, which was later executed by the Plaintiff, Defendant, and Company B. The Defendant’s counterclaim included claims for losses arising from alleged breaches of the Plaintiff’s duties prior to the Novation Agreement ("pre-novation breaches"), notably inaccuracies in design information provided before tendering. The central legal issue concerned the interpretation and effect of the Novation Agreement, particularly whether it retrospectively altered the Plaintiff’s duties and the party to whom those duties were owed.

Legal Issues Presented

1. Whether the Novation Agreement retrospectively substituted the Defendant as the party to whom the Plaintiff owed duties under the Deed of Appointment, effectively rewriting the Plaintiff’s obligations from being owed to the employer to being owed to the Defendant.
2. Whether the Defendant could recover losses for alleged pre-novation breaches of duty by the Plaintiff, notwithstanding that those duties were originally owed to the employer.
3. The proper measure and recipient of loss arising from alleged breaches of the Plaintiff’s contractual duties performed prior to the Novation Agreement.
4. The legal effect of the Novation Agreement clauses 4 and 5 in relation to pre-novation liabilities and whether these clauses operate as a novation, an assignation, or another form of contractual relationship.

Arguments of the Parties

Plaintiff's Arguments

• The primary interpretation of the Novation Agreement as retrospectively substituting the Defendant for the employer throughout the Deed of Appointment leads to absurd and nonsensical results in the contractual text.
• The Plaintiff’s duties remained owed to the employer, and the Novation Agreement did not retrospectively rewrite those duties to be owed to the Defendant.
• The natural measure of loss is that suffered by the party to whom the services were provided—the employer—not the Defendant.
• Clause 4’s reference to liability accruing before novation can only relate to duties owed to the employer, consistent with an assignation of the employer’s claims rather than a novation substituting parties.
• Even if the Defendant could claim for its own losses, the proper approach would require evidence of how the correct information would have affected the tender price, which was not advanced.
• The Novation Agreement does not constitute novation in the strict legal sense, as the employer’s rights and obligations were not extinguished.

Defendant's Arguments

• Initially, the Defendant’s pleadings advanced a primary case that the Novation Agreement retrospectively substituted the Defendant for the employer, rewriting the duties owed by the Plaintiff.
• However, at debate, the Defendant abandoned this primary approach and accepted that the Novation Agreement did not alter the scope or content of the Plaintiff’s duties, which remained owed to the employer.
• The Defendant contended that after novation it became the creditor entitled to enforce the Plaintiff’s obligations to the employer, effectively creating a tri-partite relationship: the Defendant engages the Plaintiff to provide services for the employer.
• The Defendant argued that due to the building contract placing design responsibility on the Defendant, the employer could not suffer loss, so the Defendant must be entitled to recover losses directly from the Plaintiff.
• The Novation Agreement was intended to overcome a “liability gap” whereby the engineer would not normally be liable to the contractor for design defects.
• The Defendant disputed the existence of a conflict of interest in the Plaintiff advising both employer and contractor and cited Canadian authority recognizing duties owed to contractors in similar circumstances.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court examined the contractual framework comprising the Deed of Appointment, the building contract, and the Novation Agreement, focusing on the interpretation of the Novation Agreement’s clauses 4 and 5. The Court rejected the Defendant’s initial primary argument that the Novation Agreement retrospectively rewrote the Plaintiff’s duties from being owed to the employer to being owed to the Defendant, reasoning that such a wholesale substitution led to textual absurdities and conflicted with the practical realities of the parties’ relationships.

Instead, the Court accepted the Defendant’s alternative position that the Novation Agreement did not alter the scope or content of the Plaintiff’s duties, which remained owed to the employer. The effect of the Novation Agreement was that the Defendant became the creditor entitled to enforce those duties, creating a tri-partite relationship: the Defendant engaged the Plaintiff to provide services for the employer.

However, the Court held that in respect of pre-novation breaches, the losses recoverable must be those suffered by the employer, the recipient of the services, not losses suffered directly by the Defendant. The Court reasoned that the natural measure of loss is that suffered by the party for whom the services were performed and that the Defendant’s claimed losses were indirect or collateral consequences not recoverable absent a retrospective alteration of the Plaintiff’s duties, which was disclaimed by the Defendant.

The Court further considered the Defendant’s argument that the employer could not suffer loss due to the building contract’s design obligations placed on the Defendant. The Court rejected this, observing that the Deed of Appointment contained duties beyond those in the building contract and that the employer could maintain claims against the Plaintiff independently of claims against the Defendant. The Court also noted that the Novation Agreement did not extinguish the employer’s rights and that the Defendant’s position as creditor did not displace the employer’s claim.

Finally, the Court found that the Defendant’s contention that the Novation Agreement operated as anything other than an assignation or similar arrangement was unpersuasive, and that the contractual provisions allowed the employer to maintain involvement and control, including the ability to reverse the novation.

Holding and Implications

The Court held that the Defendant could not recover losses for alleged pre-novation breaches of duty by the Plaintiff where those duties were owed to the employer prior to the Novation Agreement. The Novation Agreement did not retrospectively alter the content of the Plaintiff’s duties but only changed the party entitled to enforce those duties.

DISPOSED OF

The direct effect is that substantial parts of the Defendant’s counterclaim relating to pre-novation losses are irrelevant and cannot succeed. The Court did not establish a new legal precedent but clarified the interpretation of novation agreements in the context of tri-partite contractual relationships in construction projects. The Plaintiff’s obligations remain owed to the employer, and the Defendant’s recovery depends on the employer’s loss, not the Defendant’s own losses.