Judgments - Alfred McAlpine Construction Limited v. Panatown Limited

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    That appears to have been the conclusion adopted in St. Martins Property Corporation Ltd. v. Sir Robert McAlpine [1994] 1 A.C. 85, where my noble and learned friend Lord Browne-Wilkinson observed at p. 115:

    "In such a case, it seems to me proper, as in the case of the carriage of goods by land, to treat the parties as having entered into the contract on the footing that Corporation would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold McAlpine liable for breach."

In that case the point was made that the contractor and the employer were both aware that the property was going to be occupied and possibly purchased by third parties so that it could be foreseen that a breach of the contract might cause loss to others than the employer. But such foresight may be an unnecessary factor in the applicability of the exception. So also an intention of the parties to benefit a third person may be unnecessary. Foreseeablility may be relevant to the question of damages under the rule in Hadley v. Baxendale (1854) 9 Exch. 341, but in the context of liability it is a concept which is more at home in the law of tort than in the law of contract. If the exception is founded primarily upon a principle of law, and not upon the particular knowledge of the parties to the contract, then it is not easy to see why the necessity for the contemplation of the parties that there will be potential losses by third parties is essential. It appears that in the St. Martins case [1994] 1 A.C. 85 the damages claimed were in respect of the cost of remedial work which had been carried out. I see no reason why consequential losses should not also be recoverable under this exception where such loss occurs and the third party should have a right to recover for himself all the damages won by the original party on his behalf.

    The Albazero exception will plainly not apply where the parties contemplate that the carrier will enter into separate contracts of carriage with the later owners of the goods, identical to the contract with the consignor. Even more clearly, as Lord Diplock explained at p. 848, will the exception be excluded if other contracts of carriage are made in terms different from those in the original contract. In The Albazero the separate contracts which were mentioned were contracts of carriage. That is understandable in the context of carriage by sea involving a charterparty and bills of lading, but the counterpart in a building contract to a right of suit under a bill of lading should be the provision of a direct entitlement in a third party to sue the contractor in the event of a failure in the contractor's performance. In the context of a building contract one does not require to look for a second building contract to exclude the exception. It would be sufficient to find the provision of a right to sue. Thus as my noble and learned friend Lord Browne-Wilkinson observed in the St. Martins case [1994] 1 A.C. 85, 115:

    "If, pursuant to the terms of the original building contract, the contractors have undertaken liability to the ultimate purchasers to remedy defects appearing after they acquired the property, it is manifest the case will not fall within the rationale of Dunlop v Lambert 6 Cl. & F. 600. If the ultimate purchaser is given a direct cause of action against the contractor (as is the consignee or endorsee under a bill of lading) the case falls outside the rationale of the rule."

    In the St. Martins case the employer started off as the owner of the property and subsequently conveyed it to another company. In the present case the employer never was the owner. But that has not featured as a critical consideration in the present appeal and I do not see that that factor affects the application of the exception. In the St. Martins case there was a contractual bar on the assignment of rights of action without the consent of the contractor. In the present case the extra qualification was added that the consent should not be unreasonably withheld. But again I do not see that difference as of significance. It does not follow that the presence of a provision enabling assignment without the consent of the contractor excludes the exception. As was held in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68 where there is a right to have an assignment of any cause of action accruing to the employer against the contractor, the exception may still apply so as to enable the assignee to recover substantial damages. It may be that the exception could be excluded through some contractual arrangement between the employer and the third party who sustained the actual loss, but the law would probably be slow to find such an intention established where it would leave the black hole. At least an express provision for assignment of the employer's rights will not suffice.

    I have no difficulty in holding in the present case that the exception cannot apply. As part of the contractual arrangements entered into between Panatown and McAlpine there was a clear contemplation that separate contracts would be entered into by McAlpine, the contracts of the deed of duty of care and the collateral warranties. The duty of care deed and the collateral warranties were of course not in themselves building contracts. But they did form an integral part of the package of arrangements which the employer and the contractor agreed upon and in that respect should be viewed as reflecting the intentions of all the parties engaged in the arrangements that the third party should have a direct cause of action to the exclusion of any substantial claim by the employer, and accordingly that the exception should not apply. There was some dispute upon the difference in substance between the remedies available under the contract and those available under the duty of care deed. Even if it is accepted that in the circumstances of the present case where the eventual issue may relate particularly to matters of reasonable skill and care, the remedies do not absolutely coincide, the express provision of the direct remedy for the third party is fatal to the application of The Albazero exception. On a more general approach the difference between a strict contractual basis of claim and a basis of reasonable care makes the express remedy more clearly a substitution for the operation of the exception. Panatown cannot then in the light of these deeds be treated as having contracted with McAlpine for the benefit of the owner or later owners of the land and the exception is plainly excluded.

    I turn accordingly to what was referred to in the argument as the broader ground. But the label requires more careful definition. The approach under The Albazero exception has been one of recognising an entitlement to sue by the innocent party to a contract which has been breached, where the innocent party is treated as suing on behalf of or for the benefit of some other person or persons, not parties to the contract, who have sustained loss as a result of the breach. In such a case the innocent party to the contract is bound to account to the person suffering the loss for the damages which the former has recovered for the benefit of the latter. But the so-called broader ground involves a significantly different approach. What it proposes is that the innocent party to the contract should recover damages for himself as a compensation for what is seen to be his own loss. In this context no question of accounting to anyone else arises. This approach however seems to me to have been developed into two formulations.

    The first formulation, and the seeds of the second, are found in the speech of Lord Griffiths in St. Martins Property Corporation Ltd. v. Sir Robert McAlpine Ltd. [1994] 1 A.C. 85, 96. At the outset his Lordship expressed the opinion that Corporation, faced with a breach by McAlpine of their contractual duty to perform the contract with sound materials and with all reasonable skill and care, would be entitled to recover from McAlpine the cost of remedying the defect in the work as the normal measure of damages. He then dealt with two possible objections. First, it should not matter that the work was not being done on property owned by Corporation. Where a husband instructs repairs to the roof of the matrimonial home it cannot be said that he has not suffered damage because he did not own the property. He suffers the damage measured by the cost of a proper completion of the repair:

    "In cases such as the present the person who places the contract has suffered financial loss because he has to spend money to give him the benefit of the bargain which the defendant had promised but failed to deliver."

The second objection, that Corporation had in fact been reimbursed for the cost of the repairs was answered by the consideration that the person who actually pays for the repairs is of no concern to the party who broke the contract. But Lord Griffiths added at p. 97:

    "The court will of course wish to be satisfied that the repairs have been or are likely to be carried out but if they are carried out the cost of doing them must fall upon the defendant who broke his contract."

In the first formulation this approach can be seen as identifying a loss upon the innocent party who requires to instruct the remedial work. That loss is, or may be measured by, the cost of the repair. The essential for this formulation appears to be that the repair work is to be, or at least is likely to be, carried out. This consideration does not appear to be simply relevant to the reasonableness of allowing the damages to be measured by the cost of repair. It is an essential condition for the application of the approach, so as to establish a loss on the part of the plaintiff. Thus far the approach appears to be consistent with principle, and in particular with the principle of privity. It can cover the case where A contracts with B to pay a sum of money to C and B fails to do so. The loss to A is in the necessity to find other funds to pay to C and provided that he is going to pay C, or indeed has done so, he should be able to recover the sum by way of damages for breach of contract from B. If it was evident that A had no intention to pay C, having perhaps changed his mind, then he would not be able to recover the amount from B because he would have sustained no loss, and his damages would at best be nominal.

    But there can also be found in Lord Griffiths' speech the idea that the loss is not just constituted by the failure in performance but indeed consists in that failure. This is the "second formulation." In relation to the suggestion that the husband who instructs repair work to the roof of his wife's house and has to pay for another builder to make good the faulty repair work has sustained no damage Lord Griffiths observed at p. 97:

    "Such a result would in my view be absurd and the answer is that the husband has suffered loss because he did not receive the bargain for which he had contracted with the first builder and the measure of damages is the cost of securing the performance of that bargain by completing the roof repairs properly by the second builder."

That is to say that the fact that the innocent party did not receive the bargain for which he contracted is itself a loss. As Steyn L.J. put it in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68, 80, "he suffers a loss of bargain or of expectation interest." In this more radical formulation it does not matter whether the repairs are or are not carried out, and indeed in the Darlington case that qualification is seen as unnecessary. In that respect the disposal of the damages is treated as res inter alios acta. Nevertheless on this approach the intention to repair may cast light on the reasonableness of the measure of damages adopted. In order to follow through this aspect of the second formulation in Lord Griffiths' speech it would be necessary to understand his references to the carrying out of the repairs to be relevant only to that consideration.

    I find some difficulty in adopting the second formulation as a sound way forward. First, if the loss is the disappointment at there not being provided what was contracted for, it seems to me difficult to measure that loss by consideration of the cost of repair. A more apt assessment of the compensation for the loss of what was expected should rather be the difference in value between what was contracted for and what was supplied. Secondly, the loss constituted by the supposed disappointment may well not include all the loss which the breach of contract has caused. It may not be able to embrace consequential losses, or losses falling within the second head of Hadley v. Baxendale (1854) 9 Exch. 341 . The inability of the wife to let one of the rooms in the house caused by the inadequacy of the repair, does not seem readily to be something for which the husband could claim as his loss. Thirdly, there is no obligation on the successful plaintiff to account to anyone who may have sustained actual loss as a result of the faulty performance. Some further mechanism would then be required for the court to achieve the proper disposal of the monies awarded to avoid a double jeopardy. Alternatively, in order to achieve an effective solution, it would seem to be necessary to add an obligation to account on the part of the person recovering the damages. But once that step is taken the approach begins to approximate to The Albacruz exception. Fourthly, the "loss" constituted by a breach of contract has usually been recognised as calling for an award of nominal damages, not substantial damages.

    The loss of an expectation which is here referred to seems to me to be coming very close to a way of describing a breach of contract. A breach of contract may cause a loss, but is not in itself a loss in any meaningful sense. When one refers to a loss in the context of a breach of contract, one is in my view referring to the incidence of some personal or patrimonial damage. A loss of expectation might be a loss in the proper sense if damages were awarded for the distress or inconvenience caused by the disappointment. Professor Coote ("Contract Damages, Ruxley, and the Performance Interest" (1997) C.L.J. 537) draws a distinction between benefits in law, that is bargained-for contractual rights, and benefits in fact, that is the enjoyment of the fruits of performance. Certainly the former may constitute an asset with a commercial value. But while frustration may destroy the rights altogether so that the contract is no longer enforceable, a failure in the obligation to perform does not destroy the asset. On the contrary it remains as the necessary legal basis for a remedy. A failure in performance of a contractual obligation does not entail a loss of the bargained-for contractual rights. Those rights remain so as to enable performance of the contract to be enforced, as by an order for specific performance. If one party to a contract repudiates it and that repudiation is accepted, then, to quote Lord Porter in Heyman v. Darwins Ltd. [1942] A.C. 356, 399,

    "By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded."

    The primary obligations under the contract may come to an end, but secondary obligations then arise, among them being the obligation to compensate the innocent party. The original rights may not then be enforced. But a consequential right arises in the innocent party to obtain a remedy from the party who repudiated the contract for his failure in performance.

    Both of these two formulations seek to remedy the problem of the legal black hole. At the heart of the problem is the doctrine of privity of contract which excludes the ready development of a solution along the lines of a jus quaesitum tertio. It might well be thought that such a solution would be more direct and simple. In the context of the domestic and familial situations, such as the husband instructing the repairs to the roof of his wife's house, or the holiday which results in disappointment to all the members of the family, the jus quaesitum tertio may provide a satisfactory means of redress, enabling compensation to be paid to the people who have suffered the loss. Such an approach is available in Germany see W. Lorrenz "Contract Beneficiaries in German Law" in The Gradual Convergence: Foreign Ideas, Foreign Influences, and English Law on the Eve of the 21st Century ed. Markesinis (1994), pp. 65, 78, 79. It may also be available in Scotland (Carmichael v. Carmichael's Executrix 1920 S.C. (H.L.) 195). But we were not asked to adopt it in the present case and so radical a step cannot easily be achieved without legislative action. Since Parliament has recently made some inroad into the principle of privity but has stopped short of admitting a solution to a situation such as the present, it would plainly be inappropriate to enlarge the statutory provision by judicial innovation. The alternative has to be the adoption of what Lord Diplock in Swain v. The Law Society [1983] 1 A.C. 598, 611 described as a juristic subterfuge "to mitigate the effect of the lacuna resulting from the non-recognition of a jus quaesitum tertio." The solution, achieved by the operation of law, may carry with it some element of artificiality and may not be supportable on any clear or single principle. If the entitlement to sue is not to be permitted to the party who has suffered the loss, the law has to treat the person who is entitles to sue as doing so on behalf of the third party. As Lord Wilberforce observed in Woodar Investment Development Ltd. v. Wimpey Construction U.K. Ltd. [1980] 1 W.L.R. 277, 283, "there are many situations of daily life which do not fit neatly into conceptual analysis, but which require some flexibility in the law of contract."

    It seems to me that a more realistic and practical solution is to permit the contracting party to recover damages for the loss which he and a third party has suffered, being duly accountable to them in respect of their actual loss, than to construct a theoretical loss in law on the part of the contracting party, for which he may be under no duty to account to anyone since it is to be seen as his own loss. The solution is required where the law will not tolerate a loss caused by a breach of contract to go uncompensated through an absence of privity between the party suffering the loss and the party causing it. In such a case, to avoid the legal black hole, the law will deem the innocent party to be claiming on behalf of himself and any others who have suffered loss. It does not matter that he is not the owner of the property affected, nor that he has not himself suffered any economic loss. He sues for all the loss which has been sustained and is accountable to the others to the extent of their particular losses. While it may be that there is no necessary right in the third party to compel the innocent employer to sue the contractor, in the many cases of the domestic or familial situation that consideration should not be a realistic problem. In the commercial field, in relation to the interests of such persons as remoter future proprietors who are not related to the original employer, it may be that a solution by way of collateral warranty would still be required. If there is an anxiety lest the exception would permit an employer to receive excessive damages, that should be set at rest by the recognition of the basic requirement for reasonableness which underlies the quantification of an award of damages.

    The problem which has arisen in the present case is one which is most likely to arise in the context of the domestic affairs of a family group or the commercial affairs of a group of companies. How the members of such a group choose to arrange their own affairs among themselves should not be a matter of necessary concern to a third party who has undertaken to one of their number to perform services in which they all have some interest. It should not be a ground of escaping liability that the party who instructed the work should not be the one who sustained the loss or all of the loss which in whole or part has fallen on another member or members of the group. But the resolution of the problem in any particular case has to be reached in light of its own circumstances. In the present case the decision that Panatown should be the employer under the building contract although another company in the group owned the land was made in order to minimise charges of VAT. No doubt thought was given as to the mechanics to be adopted for the building project in order to achieve the course most advantageous to the group. Where for its own purposes a group of companies decides which of its members is to be the contracting party in a project which is of concern and interest to the whole group I should be reluctant to refuse an entitlement to sue on the contract on the ground simply that the member who entered the contract was not the party who suffered the loss on a breach of the contract. But whether such an entitlement is to be admitted must depend upon the arrangements which the group and its members have decided to make both among themselves and with the other party to the contract. In the present case there was a plain and deliberate course adopted whereby the company with the potential risk of loss was given a distinct entitlement directly to sue the contractor and the professional advisers. In the light of such a clear and deliberate course I do not consider that an exception can be admitted to the general rule that substantial damages can only be claimed by a party who has suffered substantial loss.

    I agree that the appeal should be allowed.


My Lords,

    The appellant company, Alfred McAlpine Construction Ltd. ("McAlpine"), is a building contractor. The respondent company, Panatown Ltd., is one of the Unex group of companies, of which the parent company is Unex Corporation Ltd. ("UCL") and which also includes Unex Investment Properties Ltd. ("UIPL"). On 2 November 1989 Panatown as employer entered into a building contract ("the building contract") with McAlpine as contractor, for the design and construction of an office building and car park on a site at 126-130 Hills Road, Cambridge. The contract was in a modified J.C.T. Standard Form of Building Contract with Contractor's Design (1981edition), the contract sum being a little under £10.5m.

    It is of crucial importance in the present litigation that, although Panatown was the member of the Unex group which entered into the building contract as employer, the site at 126-130 Hills Road has at all material times been the property of another member of the group, UIPL. Another matter upon which McAlpine has placed much reliance is that, in addition to the building contract, McAlpine entered into a Duty of Care Deed ("the DCD") with UIPL. Under the DCD UIPL, as building owner, acquired a direct remedy against McAlpine in respect of any failure by McAlpine to exercise reasonable skill, care and attention in respect of any matter within the scope of McAlpine's responsibilities under the building contract. The DCD was expressly assignable by UIPL to its successors in title (with McAlpine's consent, such consent not to be unreasonably withheld). I should mention that, in the DCD, it is stated that Panatown entered into the building contract "on behalf of the building owner," viz. UIPL. It is however common ground between the parties that Panatown entered into the building contract as principal and not as agent (see para. 2.9 of the Agreed Statement of Facts and Issues). In these circumstances, especially as in the building contract itself "the employer" is identified simply as "Panatown," I shall proceed on the basis, accepted on both sides, that Panatown did not in fact contract as agent for UIPL. The true position, as I understand it, was that Panatown was authorised by UIPL to enter onto UIPL's land and to cause the development to be constructed there for the benefit of UIPL, Panatown having been put in funds for that purpose from within the Unex group of which both UIPL and Panatown were members. I should add that similar DCDs were entered into with UIPL by the architects, the structural engineers and the M. and E. engineers.

    Another matter on which McAlpine placed reliance was that the reason why it was decided within the Unex group that Panatown, rather than UIPL, should be the employer under the building contract was to avoid the incidence of VAT, which was not imposed on contracts for new buildings until September 1989. UIPL was treated as being within the group ("the Unex VAT group") for VAT purposes, but Panatown was not. On 23 March 1989 arrangements were made within the Unex group for an advance payment of £7.5m. to be paid to Panatown from within the Unex VAT group. This payment, which did not attract VAT, was intended to finance the development. Between January 1990 and January 1992 Panatown paid to McAlpine about £7.4 million under the building contract.

    The building contract contained an arbitration clause. On 8 July 1992 Panatown served notice of arbitration on McAlpine, claiming (inter alia) damages for alleged breaches by McAlpine of the building contract by reason of allegedly defective work and delay. The dispute was referred to Mr. John Sims as arbitrator. In the proceedings McAlpine has denied Panatown's allegations of breach of contract, and no determination has yet been made in respect of any of these allegations. Even so, McAlpine and the Unex group have together investigated the extent of defects in the office and car park buildings. These investigations led to an open letter from McAlpine to UCL, dated 4 July 1994, acknowledging the existence of significant defects in the foundations and steel frame of the office building and, where the defects arise from a breach of the building contract, acknowledging McAlpine's responsibility for the necessary remedial works. The present appeal has proceeded on the assumption, in Panatown's favour, that McAlpine is in breach of the building contract by reason of defective design and construction and delay. The defects in the building alleged by Panatown are very serious; indeed it appears that the building may have to be demolished and rebuilt. The total damages claimed by Panatown run to many millions of pounds.

    In the proceedings, McAlpine has raised a contention that Panatown is not entitled to recover substantial damages under the building contract on the ground that Panatown, having no proprietary interest in the site, has suffered no loss. McAlpine sought an award to that effect. The arbitrator directed that this be heard as a preliminary issue. By an interim award dated 12 August 1994 the arbitrator, who for the hearing of the issue had sat with Mr. Brian Knight Q.C. as a legal assessor, answered the question in the issue in Panatown's favour.

    McAlpine appealed to the High Court against the interim award. The proceedings were transferred to Official Referee's business. Judge Thornton Q.C. held that the matter should be remitted to the arbitrator, but in so doing he answered questions of law arising on the issue adversely to Panatown. However on appeal by Panatown, the Court of Appeal on 13 March 1998 ordered that the answer in the interim award of the arbitrator be confirmed, and that each of the relevant answers in the judgment of Judge Thornton Q.C. be set aside. It is from that decision that McAlpine now appeals to your Lordships' House, by leave of the Court of Appeal. The issue in the appeal was summarised in the judgment of the Court of Appeal as follows:

    "Is Panatown debarred from recovering substantial as opposed to nominal damages, by reason of the fact that it is not, and was not, owner of the land?"

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