Judgments - Alfred McAlpine Construction Limited v. Panatown Limited

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    This appeal arises from a question of law raised in an arbitrator's interim award. That question was broadly whether Panatown was entitled to recover substantial, as opposed to nominal, damages when they were not the owners of the land on which the building was constructed and had suffered no financial loss as a result of the breach. The Court of Appeal answered the question in favour of Panatown.

    Three issues were canvassed in this House namely:-

    (1) Whether there is a general rule of English law that a person cannot recover substantial damages for breach of contract where he himself has suffered no loss by reason of the alleged breach;

    (2)Whether if such a rule exists, the exception to it said to be established in Dunlop v. Lambert (1839) 6 Cl. & F.600 and upheld in The Albazero [1977] A.C. 774 and in St. Martin's Property Corporation Ltd. v. Sir Robert McAlpine Ltd. [1994] 1 A.C. 85 applied ("the narrow ground"); and

    (3)Whether Panatown were entitled to recover substantial damages on the ground that they had not received the bargain for which they had contracted, irrespective of the fact that they had no proprietary interest in the building at the date of the breach and had no suffered no financial loss ("the broader ground").

The General Rule

    That damages for breach of contract are compensatory has long been established in English Law. Mr. Friedman for Panatown did not seek to challenge this general principle but argued that there was no need to limit the compensatory principle by reference to the promisee's loss. He referred to the following well known dictum of Parke B. in Robinson v. Harman (1848) 1 Exch. 850 (154 E.R. 363) 855:

    "The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it to be placed in the same situation, with regard to damages as if the contract had been performed."

and also to Livingstone v. Rawyards Coal Co. (1880) 5 App. Cas. 25, 39, where Lord Blackburn referred to the general rule that compensatory damages should as nearly as possible:

    "put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong. . . "

These dicta, Mr. Friedman submitted, did not exclude a case where a third party and not the plaintiff had suffered the loss. Furthermore although it had been assumed in previous cases that the compensatory principle was restricted to loss suffered by the plaintiff no authority for this proposition had been cited.

    My Lords, there are in my view two answers to this submission. In the first place while it is true that neither of the above quoted dicta specifically excluded claims by a promisee for loss suffered by a third party, it is equally true that in neither case was the position of a third party under consideration. Thus, when Parke B. and Lord Blackburn referred to a or the "party" it is quite obvious that they were referring to the plaintiff and pursuer in the actions and to no one else. In the second place in the The Albazero [1977] A.C. 774 there were clear statements both in the Court of Appeal (Cairns L.J. at p. 803C Ormerod L.J. at p. 823C) and in your Lordships' House that in an action of damages for breach of contract the plaintiff can only recover such damages as he has actually suffered. Lord Diplock, at p. 846G, referred to:

    "the general rule of English Law that apart from nominal damages a plaintiff can only recover in an action for breach of contract the actual loss he has himself sustained." (see also 845G).

The existence of this general rule was again referred to by my noble and learned friend Lord Browne-Wilkinson in St. Martin's Property Corporation v. Sir Robert McAlpine Ltd. [1994] 1 A.C. 85, 114G. Mr. Friedman could cite no positive authority to support his submission and to give effect to it would mean departing not only from Lord Diplock's authoritative statement of the law but also from that of Lord Browne-Wilkinson. I see no justification for so doing and am content to proceed upon the basis that the law is as stated by Lord Diplock and Lord Browne-Wilkinson.

The Narrow Ground

    The starting point is the Scots case of Dunlop v. Lambert 6 Cl. & F. 600, 3 Maclean & R. 663 which has been treated ever since by authoritative English text book writers:

    "as authority for the broad proposition that the consignor may recover substantial damages against the ship owner if there is privity of contract between him and the carrier for the carriage of goods; although, if the goods are not his property or at his risk, he will be accountable to the true owner for the proceeds of his judgment.": The Albazero [1977] A.C. 774, 884D, per Lord Diplock.

    Scottish text book writers have been less enthusiastic. My noble and learned friend Lord Clyde in his powerful and detailed analysis of the case has already referred to Professor Gloag's comment. In the 10th ed. (1899) of Bell's Principles para. 88 Dunlop v. Lambert, among other cases, is cited as vouching the proposition that the risk is continued in the seller "where there is an express or implied undertaking of the risk by the seller, as to deliver at a certain place."

    Lord Diplock at p. 847E rationalised the rule in Dunlop v. Lambert 6 Cl. & F. 600 as an application of the principle:

    "that in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into."

Although the rule in Dunlop v. Lambert, as Lord Diplock described it, was held not to be applicable to the circumstances of The Albazero where the breach of a charterparty resulted in a total loss of cargo he refused to accept counsel's invitation to jettison it (847B).

    In view of my noble and learned friend's analysis it is unnecessary for me to go over all the same ground but I consider that in order to understand what was decided by this House in Dunlop v. Lambert 6 Cl. & F. 600 it is necessary first to look at the proceedings in the Court of Session. During the course of the jury trial counsel for the pursuers sought to introduce parole evidence as to what the consignee understood to be the contractual position between him and the pursuers (the consignors) as to the risk of the puncheon during the voyage. The Lord President ruled the question incompetent on the ground that the understanding of one of the parties could not effect the real nature of the agreement which was in writing (1837) 15S at 886). The direction to which the exception was taken was in these terms:

    "that as it appeared that the pursuers, at the time of furnishing the puncheon of spirits in question, had sent an invoice thereof to Matthew Robson the purchaser bearing that the same had been insured, and that the freight thereof and insurance were charged against the said Matthew Robson in the said invoice, the pursuers were not entitled in law or interest to recover the value of the said puncheon from the defenders."

In the Inner House (1837) (15S 1232) the judges referred to the averment in the summons that the pursuers "undertook by this agreement, and were answerable to the said Matthew Robson for the safe delivery of the puncheon."

    The majority held that these averments had not been proved but that in terms of the written agreement between the pursuers and Robson the former were, after shipping the puncheon, free of all risk or liability on account thereof. In construing the written agreement the majority were clearly impressed with the fact that Robson had instructed and paid for the insurance. The Lord President pointed out that it would be quite wrong to qualify the terms of the written agreement by the parole evidence of Robson as to what he thought he had agreed to (1237). Pausing here it is clear that the Lord President was doing no more than construing a written agreement and propounding the long established rule of law that it is impermissible to vary the terms of a written agreement by parole evidence as to what one of the parties thought it meant. So far as the direction is concerned there being no competent evidence to support the averment (supra) as to the pursuers' liability I should have thought that it was unexceptionable.

    In this House the Lord Chancellor took a different view and held the Lord President to be in error. After referring at 6 Cl. & F. 600, 621, Maclean & R. (1839) 663, 676 to the "general rule that delivery by the consignor to the carrier is a delivery to the consignee, and that the risk is after such delivery the risk of the consignee" he went on to explain the rule can be varied by circumstances. He proceeded:

    " and now The Lord President laid down the rule to the jury as if there could be no exception to the operation of it. And that seems to me to be the first error in the direction. The Lord President stated it as a rule without an exception, that the cost of freight and insurance were paid by the consignor, who charged the consignee with their amount, the risk was therefore necessarily with the consignee - that there was consequently no right to enquire what was the particular transaction between the parties - but that the course of that circumstance alone the consignor could not recover."

If the Lord Chancellor was referring only to the direction to which exception had been taken I am at a loss to understand how he justified the words "stated as a rule without an exception." To my mind the direction did no more than tell the jury what was the proper construction of the written agreement. Neither in the direction nor in his judgment in the Inner House did The Lord President suggest that he was doing anything more than construing the written agreement and applying the normal rules of evidence. However, the Lord Chancellor later referred to the averment (supra) and stated that if such a contract existed, it ought to have been admitted to proof (6 Cl. & F. 600, 622-3, Maclean & R. 663, 677-678). This statement appears entirely to overlook the fact that there was no competent evidence of such an agreement which the jury could consider.

    My Lords I am driven to the conclusion that the Lord Chancellor who does not appear to have had the benefit of Scottish Counsel before him proceeded upon a misapprehension of the true effect of the proceedings in the Court of Session. Nevertheless the so called rule as Lord Diplock pointed out in The Albazero has become firmly established in English Law notwithstanding its exceedingly dubious parentage and I must proceed accordingly. I should, however, emphasise that throughout the proceedings in Dunlop v. Lambert there was never any suggestion that the carrier could escape liability for any breach of contract resulting in the loss. The Inner House of the Court of Session concluded that at the time of the loss the puncheon was the property of and at the risk of the consignee who could have sued in terms of the contract. This House simply concluded that it should have been left to the jury to determine whether there was a special contract which modified the terms of the written contract so that the consignors rather than the consignee could sue. I would only add that I agree with my noble and learned friend Lord Clyde that rather more relevant to what has become the Albazero exception than Dunlop v. Lambert was Joseph v. Knox [1813] 3 Camp 320 in which Lord Ellenborough held that the plaintiffs who had shipped the goods and paid the freight were entitled to recover the value of the lost cargo which they would "hold as trustees for the real owner."

    The rule in Dunlop v. Lambert, as expounded by Lord Diplock, was applied in St. Martins Property Corporation Ltd. v. Sir Robert McAlpine Ltd. [1994] 1 A.C. 85 to a case arising out of breach of a building contract whereby St. Martins had contracted with McAlpine for the multi-purpose development of a site in Hammersmith. The contract contained a clause prohibiting the assignment of the contract by St. Martins without the consent of McAlpine. Some 17 months after the contract date St. Martins assigned to another company in the group for full value their whole interest in the property without attempting to obtain the consent of McAlpine. After the practical completion of the works a serious defect was discovered which was remedied at a substantial cost paid for initially by St. Martins who were later reimbursed by the assignee company. The defect was alleged to have resulted from a breach of contract occurring after the assignment. St. Martins sued McAlpine who maintained that since St. Martins had suffered no loss they were only entitled to nominal damages. In a speech with whose reasoning Lord Keith of Kinkel, Lord Bridge of Harwich and Lord Ackner agreed, Lord Browne-Wilkinson concluded that St. Martins were entitled to recover substantial damages. At p. 114G-115C he stated:

    "In my judgment the present case falls within the rationale of the exceptions to the general rule that a plaintiff can only recover damages for his own loss. The contract was for a large development of property which, to the knowledge of both Corporation and McAlpine, was going to be occupied, and possibly purchased, by third parties and not by Corporation itself. Therefore it could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the original contracting party, Corporation. As in contracts for the carriage of goods by land, there would be no automatic vesting in the occupier or owners of the property for the time being who sustained the loss of any right of suit against McAlpine. On the contrary, McAlpine had specifically contracted that the rights of action under the building contract could not without McAlpine's consent be transferred to third parties who became owners or occupiers and might suffer loss. 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. It is truly a case in which the rule provides 'a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it.'"

The reasoning of Lord Browne-Wilkinson (supra), was applied by the Court of Appeal in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68, another building contract case in which a third party and not the employer under the contract who had no interest in the site had suffered the physical loss flowing from the breach.

    The circumstances in the instant case differ from those in the St. Martins case in as much as in the latter case the employer had an interest in the site at the date of the contract whereas Panatown had no such interest at that date or thereafter. I very much doubt whether this distinction is sufficient to remove the case from the ambit of Lord Browne-Wilkinson's reasoning. There are, however, certain other considerations to be examined.

    In The Albazero [1997] A.C. 774 Lord Diplock pointed out that the rationale of the rule in Dunlop v. Lambert did not extend to cases where there existed a separate contract of carriage between the person who actually suffered the loss and the carrier. He referred to the Bills of Lading Act 1855 having rendered the rationale of the rule in cases to which the Act applied inapplicable since the property in the goods and the right of suit against the ship owner would have passed from consignor to consignee. Thus having stated, at pp. 847H to 848A, that there was no justification for extending the rule:

    "to contracts for the carriage of goods which contemplate that the carrier will also enter into separate contracts of carriage with whoever may become the owner of goods carried pursuant to the original contract."

he went on at p. 848C to state:

    "A fortiori there can be no sensible business reason for extending the rule to cases where the contractual rights of the charterer under the charterparty are not identical with those of the bill of lading holder whose goods are lost or damaged; and this must always be the case as respects holders for valuable consideration because of the statutory estoppel to which I have referred."

He subsequently stated:

    "The complications, anomalies and injustices that might arise from the co-existence in different parties of rights of suit to recover, under separate contracts of carriage which impose different obligations upon the parties to them, a loss which a party to one of those contracts alone has sustained, supply compelling reasons why the rule in Dunlop v. Lambert, 6 Cl. & F. 600 should not be extended to cases where there are two contracts with the carrier covering the same carriage and under one of them there is privity of contract between the person who actually sustains the loss and the carrier by whose breach of that contract it was caused."

Lord Diplock's reasoning for these statements can be traced to his earlier reference to the fact that notwithstanding the effect of the Bills of Lading Act 1855 there might still be occasional cases in which the rule would provide a remedy where no other would be available to a person sustaining loss (847B). It was this lack of other remedy which justified the rule. In St. Martins Lord Browne-Wilkinson similarly pointed out that the rationale of Dunlop v. Lambert did not extend to a case where C had a contractual right of action against B. At p. 115E-G he stated:

    "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. The original building owner will not be entitled to recover damages for loss suffered by others who can themselves sue for such loss."

The DCD in favour of UIPL was executed by McAlpine in pursuance of an obligation contained in the building contract. In these circumstances Mr. Pollock for McAlpine argued that the Dunlop v. Lambert rule had no application and the general rule that a plaintiff can only recover damages (other than nominal) for his own loss applied. Mr. Friedman countered this by pointing out that the remedies available to UIPL under the DCD were different from and less effective than those available under the building contract. He referred to the arbitration clause in the building contract which was absent in the DCD, and to the facts that McAlpine's duty of compliance with the contractual provisions of the building contract under the DCD were merely to exercise reasonable care and skill whereas the duty under the building contract was absolute and that the provision for liquidated damages for delay in the building contract was absent in the DCD. He also referred to an article by Mr. I N Duncan Wallace Q.C. in [1999] 15 Const. L.J. 245 in support of the proposition that the DCD could not properly be treated as the equivalent of the "separate contract of carriage" referred to by Lord Diplock in The Albazero as an exception to the Dunlop v. Lambert rule. Mr. Friedman also urged upon your Lordships that the DCD was granted, not for the benefit of UIPL, but to enable that company to assign the benefit thereof to a future purchaser. Be that as it may there can be no doubt that UIPL were, and indeed are, entitled to sue McAlpine under the DCD and this cannot be ignored.

    My Lords it is of course correct that the DCD is not co-terminous with the building contract but does that necessarily mean that the exception to the Dunlop v. Lambert rule above referred to has no application? That rule provides a remedy where no other would be available for breach of a contract in circumstances where it is within the contemplation of contracting parties that breach by one is likely to cause loss to an identified or identifiable stranger to the contract, rather than to the other contracting party. It prevents the claim to damages falling into what Lord Keith of Kinkel in G.U.S. Property Management Ltd. v. Littlewoods Mail Stores 1982 S.L.T. 533, 538 so graphically described as "some legal black hole." It must however, be remembered that the Dunlop v. Lambert rule is an exception to the general rule that a party who has suffered no loss cannot recover substantial damages for breach. Neither in the speeches of Lord Diplock nor of Lord Browne-Wilkinson, to which I have referred, is it suggested that the Dunlop v. Lambert rule will only be displaced by rights vested in a third party which are identical to those of the innocent contracting party, indeed Lord Diplock, The Albazero [1977] A.C. 774, 848C, considered that there were even stronger grounds for not applying the rule to cases where the two sets of contractual rights were different. What is important, as I see it, is that the third party should as a result of the main contract have the right to recover substantial damages for breach under his contract even if those damages may not be identical to those which would have been recovered under the main contract in the same circumstances. In such a situation the need for an exception to the general rule ceases to apply. I therefore conclude that in this case the general rule is not displaced by the rule in Dunlop v. Lambert and that Mr. Pollock's submissions are correct. I find support for this conclusion in an article by Professor Treitel "Damages in Respect of a Third Party's Loss" (1998) 114 L.Q.R 527, 533-4.

The Broader Ground

    For the purposes of his argument Mr. Friedman limited the application of the broader ground to contracts for the supply of services and defined it as recovery on the basis that the promisee suffers a loss if there is a breach of a contract to confer a benefit on a third party. The promisee suffers that loss because he has not received the benefit of the bargain for which he contracted. Since Panatown had not received what they had contracted for, namely the construction of a building conform to contract, it followed that they had suffered loss, which was the cost of achieving that objective.

    The basis for the foregoing proposition was the speech of Lord Griffiths in St. Martins Property Corporation Ltd. v. Sir Robert McAlpine Ltd. [1994] 1 A.C. 85, which it is necessary to look at in some detail. After referring to two defences advanced by McAlpine to the effect (1) that St. Martins had no proprietary interest in the property when the breach occurred and (2) that they had been reimbursed from within the group for the cost of repairs Lord Griffiths, continued at, p. 96F, in relation to the first defence:

    "I cannot accept that in a contract of this nature, namely for work, labour and the supply of materials, the recovery of more than nominal damages for breach of contract is dependent upon the plaintiff having a proprietary interest in the subject matter of the contract at the date of breach."

Lord Griffiths instanced the case of a husband who was the sole earner contracting for the repair of the matrimonial home owned by his wife and having to pay a second builder to remedy the defects created by the first. He continued, at 96H:

    "Is it to be said that the husband has suffered no damage because he does not own the property? 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."

    Lord Griffiths then gave a further similar example where the husband after contracting with the builder, on advice, transferred his house to his wife and defects appeared. In response to the argument that neither husband nor wife could recover damages he remarked that that would be so unjust a result that the law could not tolerate it. This comment was made with reference to a hypothetical situation in which if the husband had no right of action no one else had and the claim to damages would fall into Lord Keith's black hole.

    Lord Griffiths considered McAlpine's argument that The Albazero [1977] A.C. 774 supported their argument that a contracting party suffered no loss if they did not have a proprietary interest in the property at the date of the breach and continued, at 97D:

    "The Albazero was not concerned with money being paid to enable the bargain, i.e. the contract of carriage, to be fulfilled. The damages sought in The Albazero were claimed for the loss of the cargo, and as at the date of the breach the property in the cargo was vested in another with a right to sue it is readily understandable that the law should deny to the original party to the contract a right to recover damages for a loss of the cargo which had caused him no financial loss. 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. I therefore cannot accept that it is a condition of recovery in such cases that the plaintiff has a proprietary right in the subject matter of the contract at the date of breach."

    Two matters emerge from that passage namely (1) that Lord Griffiths was contrasting a situation where the promisee (the consignor in The Albazero) had suffered no financial loss by the breach of contract and the case before him where St. Martins had paid for the necessary repairs, and (2) that he clearly considered it to be of importance that a third party who had actually sustained the financial loss had a right to sue. I summarise Lord Griffith's position on the first defence as follows: Where A employs B to perform work on Whiteacre, which B performs defectively the fact that Whiteacre is owned by C who has no contractual rights against B is no bar to an action for damages by A provided that he has paid or intends to pay for the necessary remedial treatment. In relation to the second defence Lord Griffiths expressed the view that:

    "who actually pays for the repairs is no concern of the defendant who broke the contract. The court will of course wish to be satisfied that the repairs have been or are likely to be carried out . . . "

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