Judgments - Alfred McAlpine Construction Limited v. Panatown Limited

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    I do not find it entirely easy to reconcile Lord Griffith's last observation with his reference to the promisee, St. Martins, having suffered financial loss because they had to spend money. It is true that they did initially pay for the remedial work but they were reimbursed in full and cannot therefore be said to have suffered financial loss in the end of the day. Can it matter that they were reimbursed afterwards rather than being put in funds before they made payment? Lord Griffiths vouched his remarks about the second defence by reference to Jones v. Stroud District Council [1986] 1 W.L.R. 1141, in which the plaintiffs were unable to prove that they had paid for repair carried out to their building and rendered necessary by the defendants' negligence. In the Jones case Neill L.J., at p. 1150H, after referring to the general principle that a plaintiff who seeks to recover damages must prove that he has suffered loss continued:— 'but if property belonging to him has been damaged to an extent which is proved and the court is satisfied that the property has been or will be repaired I do not consider that the court is further concerned with the question whether the owner has had to pay for repairs out of his own pocket or whether the funds have come from some other source.' Such a case must be distinguished from that where the defect is in the property of a third party and the cost is met by that party or someone other than the plaintiff. In the latter case it is the third party rather than the plaintiff who has suffered financial loss. Given the detailed reasoning of Lord Griffiths in relation to McAlpine's first defence which proceeded upon the footing that the plaintiff although not the proprietor of the subjects had incurred or would have to incur expenditure to remedy the defect I do not think that he can have intended his remarks on the second defence to be taken as authority for the proposition that a plaintiff who had neither incurred expenditure on a third party's property nor had any interest in so doing was nevertheless entitled to recover substantial damages for breach of contract by the contractor. Indeed his comments on The Albazero would suggest that a plaintiff should not recover substantial damages for breach of contract when he had suffered no financial loss and when the third party had an independent right of action against the promissor. This would appear to be how Lord Keith of Kinkel understood Lord Griffith's position because having expressed sympathy with the view that a building contractor in breach of his contract should not be relieved of liability to pay substantial damages merely by reason that the other contracting party had no proprietary interest in the works at the time of the breach continued at 95F:

    "There is much force in the analysis that the party who contracted for the works to be done has suffered loss because he did not receive the performance he had bargained for and in order to remedy that has been required to pay for the defects to be put right by another builder."

    It was not mere lack of performance but lack of performance plus the requirement to incur expenditure by the promisee which impressed Lord Keith. In my view Mr. Friedman's definition of the broader ground goes far beyond what Lord Griffiths said in St. Martins and consequently is not supported by his speech in that case.

    In Darlington Borough Council. v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68, where A entered into a contract with B for an erection of a building on C's land the Court of Appeal applied the narrow ground in St. Martins. However, Steyn L.J. (as he then was) at p. 80E expressed his agreement with Lord Griffith's wider principle which he defined as where a builder fails to render the contractual service the employer suffers a loss of bargain or expectation of interest which loss can be recovered on the basis of what it would cost to remedy the defect. Steyn L.J. went on to express the view that "in the field of building contracts, like sale of goods, it is no concern of the law what the plaintiff proposes to do with his damages," thereby rejecting Lord Griffiths qualification that the court would wish to be satisfied that the repairs have been or are likely to be carried out. Darlington Borough Council v. Wiltshier Northern Ltd. was a case in which the employer suffered no financial loss by reason of the contractors' breach and the third party, for whose benefit the works were to be carried out, had no independent right of action. On the reasoning of Steyn L.J. it would appear that the employer in such a case could recover the cost of effecting the necessary repairs and then put the money in his own pocket. This would be a particularly unattractive result and certainly not one which Lord Griffiths would have advocated. Indeed it would seem to raise very sharply the question of whether the employer had suffered any financial loss at all.

    Mr. Friedman sought further support for the broader ground in the authoritative judgment of Oliver J., (as he then was) in Radford v. De Froberville [1977] 1 W.L.R. 1262. The plaintiff owned a large house and garden in Holland Park. The house was divided into six flats all of which were let and the tenants had the right to use the garden so far as not used for building. The plaintiffs sold part of the garden as a building plot for a consideration which included a convenant by the purchaser to build a dividing wall on the plot sold. The purchaser failed to build the wall and sold the plot. In an action for breach of contract Oliver J., being satisfied that the plaintiff intended to build a wall on his own side of the boundary, awarded him damages measured by the cost of carrying out this work. In response to the argument that the only loss which the plaintiff had sustained as a result of the breach was the diminution in value of the property, which was little or nothing, Oliver J. pointed out that the plaintiff had a contractual right to have the work done and did in fact want to do it and continued, at p. 1285D:

    "As it seems to me, the fact that his motive may be to confer what he conceives to be a benefit on persons who have no contractual rights to demand it cannot alter the genuineness of his intentions."

The facts in Radford were far removed from those in St. Martins or in the present case. The plaintiff conveying the plot to the purchaser in consideration inter alia of the covenant had effectively paid for the works. These works were for the benefit of his property and the tenants therein and he proposed to carry out substitute works on his own property at his own expense. Oliver J.'s dictum that the plaintiff had a contractual right to have the work done was thus made in circumstances different from those addressed by Lord Griffiths. The plaintiffs' loss was not merely one of bargain or expectation of interest - it was the loss of the covenanted and paid for works with their aforementioned benefits. I do not therefore consider that it supports the broader ground as advanced by Mr. Friedman.

    It is interesting that in The Albazero there was no suggestion in Lord Diplock's speech that a plaintiff had a right to recover on the broader ground, which would in that case have rendered unnecessary application of the rule in Dunlop v. Lambert. Indeed, in refusing to jettison the rule Lord Diplock, at p. 847B said:

    "there may still be occasional cases in which the rule would provide 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."

Had Lord Diplock thought that recovery under the broader ground was generally available there would have been little or no content for these observations. I accept, of course, that Mr. Friedman in his submissions restricted the application of the broader ground to supply contracts but if the broader ground is to be accepted as a principle there seems little reason for restricting its application to one type of contract.

    In Woodar Investment Development Ltd. v. Wimpey Construction U.K. Ltd. [1977] 1 W.L.R. 277 Wimpey agreed to buy land from Woodar for a sum of £850,000 of which £150,000 was to be paid to Transworld. A month later Wimpey sent a letter purporting to rescind the contract and Woodar sued for damages including the £150,000 payable to Transworld. This House, in allowing the appeal, held that Wimpey had not repudiated the contract but in view of the Court of Appeal's decision that Wimpey were liable in damages for the £150,000 made certain observations thereon. At p. 284A-D Lord Wilberforce referred to the proposition:

    "that if Woodar made a contract for a sum of money to be paid to Transworld, Woodar can, without showing that it has itself suffered loss or that Woodar was agent or trustee for Transworld, sue for damages for non payment of that sum. That would certainly not be an established rule of law. . . "

Lord Wilberforce later said, at p. 284C:

    "Whether in a situation such as the present - viz. where it is not shown that Woodar was agent or trustee for Transworld, or that Woodar itself sustained any loss, Woodar can recover any damages at all, or any but nominal damages, against Wimpey, and on what principle, is, in my opinion, a question of great doubt and difficulty - no doubt open in this House - but one on which I prefer to reserve my opinion."

Lord Salmon considered that the law in relation to damages of the kind under consideration was most unsatisfactory (at p. 291C). Lord Russell of Killowen would have concluded that in the absence of evidence to suggest that Woodar would suffer any damage from a failure by Wimpey to pay the £150,000 Woodar had established no more than nominal damages (at p. 293F). Lord Keith of Kinkel agreed with Lord Scarman, at p. 300G, that it was open to the House to declare that:

    "in the absence of evidence to show that he has suffered no loss, A, who has contracted for a payment to be made to C, may rely on the fact that he required the payment to be made as prima facie evidence that the promise for which he contracted was a benefit to him and that the measure of his loss in the event of non-payment is the benefit which he intended for C but which has not been received."

Lord Scarman pointed out that this was clearly a difficult question.

    It is clear from the speeches in the Woodar case that none of their Lordships were aware of an existing principle such as the broader ground contended for by Mr. Friedman. Lord Wilberforce and Lord Russell of Killowen were, to say the least, extremely doubtful whether such a principle could exist and certainly did not consider that mere loss of bargain or expectation per se with no resultant financial loss would justify substantial damages. Mr. Friedman has not persuaded me otherwise.

    My Lords there is a fundamental distinction between the narrow and broader grounds whether as examined by Lord Griffiths or as expounded by Mr. Friedman. In the former the promisee seeks to recover the loss suffered by and for the benefit of the third party, and is accountable therefor to that party (Joseph v. Knox, The Albazero 845-846). In the latter the promisee seeks to recover the loss which he personally has suffered. Given that the law is not generally concerned with what a plaintiff proposes to do with his damages one must ask what principle of law would require the promisee to hand over his damages to the third party. It was suggested that in applying the broader ground the court would only award substantial damages to the promisee if satisfied that he was likely to pass them on to the third party. John Cartwright in "Damages, Third Parties and Common Sense" (1996) 10 J.C.L. 244, 256 recognising the difficulty suggests that the court might require the promisee to give an appropriate undertaking on condition of allowing recovery. These suggestions, however, throw no light on the principle which dictates that thereafter the promisee should hand over the damages. Furthermore consequential loss resulting to the third party due to delay and resultant loss of profits would appear to be irrecoverable. Lord Griffiths in the St. Martins case [1994] 1 A.C. 85, 97A referred to the husband's loss as being the cost of securing performance of the bargain with the first builder, namely the proper completion of the roof repairs. He did not require to consider consequential loss.

    The St. Martins case and Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68 were both what I may describe as "black hole" cases, that is to say if the employer under the building contract could not recover from the contractor the owner of the building would receive nothing and the contractor would effectively be relieved of liability for his breach. The greater part of Lord Griffith's reasoning was directed to reject the proposition that entitlement to more than nominal damages was dependent upon the plaintiff having a proprietary interest in the subject matter. His examples predicated that the husband/employer required to pay for repairs rendered necessary by the breach. He did not require to address the situation where, as here, Panatown has neither spent money in entering into the contract nor intends to do so in remedying the breach and has therefore suffered no loss thereby. Had he had to do so I very much doubt whether he would have expressed the same views in relation thereto.

    Since writing this speech, I have had the advantage of reading in draft the speech of my noble and learned friend Lord Goff of Chieveley. I respectfully agree with his rejection of the proposition that the employer under a building contract is unable to recover substantial damages for breach of the contract if the work in question is to be performed on land or buildings which are not his property. In such a case the employer's right to substantial damages will, in my view, depend upon whether he has made good or intends to make good the effects of the breach. This appears to be implicit in the speech of Lord Griffiths at p. 97E and of Lord Keith of Kinkel at p. 95F to which I have already referred and to the two passages in the judgment of Oliver, J. in Radford v. De Froberville [1997] 1 WLR 1262 at 1283 and 1285 to which my noble and learned friend has referred. This produces a sensible result and avoids the recovery of an "uncovenanted" profit by an employer who does not intend to take steps to remedy the breach.

    However, there is a further matter to be considered in this case namely the DCD in favour of UIPL. This, in my view, is equally relevant to the broader as to the narrow ground. The former as does the latter seeks to find a rational way of avoiding the "black hole." What is the justification for allowing A to recover from B as his own a loss which is truly that of C when C has his own remedy against B? I would submit none. The complications and anomalies to which Lord Diplock referred in The Albazero [1977] A.C. 774, 848F as arising from two contracts of carriage for the same goods could arise equally if not more sharply were Panatown entitled to claim substantial damages on the broader ground. If Panatown have a claim for loss of expectation of interest measured by the cost of achieving what they contracted for and UIPL have a separate claim in relation to the same defects McAlpines' cannot be mulcted twice over in damages. Panatown's claim for loss of expectation of interest can have only nominal value when UIPL has an enforceable claim and Panatown has no intention of taking steps to remedy the breach. Were it otherwise the great practical difficulties referred to by my noble and learned friend Lord Browne-Wilkinson at the end of his speech would arise. Lord Griffiths in a passage to which I have already referred ([1994] 1 A.C. 85, 97E) accepted that A should not have a remedy for loss of cargo which had caused him no financial loss when C had a direct right of action. It would be surprising if he had taken a different view of the position of Panatown and UIPL. I therefore consider that Panatown is not entitled to recover under Mr. Friedman's broader ground not only because they have suffered no financial loss but also because UIPL have a direct right of action against McAlpine under the DCD. As I have come to the conclusion that neither the narrow nor the broader ground is applicable to the facts of this case I would allow the appeal.


My Lords,

    This appeal raises again the question which was considered by the House in St. Martin's Property Corporation v. Sir Robert McAlpine Ltd. (heard with Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd.) [1994] 1 A.C. 85, viz., where A enters into a contract with B for the erection by B of a building on land belonging to C and the building so erected is defective, have either A or C a remedy against B? The general rule is that A can only recover compensation for damage that A has suffered; it is argued that, since neither the building nor the land belonged to A, no compensatable damage has been suffered by A. C as owner of the land and building has suffered damage but, not being a party to the contract, it is said that C has no claim against B. The legal position in cases such as these is now fundamentally affected by the Contract (Rights of Third Parties) Act 1999. However the Act does not apply to the present case where all the events took place before that Act came into force.

    In the St. Martin's case, one company in the group (A) contracted with McAlpines (B) for the erection of a building on land which at the date of contract belonged to A but which, before the date of breach, had been transferred to another company in the group (C). The building was defective. The contract contained no provision enabling C to sue B for the defect in the building. B argued that no damages were recoverable by A: the wrong done had fallen into a black hole where no one had a claim. Your Lordships rejected that submission on what was called in argument "the narrower ground."

    The narrower ground starts by accepting the basic proposition that A, not owning the land at the date of breach, can show no compensatable loss and therefore no substantial damage suffered by A. However, the majority of the members of the Committee extended the reasoning in The Albazero [1977] A.C. 774, to cover the case so as to hold that where A enters into a contract with B relating to property and it is envisaged by the parties that ownership of that property may be transferred to a third party, C, so that the consequences of any breach of contract will be suffered by C, A has a cause of action to recover from B the loss suffered by C. However, two points are clearly established by the decision in both The Albazero and the St. Martin's case. First, A is accountable to C for any damages recovered by A from B as compensation for C's loss: The Albazero at p. 888D. Second, the exceptional principle does not apply (because it is not needed) where C has a direct remedy against B: see the The Albazero at p. 848 and the decision itself which, whilst recognising the exception, held that it did not apply to that case since the consignee of the goods had a direct claim; St. Martin's case, at p. 115E-F.

    Lord Griffiths decided the St. Martin's case on what has been called "the broader ground." In the present case it is argued that the broader ground represents the right approach in law and that it applies even in cases where the third party has a cause of action directly against the defaulting promisor. Before considering it in greater detail I will shortly summarise the relevant facts of the present case, which are fully stated in the speech of my noble and learned friend Lord Goff of Chieveley.

    The respondent, Panatown, entered into a building contract with Alfred McAlpine Construction Ltd. under which McAlpine undertook to design and construct an office building on a site. Panatown did not own that site. However, Panatown was part of the Unex Group of which Unex Corporation Ltd. is the parent. Another member of the group was U.I.P.L. which did own the land. Defects have appeared in the building erected by McAlpine and Panatown has launched arbitration proceedings claiming substantial damages. If these were all the relevant facts, the case would be covered by the decision in the St. Martin's case: Panatown would be entitled on the narrower ground to recover the loss suffered by U.I.P.L. through the failure to construct a sound building on U.I.P.L.'s land.

    But, critically, there is in the present case an additional factor which was absent in the St. Martin's case. In negotiating and agreeing the contractual arrangements, the Unex Group negotiated for, and obtained, a direct contractual obligation between McAlpine and U.I.P.L. the owner of the site. Under a duty of care deed ("the D.C.D.") McAlpine undertook to U.I.P.L. as follows:

    "1. Warranties

    The contractor undertakes with the building owner that in respect of all matters that lie within the scope of his responsibilities under the building contract (a) he has exercised and will continue to exercise all reasonable skill, care and attention; (b) he shall owe a duty of care to the building owner in respect of such matters; (c) the building owner shall be entitled to rely upon the contractor's professional skill and judgment in respect of such matters as defined in the terms of the building contract; (d) he will use his reasonable endeavours to maintain and enforce professional indemnity insurance without any material excesses or unusual exclusions taken out with reputable insurers carrying on business in the United Kingdom sufficient to cover any liabilities of the contractor which may arise out of the work carried out pursuant to the building contract up to a limit in respect of each and every claim of not less than £3m. and will use his reasonable endeavours to maintain the same until 12 years after the completion of his services under the building contract and will produce such evidence as the building owner may require to satisfy itself that the terms of this clause have been complied with."

By clause 3 it was expressly provided that U.I.P.L. could assign the D.C.D. to its successors in title or to any other party with the consent of the contractor such consent not to be unreasonably withheld.

    Therefore the whole contractual matrix relating to this development envisaged that McAlpine's obligations under the building contract were to be enforceable against McAlpine not only by Panatown but also to a very substantial extent by U.I.P.L. and its successors in title under the D.C.D. It was suggested in argument that the purpose of the D.C.D. was to give purchasers of the site from the Unex Group undoubted causes of action for breach of a tortious duty of care. Even if that is so, it does not alter the fact that under the D.C.D., U.I.P.L. itself has the right to claim substantial damages for any negligent performance of the building contract, a right which will cover most of the claims arising under the building contract.

    In my judgment the direct cause of action which U.I.P.L. has under the D.C.D. is fatal to any claim to substantial damages made by Panatown against McAlpine based on the narrower ground. First, the principle in The Albazero [1977] A.C. 774 as applied to building contracts by the St. Martin's case [1994] 1 A.C. 85 is based on the fact that it provides a remedy to the third party "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.": see The Albazero, at p. 847B and the St. Martin's case, at p. 114G. If the contractual arrangements between the parties in fact provide the third party with a direct remedy against the wrongdoer the whole rationale of the rule disappears. Moreover, as I have said, both the decision in The Albazero case itself and dicta in the St. Martin's case at p. 115F state that where the third party (C) has a direct claim against the builder (B) the promisee under the building contract (A) cannot claim for the third party's damage.

    I turn now to the broader ground on which Lord Griffiths decided the St. Martin's case. He held that the building contractor (B) was liable to the promisee (A) for more than nominal damages even though A did not own the land at the date of breach. He held in effect that by reason of the breach A had himself suffered damage, being the loss of the value to him of the performance of the contract. On this view even though A might not be legally liable to C to provide him with the benefit which the performance of the contract by B would have provided, A has lost his "performance interest" and will therefore be entitled to substantial damages being, in Lord Griffiths' view, the cost to A of providing C with the benefit. In the St. Martin's case Lord Keith of Kinkel, Lord Bridge of Harwich and I all expressed sympathy with Lord Griffiths' broader view. However, I declined to adopt the broader ground until the possible consequences of so doing had been examined by academic writers. That has now happened and no serious difficulties have been disclosed. However, there is a division of opinion as to whether the contracting party, A, is accountable to the third party, C, for the damages recovered or is bound to expend the damages on providing for C the benefit which B was supposed to provide. Lord Griffiths in the St. Martin's case (at p. 97G) took that view. But as I understand them Lord Goff of Chieveley and Lord Millett in the present case (in agreement with Lord Steyn in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68, 80H) would hold that, in the absence of the specific circumstances of the present case A, is not accountable to C for any damages recovered by A from B.

    I will assume that the broader ground is sound in law and that in the ordinary case where the third party (C) has no direct cause of action against the building contractor (B) A can recover damages from B on the broader ground. Even on that assumption, in my judgment Panatown has no right to substantial damages in this case because U.I.P.L. (the owner of the land) has a direct cause of action under the D.C.D.

    The essential feature of the broader ground is that the contracting party A, although not himself suffering the physical or pecuniary damage sustained by the third party C, has suffered his own damage being the loss of his performance interest, i.e. the failure to provide C with the benefit that B had contracted for C to receive. In my judgment it follows that the critical factor is to determine what interest A had in the provision of the service for the third party C. If, as in the present case, the whole contractual scheme was designed, inter alia, to give U.P.I.L. and its successors a legal remedy against McAlpine for failure to perform the building contract with due care, I cannot see that Panatown has suffered any damage to its performance interests: subject to any defence based on limitation of actions, the physical and pecuniary damage suffered by U.P.I.L. can be redressed by U.P.I.L. exercising its own cause of action against McAlpine. It is not clear to me why this has not occurred in the present case: but, subject to questions of limitation which were not explored, there is no reason even now why U.P.I.L. should not be bringing the proceedings against McAlpine. The fact that the D.C.D. may have been primarily directed to ensuring that U.P.I.L.'s successors in title should enjoy a remedy in tort against McAlpine is nothing to the point: the contractual provisions were directed to ensuring that U.P.I.L. and its successors in title did have the legal right to sue McAlpine direct. So long as U.P.I.L. enjoys this right Panatown has suffered no failure to satisfy its performance interest.

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