Judgments - Alfred McAlpine Construction Limited v. Panatown Limited

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    Lord Griffiths did not consider that the case was covered by the rule in Dunlop v. Lambert 6 Cl. & F. 600. He distinguished that case and The Albazero [1977] A.C. 774 on the ground that they were claims for damages for the loss of cargo, not with a claim to damages to enable the bargain (in that case the contract of carriage) to be fulfilled.

    Lord Browne-Wilkinson had considerable sympathy with this approach. He recognised that a contract for the supply of goods or of work, labour and materials is not the same as a contract for the carriage of goods. Breach of a supply contract involves a failure to provide the very goods or services which the defendant has contracted to supply and for which the plaintiff has paid or agreed to pay. If the breach is discovered before the payment of the contract price, the price is abated by the cost of making good the defects. The right to abatement does not depend upon ownership by the plaintiff of the property, whether goods or land, on which the work was to be carried out; and it would be very odd if the plaintiff's rights varied according to whether the breach was discovered before or after the payment of the price.

    In the present case McAlpine insists that there is nevertheless a critical distinction between abatement of the price and damages in that damages may exceed the contract price. The building employer, it concedes, may obtain abatement of the price, because he is the paying party; but only the building owner may recover damages for breach of contract, because only he has suffered any loss. I see the distinction, of course, but I think that it is less than it appears. Abatement of the purchase price is a species of damages; it is not a form of restitution, since ex hypothesi the plaintiff has not made payment. The distinction between being charged for more than one has received and having to pay a third party to supply what one ought to have but has not received is, in economic terms at least, a distinction without a difference. The argument does, however, throw up a real issue; who in contemplation of law is the recipient of the services contracted for? Is it the building employer who ordered them? Or is it the building owner who owns the land on which the works were to be carried out? Or can it be both? In Customs and Excise Commissioners v. Redrow Group Plc. [1999] 1 W.L.R. 408, where the taxpayer instructed estate agents to value and act in the sale of a customer's house, your Lordships' House held that the right to have goods or services supplied to a third party was itself a right to a supply of services. The case was concerned with VAT, not with the contractual measure of damages; but it is a useful illustration of a case where, on the facts, the party who ordered services to be supplied to a third party had a strong commercial interest in having the services properly performed.

    In the St. Martin case Lord Browne-Wilkinson considered that there was much to be said for drawing a distinction between cases where the ownership of property is relevant to prove that the breach of contract has caused the plaintiff loss and contracts for the supply of goods or services where the contract requires the very goods or services to be supplied. But understandably he was unwilling to express a concluded view on the point, which might have profound effects on commercial contracts which had not been fully explored in argument and which he considered merited academic exposure before it was decided by the House. He found it unnecessary to do so because, unlike Lord Griffiths, he was satisfied that the case could be brought within the rule in Dunlop v. Lambert. Two of the other members of the House (Lord Keith of Kinkel and Lord Bridge of Harwich) expressed themselves as attracted by the broad principle favoured by Lord Griffiths, but for similar reasons were content to dispose of the appeal on the narrow ground.

    My Lords, Lord Griffiths was not proposing to depart from the general rule that a plaintiff can only recover compensatory damages for breach of contract in respect of a loss which he has himself sustained. He was insisting that, in certain kinds of contract at least, the right to performance has a value which is capable of being measured by the cost of obtaining it from a third party. In Darlington v. Wiltshier [1995] 1 W.L.R. 68 Steyn L.J. expressed himself as being in agreement with Lord Griffith's broad principle, which he considered to be based on classic contractual theory. Indeed, he adopted it as part of his reasoning. But he held that the case was also covered by the rule in Dunlop v. Lambert, and I have a difficulty with this. I do not think that it can be both. The rule in Dunlop v. Lambert is an (incidental) exception to the general rule that a plaintiff can only recover damages for his own loss. Lord Griffiths' broader principle treats the plaintiff as recovering for his own loss, and is thus is an application of the general rule and not an exception to it. For the same reason I cannot accept the Court of Appeal's attempt in the present case to unify the narrow and broad grounds by treating the broad ground as "the underlying principle" of the narrow. If the House had felt itself free to adopt the broad ground in the St. Martin case, then logic would have required it to adopt it in place of and not in addition to the narrow ground.

    If in the St. Martin case Lord Browne-Wilkinson was wise to await academic consideration of Lord Griffiths' broad principle, as I respectfully think he was, it has now been received in some abundance, particularly since the decision of the Court of Appeal in the present case. Commentators have given it their support, as might be expected with varying degrees of enthusiasm. None has rejected it outright or suggested that it is heterodox. There has for some time been a growing consensus among academic writers that English law adopts an unduly narrow approach to the concept of loss, and that it ought to recognise that the performance of a contractual obligation may have an economic value of its own which is capable of sounding in damages. Such damages may be measured by the cost of obtaining alternative performance, but they may also take account of loss from delay and other consequential loss. I would instance in particular: Brian Coote: 13 Journal of Contract Law 91; Professor Treitel "Damages in Respect of a Third Party's Loss" (1998) L.Q.R. 527 (a muted dubitante); I.N. Duncan-Wallace Q.C.: "Third Party Damage: No Legal Black Hole" (1999) 115 L.Q.R. 394 and (1999) 15 Const. L.J. 245; Gerard McMeel (1999) R.L.R. 20. I have also had the advantage of reading a paper given by Janet O'Sullivan in 1999 which is shortly to be published. Her paper was prompted by the decision of the Court of Appeal in Attorney-General v. Blake [1998] Ch. 439, which opened the door to the possibility of restitutionary damages for breach of contract. Her preferred solution was the recognition of the performance interest as a basis for compensatory damages. I think that there is room for both approaches. In some cases one approach may be more appropriate, in others the other. They will often produce the same measure of damages, though they may not always do so. But there has always been some flexibility in the measure of damages, and this is not undesirable.

    To my mind the most significant feature of the academic literature is that no one has suggested that the adoption of the broad ground would have any adverse consequences on commercial arrangements. Nor, despite every incentive to do so, has McAlpine been able to suggest a situation in which it would cause difficulties or defeat the commercial expectations of the parties. In my view it would help to rationalise the law and provide a sound basis for decisions like Ruxley Electronics and Construction Ltd. v. Forsyth [1996] A.C. 344 and Jackson v. Horizon Holidays Ltd. [1975] 1 W.L.R. 1468. If it is adopted, it will be for future consideration whether it would provide the better solution in cases such as St. Martin also.

    In the Ruxley case your Lordships' House refused to allow the full costs of reinstatement on the well-recognised ground that reinstatement would be an unreasonable course to take. But it was not constrained to withhold substantial damages on the ground that the value of the property was unaffected by the breach. It expressly rejected the view that these were the only two possible measures of damage in a building case. It awarded an intermediate sum for "loss of amenity." The evidence, however, showed that, viewed objectively, there was no loss of amenity either. The amenity in question was entirely subjective to the plaintiff; and its loss could equally well, and perhaps more accurately, be described as defeated expectation.

    In Woodar Investment Development Ltd. v. Wimpey Construction Ltd. [1980] 1 W.L.R. 277 Lord Wilberforce was prepared to support the Jackson case [1975] 1 W.L.R. 1468 either as a broad decision on the measure of damages or as an example of a type of contract calling for special treatment. Other examples which he instanced were persons contracting for family holidays, ordering meals in restaurants for a party, or hiring a taxi for a group. He observed that 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 must be wrong to adopt a Procrustean approach which leaves parties without a remedy for breach of contract because their arrangements do not fit neatly into some pre-cast contractual formula. When such arrangements have been freely entered into and are of an everyday character or are commercially advantageous to the parties, it is surely time to re-examine the position.

    This is the product of the narrow accountants' balance sheet quantification of loss which measures the loss suffered by the promisee by the diminution in his overall financial position resulting from the breach. One of the consequences of this approach is to produce an artificial distinction between a contract for the supply of goods to a third party and a contract for the supply of services to a third party. A man who buys a car for his wife is entitled to substantial damages if an inferior car is supplied, on the assumption (not necessarily true) that the property in the car is intended to vest momentarily in him before being transferred to his wife, whereas a man who orders his wife's car to be repaired is entitled to nominal damages only if the work is imperfectly carried out. This is surely indefensible; the reality of the matter is that in both cases the man is willing to undertake a contractual liability in order to be able to provide a benefit to his wife.

    The idea that a contracting party is entitled to damages measured by the value of his own defeated interest in having the contract performed was not new in 1994. A strong case for its adoption in the case of consumer contracts was made in an important article "The Consumer Surplus" [1979] 95 L.Q.R. 581, in which the authors explained that this would make a significant difference only in a minority of cases. As I shall show, the language of defeated expectation has been employed in the context of building contracts, at least in ordinary two-party cases like Ruxley, since the 19th century. As for three-party cases like the present, Lord Keith adverted to it as a possible solution in the Woodar case [1980] 1 W.L.R. 277, and in the same case both Lord Salmon and Lord Scarman expressed the view that the question required consideration by the House. Lord Scarman said at. pp.300-301:

    "Likewise, I believe it 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. Whatever the reason, he must have desired the payment to be made to C and he must have been relying on B to make it. If B fails to make the payment, A must find the money from other funds if he is to confer the benefit which he sought by his contract to confer upon C. Without expressing a final opinion on a question which is clearly difficult, I think the point is one which does require consideration by your Lordships' House."

    Whether the law should take account of the performance interest when considering the measure of damages for breach of contract arose clearly in the seminal case of Radford v. De Froberville [1977] 1 W.L.R. 1262. The landlord of premises let to tenants had obtained a covenant from the owner of neighbouring land to build a garden wall on the neighbour's side of the boundary. The wall was not built. The landlord sued on the covenant for damages, claiming the cost of building a similar wall on his own side of the boundary. Oliver J. found that the absence of the wall caused no reduction in value to the landlord's reversionary interest, and that the landlord (as opposed to his tenants) would derive no amenity or other advantage from having the wall built. The defendant contended that, since the landlord had suffered no loss, he was entitled to nominal damages only. The judge found that the landlord intended to apply the damages in building the wall in order to provide his tenants with the amenity which the promised wall would have done, and that this was a reasonable course for him to take. On these findings Oliver J. awarded the landlord the cost of building the wall. He said at p. 1270:

    "Now, it may be that, viewed objectively, it is not to the plaintiff's financial advantage to be supplied with the article or service which he has stipulated. It may be that another person might say that what the plaintiff has stipulated for will not serve his commercial interests so well as some other scheme or course of action. And that may be quite right. But that, surely, must be for the plaintiff to judge. Pacta sunt servanda. If he contracts for the supply of that which he thinks serves his interests - be they commercial, aesthetic or merely eccentric - then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit."

    This is the language of Lord Griffiths' broad ground. Moreover, Oliver J. raised the question of the tenants' interest, recalling the defendant's argument that the landlord was merely a landlord with an investment property and that he was not entitled to damages for a loss suffered by his tenants who were strangers to the contract. He dealt with the point, at. p. 1285:

    "Whilst I see the force of this, I do not think that it really meets the point that, whatever his status, the plaintiff had a contractual right to have the work done and does in fact want to do it. I refrain from expressing any view about what the position would be if his motives were merely capricious, for there is no suggestion of anything of that sort. 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 recent case of Jackson v. Horizon Holidays Ltd. [1975] 1 W. L.R. 1468 demonstrates that the plaintiff may obtain damages for breach of a contract entered into for the benefit of himself and other persons not parties to the contract."

This is the language of defeated expectation with substantial damages being awarded for the loss of the performance interest.

    My Lords, Oliver J.'s judgment has been very influential. His test of reasonableness was approved and applied by your Lordships' House in Ruxley Electronics and Construction v. Forsyth [1996] A.C. 344. I believe that it provides the key to the present case. The similarity of the two cases is striking. Both are concerned with building contracts in circumstances where performance would benefit a third party to the contract but not the promisee. I would draw particular attention to the fact that in Radford v. De Froberville [1977] 1 W.L.R. 1262 the proper measure of damages was taken to be the cost of doing the promised work (i.e. fulfilling the landlord's contractual expectation) and not the tenants' loss of amenity. No independent attempt was made to evaluate this.

    The seed was planted more than 20 years ago. It has been long in germination, but it has been watered and nurtured by favourable judicial and academic commentators in the meantime. I think the time has come to give it the imprimatur of your Lordships' House. I am not impressed by the argument that such a radical change, with the attendant risk of opening the floodgates to capricious and complex claims to damages in unforeseen situations of every kind, should be left to Parliament. In the first place, I do not think that it is a radical change. I respectfully agree with Steyn L.J. in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68 that it is based on orthodox contractual principles. And in the second place, the development of the remedial response to civil wrongs and the appropriate measure of damages are matters which have traditionally been the province of the judiciary. For the present I would restrict the broad ground to building contracts and other contracts for the supply of work and materials where the claim is in respect of defective or incomplete work or delay in completing it. I would not exclude the claim for damages for delay, since the performance interest extends to having the work done timeously as well as properly. There is no difficulty in quantifying the loss due to delay, at least in the family or group context. In the case of building contracts the broad ground is in line with the principle that the prima facie measure of damages is the cost of repair rather than the reduction in the market value of the property or any loss of amenity, even where the cost of repair is substantially greater, subject only to the qualification that the carrying out of the repairs must be a reasonable course to adopt: see Bellgrove v. Eldridge (1954) 90 C.L.R. 613: East Ham Corporation v. Bernard Sunley & Sons Ltd. [1996] A.C. 406.

    The rationale which underlies this measure of damages is instructive. It is best summed up in a passage in the judgment of Wetmore J. in an old Canadian case (Allen v. Pierce (1895) 3 Terr.L.R. at p. 323) cited with approval in Hudson's Building and Engineering Contracts 11th ed., (1995) Vol. 1, p. 1047:

    "It is not a mere matter of difference between the value of the material supplied and that contracted for, or of the work done and that which ought to have been done, or of the house as it stands and that which ought to have been built under the contract. If these were the standards of damages, there would be no point in a man contracting for the best materials. The owner of the building is, therefore, entitled to recover such damages as will put him in a position to have the building he contracted for."

    Again this is the language of defeated expectation. Of course, as the last sentence cited shows, Wetmore J. was speaking of the ordinary two-party case where the building employer is also the building owner. But his reasoning applies equally, and perhaps with even greater force, to the case where the building employer is not the building owner. If it did not, there would be no point in the building employer entering into the contract at all. It would be strange logic to allow the building employer to recover the cost of achieving his contractual expectations even where these do not affect the value of his land, and insist at the same time that he must own the land in question if he is to recover more than nominal damages. In my opinion, it is not a departure from orthodoxy to say, adapting Wetmore J.'s words, that the building employer, whether or not he is also the owner of the building, is entitled to recover such damages as will put him in a position to have the building he contracted for.

    Moreover, the question must be considered from a wider perspective than merely defective work. As my noble and learned friend Lord Goff observes, unless the law recognises the performance interest it can provide no remedy to the building employer if the contractor repudiates the contract before he has done any work at all, and the building employer has to engage another contractor to do the work at a higher price. This would be manifestly unjust, and to defend it by saying that the loss is suffered by the building owner (who in fact has suffered none) and not by the building employer is nothing short of absurd.

    The broad ground may be more readily applicable where the contracting party had a legitimate interest, though not necessarily a commercial one, in placing the order for the services to be supplied to the third party. Where there is a family or commercial relationship between them, as in the present case, any such requirement is easily satisfied, though it would not be right to limit the application of the principle to cases where such a relationship exists. The charitable donor has a legitimate interest in the object of his charity. But I do not think that the existence of such an interest should be seen as a separate or necessary requirement. It is rather an aspect of the test adopted by Oliver J., that is to say, reasonableness. There is much to be said for the view expressed by Lord Scarman in Woodar v. Wimpey that the fact that a contracting party has required services to be supplied at his own cost to a third party is at least prima facie evidence of the value of those services to the party who placed the order.

Must the building employer intend to carry out the work?

    Where the broad ground applies, the plaintiff recovers damages for his own loss, and accordingly in my opinion there can be no question of requiring him to account for them to the third party. In the St. Martin case Lord Griffiths drew attention to the fact that the person who places the contract suffers loss because he has to spend money to obtain the benefit of the bargain which the defendant had promised but failed to deliver. He added that the Court would wish to be satisfied that the repairs had been or would be carried out. Professor Treitel has argued that Lord Griffiths was merely saying that the plaintiff could recover damages in respect of his own loss in making alternative arrangements. I do not think that this can be right. If the making of such arrangements were a precondition of recovery, it would follow that in their absence no such damages would be recoverable. But a plaintiff is bound to mitigate his loss. He cannot increase it by entering into other arrangements. I respectfully agree with Steyn L.J. in the Darlington Borough Council case [1995] 1 W.L.R. 68 that what the plaintiff proposes to do with his damages is of no more concern to the party in breach in a three-party case than it is in a two-party case. In my opinion, it may be evidence of the reasonableness or otherwise of the plaintiff's claim to damages, but it cannot be conclusive.

    In the present case, the development of the site was a group project financed by group money. Panatown was chosen to be the building employer, but it did not use its own money to fund the cost. This was provided to it from within the group, almost certainly (if implicitly) on terms that it should be applied in paying for the works and for no other purpose. U.I.P.L. was the building owner, and must be taken to have known and approved of the works and allowed Panatown to grant McAlpine permission to enter the land and carry out the works, presumably on the basis that they would be carried out properly and in accordance with the building contract. It would be inconsistent with these arrangements if Panatown were simply to retain the damages for its own benefit. They will almost certainly be held on trust to apply them at the direction of the group company which provided the building finance.

    It may sometimes be implicit in the arrangements between the building owner and the building employer by which the building owner agrees to allow the contractor onto its land to carry out the proposed works that such works will be completed properly and in accordance with the building contract. I do not think that it is necessary or desirable to explore this question further in the present case, particularly as it may be precluded by the findings of fact below. It is sufficient that the necessary remedial work will obviously have to be carried out, and that it will have to be carried out at the expense of the group. Whether it is carried out directly or indirectly by or at the expense of Panatown itself or of another member of the group is not material. What matters is that the work will be done and that doing it will enable Panatown to obtain whatever benefit it sought to obtain as a member of the Unex Group by entering into the building contract. It will not, to use the language of Oliver J., obtain an uncovenanted benefit.

Does the existence of the D.C.D. bar recovery?

    I am unable to accept McAlpine's submission that the parties were well aware of the problem caused by the fact that Panatown was not the owner of the site, and that the D.C.D. was intended to cater for this. It is much more likely that the parties, being businessmen and more sensible than lawyers, assumed that it made no difference which company in the group owned the land. If the present problem had been foreseen, Panatown would surely have insisted on taking the benefit of an unqualified warranty such as was proposed to be given to a future tenant. It would make no commercial sense for a future tenant to have a more effective remedy than either the building employer or the building owner.

    I agree with the Court of Appeal that the D.C.D. was primarily designed to cater for subsequent purchasers. This is also the view expressed by Mr. Duncan Wallace Q.C. in "Third Party Damages: No Legal Black Hole? (1999) 115 L.Q.R. 394 and is confirmed by an article by Mr. David Lewis in (1997) 13 Const. L.J. 305. .He notes that the widespread use of collateral warranties, as they are usually called, derives from the change in the law of tort which occurred in 1990 when the House decided Murphy v. Brentwood District Council [1991] 1 A.C. 398 and departed from Anns v. Merton London Borough Council [1978] A.C. 728. Collateral warranties were commonly given by consultants and other professionals before this, but more rarely by the contractor and subcontractors. After Murphy's case strangers to the building contract, such as successors in title of the building owner, could no longer recover damages in tort for economic loss caused by the contractor's negligence. Building employers employed collateral warranties in order to provide their successors in title with a contractual cause of action for defective work discovered after they had sold the land. Contractors did not give unqualified warranties; they only warranted the exercise of due care. They were normally unwilling to undertake strict liability in advance to an unknown entity. But they were prepared to warrant due care and attention, since this only replicated their former liability in tort. Since the intended beneficiary was as yet unidentified, one solution was to enter into the warranty with the building owner and make it assignable to his successors in title. It cannot, however, have been contemplated that the building owner would rely on it himself; he had a better cause of action under the building contract.

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