Judgments - Alfred McAlpine Construction Limited v. Panatown Limited

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    This appeal is therefore concerned with a case in which there is an assumed breach by B of his contractual obligations with A but, because the contract relates to services rendered by B in respect of the property of a third party, C, a question has been raised by B whether in such circumstances A can recover substantial damages from him. The principal type of case in which such a point has arisen has related to contracts for the carriage of goods where, at the time of loss of or damage to the goods in transit, the property in the goods has passed to C; but more recently the point has been taken in the context of a building contract under which the work contracted for was to be performed on land or buildings which, at the time of performance, belonged to C.

    It is widely supposed that there is a general rule that a party is only entitled to recover substantial damages for breach of contract in respect of his own loss, and not therefore in respect of loss suffered by a third party. The clearest statement of this supposed rule is to be found in the opinion of Lord Diplock in The Albazero [1977] A.C. 774, 845, where he referred to "the general rule of English law that a party to a contract apart from nominal damages, can only recover for its breach such actual loss as he himself has sustained." In support of the proposition, reliance is frequently placed on statements of principle by two distinguished judges, Parke B. in Robinson v. Harman (1848) 1 Exch. 850, 855, and Lord Blackburn in Livingstone v. Rawyards Coal Co. (1880) 5 App. Cas. 25, 39; yet in both cases the judges were addressing only the measure of damages suffered by the plaintiff in an ordinary two-party situation. Neither was concerned with the situation in which a party contracts for a benefit to be conferred on a third party, and so neither statement can properly be read as ruling out the possibility that the contracting party can recover substantial damages for a breach of such a contract. So far as Lord Diplock's statement of law is concerned, the function of his proposition, for which he cited no authority, was simply to provide a peg on which to hang a truly exceptional case (to which I will turn in a moment).

    It would be an extraordinary defect in our law if, where (for example) A enters into a contract with B that B should carry out work for the benefit of a third party, C, A should have no remedy in damages against B if B should perform his contract in a defective manner. Contracts in this form are a commonplace of everyday life, very often in the context of the family; but, as the present case shows, they may also occur in a commercial context. It is not surprising therefore to discover that the authority for the supposed rule which excludes such a right to damages is very thin, and that its existence has been doubted by distinguished writers - I refer in particular to articles by Professor G.H. Treitel in (1998) 114 L.Q.R. 527, and by Mr. Duncan Wallace Q.C. in (1999) 115 L.Q.R. 394.

    At all events, however, the problem surfaced first in the context of carriage of goods by sea, though the case in question, Dunlop v. Lambert (1839) 6 Cl. & F. 600, must be regarded as most unsatisfactory. That case was considered by your Lordships' House in The Albazero [1977] A.C. 774, in which the leading opinion was given by Lord Diplock who at (p. 843) described the reasoning in the speech of Lord Cottenham L.C. in Dunlop v. Lambert as "baffling," and the value of that case as an authority has been further undermined by the trenchant critique of my noble and learned friend Lord Clyde in his opinion in the present case (which I have had the opportunity of reading in draft). At all events, in The Albazero [1977] A.C. 774, 844, Lord Diplock concluded that the relevant passage in the speech of Lord Cottenham L.C. has been:

    "uniformly treated ever since by textbook writers of the highest authority . . . as authority for the broad proposition that the consignor may recover substantial damages against the shipowner 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."

Later in his opinion at p. 847, Lord Diplock rationalised the "rule in Dunlop v. Lambert" as follows:

    "The only way in which I find it possible to rationalise the rule in Dunlop v. Lambert so that it may fit into the pattern of the English law is to treat it as an application of the principle, accepted also in relation to policies of insurance upon goods, 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 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."

    Lord Diplock however identified an important exception to the rule, holding that it could not apply 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 the goods in question. This was because, Lord Diplock said at p. 848 of the

    "complications, anomalies and injustices that might arise from the co-existence of 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 . . ."

    The rule in Dunlop v. Lambert was therefore treated by Lord Diplock as an aspect of a special rule applicable in the case of commercial contracts concerning goods. It was moreover designed to solve a practical problem which may arise in the context of such contracts, viz., that the property in the goods may pass from one party to another after the contract was made, and that loss of or damage to or loss of the goods may occur at a time when the property in the goods has passed from the consignor to another party. In such circumstances it is obviously convenient that the consignor of the goods should, if such be the intention of the parties, be treated as having contracted for the benefit of all those who have acquired, or may acquire, an interest in the goods before they are lost or damaged, and as such be able to recover damages for their benefit. The rule, as so understood, is founded on commercial convenience, though its usefulness has since been much reduced as a result of later legislation, notably the Bills of Lading Act 1855 and now the Carriage of Goods by Sea Act 1992.

    However the rule in Dunlop v. Lambert 6 Cl. & F. 60 was recently invoked and applied by your Lordships' House in a very different context, viz., a case concerned with a building contract, Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd.; St. Martin's Property Corporation Ltd. v. Sir Robert McAlpine Ltd. [1994] 1 A.C. 85. In 1968 St. Martin's Property Corporation Ltd. ("Corporation") began to develop a site in Hammersmith. In the same year Corporation entered into an agreement with the local authority under which, on completion of the development, Corporation would become entitled to a 150 year lease of the site. In 1974 Corporation entered into a building contract with contractors, Sir Robert McAlpine Ltd. ("McAlpine") for the construction of the proposed buildings on the site. In the mid-1970s all the property interests of Corporation including its interest in the property under the agreement with the local authority of 1968, were assigned to another company in the same group, St. Martin's Property Investments Ltd. ("Investments"). Corporation also purported to assign to Investments the benefit of the contracts and engagements entered into by it for the construction of the development. This assignment was however held to fall foul of a prohibition against assignment contained in the building contract with McAlpine, which had the effect of precluding any claim by Investments as assignee against McAlpine under the building contract. The question then arose whether Corporation could recover substantial damages from McAlpine for breach of the building contract, notwithstanding that the interest of Corporation in the site had been transferred to another party. It was submitted by McAlpine that Corporation, having before the date of any breach of contract disposed of its interest in the property on which the building works were carried out, had suffered no loss in respect of which damages could be recovered by it, and for this proposition McAlpine cited The Albazero. The majority of their Lordships then invoked against McAlpine the exceptions to that general rule, referred to by Lord Diplock in The Albazero and exemplified by the so-called rule in Dunlop v. Lambert as rationalised by Lord Diplock in the same case. In his leading opinion, with which three other members of the Appellate Committee agreed, Lord Browne-Wilkinson said [1994] 1 A.C. 85, at pp. 114-115:

    "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 a third party 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 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 caused it.'"

    Lord Griffiths also reached the conclusion that Corporation was entitled to recover substantial damages from McAlpine, but he did so on what he called a broader ground, viz. that Corporation had suffered loss because it did not receive from McAlpine the performance of the bargain which it had contracted for. He said at pp. 96-97:

    "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. In everyday life contracts for work and labour are constantly being placed by those who have no proprietary interest in the subject matter of the contract. To take a common example, the matrimonial home is owned by the wife and the couple's remaining assets are owned by the husband and he is the sole earner. The house requires a new roof and the husband places a contract with a builder to carry out the work. The husband is not acting as agent for his wife, he makes the contract as principal because only he can pay for it. The builder fails to replace the roof properly and the husband has to call in and pay another builder to complete the work. 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' broader ground was found attractive by three other members of the Appellate Committee, including my noble and learned friend Lord Browne-Wilkinson; but they hesitated to follow Lord Griffiths down that road, partly because the point had not been fully argued, and partly because they felt that "exposure to academic consideration" was desirable before the point was decided by the House: see p. 112 per Lord Browne-Wilkinson.

    The next decision in this line of authority, following on the St. Martin's case, was the decision of the Court of Appeal in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68, another building contract case in which the same point was taken. There the council was the owner of land on which it had been decided to build a recreational centre. For reasons connected with local government finance, contracts were entered into for construction of the centre not by the council but by a finance company, the building contractors being the respondents Wiltshier Northern Ltd. The finance company subsequently assigned to the council its rights under the building contracts, and the council claimed damages from the builders for breach of the contracts. The builders took the point that the council, as assignee, had no greater rights under the contracts than the finance company had and that, as the finance company did not own the site, it had suffered no loss. The point was again rejected - by all three members of the Court (Dillon, Waite and Steyn L.JJ.) on the narrower ground in the opinion of my noble and learned friend Lord Browne-Wilkinson in the St. Martin's case [1994] 1 A.C. 85, but by Steyn L.J. (as he then was) also on Lord Griffiths' broader ground.

    The point next arose before the Court of Appeal in the present case. As I have already recorded, the submission of McAlpine was unanimously rejected by the court. The judgment of the court was delivered by Evans L.J. He proceeded essentially in accordance with the narrower ground set out in my noble and learned friend Lord Browne-Wilkinson's opinion in the St. Martin's case, based upon the rationale of Dunlop v. Lambert 6 Cl. & F. 600 which Evans L.J. described as "contract-based," The broader approach was not, in the opinion of the Court of Appeal, a possible alternative route to the same conclusion; rather "it was the underlying principle on which the Dunlop v. Lambert and St. Martin's decisions based." The court went on to consider whether the existence of a direct contractual obligation by McAlpine to UIPL under the DCD precluded recovery of substantial damages by Panatown from McAlpine on the narrower ground, having regard to the exception to the rule in Dunlop v. Lambert identified by Lord Diplock in The Albazero [1977] A.C. 774. They regarded the point as one of construction, and concluded that "the DCD was not intended to preclude the employer's right to receive substantial damages under the building contract in the present case." Evans L.J. continued:

    "The parties to that contract [the building contract] cannot have intended or even contemplated that the elaborate provisions of the standard form of contract, which they amended in many respects so as to have a tailor-made version for the particular project, could be replaced by a claim for damages, on a different basis, before a court rather than in arbitration under the building contract (there is no arbitration clause in the DCD). We would hold that, on the true construction of their contract, the parties did not intend or contemplate that the DCD should deprive the employers of the right to claim substantial damages for the contractor's breach."

    It was for these reasons that the Court of Appeal upheld the conclusion of the arbitrator on the issue before him in the present case. It is from the decision of the Court of Appeal, for the reasons I have set out, that McAlpine now appeals to your Lordships' House.

    There are, as I understand the case, essentially two questions which your Lordships have to consider: (1) whether Panatown is entitled to recover substantial damages from McAlpine in respect of the assumed breaches by McAlpine of the building contract, notwithstanding that at all material times Panatown had no proprietary interest in the site of the development; and (2) if so, whether the existence of the direct right of action by the owners of the site, UIPL, against McAlpine under the DCD precluded Panatown from recovering substantial damages from McAlpine.

    I turn therefore to the first question. Here Panatown presented its case primarily on the basis of Lord Griffiths' broader ground in the St. Martin's case [1994] 1 A.C. 85; though in the alternative it was prepared, if necessary, to fall back on the rule in Dunlop v. Lambert, 6 Cl. & F. 600 as adopted by the majority of the Appellate Committee in the St. Martin's case. It was, however, submitted on behalf of McAlpine that it was not open to Panatown to invoke the broader ground. Its submission was that the prospect of imminent legislative reform of the privity rule, in the form of the Contract (Rights of Third Parties) Bill already before Parliament, both removed the need for, and rendered illegitimate, any further judicial activism in the field which was subject of the appeal; and that the present case therefore fell to be decided solely on the basis of the exception to the "privity/loss rules" as laid down in the The Albazero [1977] A.C. 774, and explained and applied by Lord Browne-Wilkinson in the St. Martin's case. There is, I believe,. little doubt that the choice by the parties of their respective grounds was largely dictated by the possible impact of the DCD upon Panatown's claim to substantial damages under the building contract. On McAlpine's approach, it was open to it to argue that, by reason of the exception identified by Lord Diplock in The Albazero, the existence of the DCD precluded any claim by Panatown to substantial damages for breach of the building contract; whereas, by invoking Lord Griffiths' broader ground, Panatown could at least avoid that trap, though a claim on the broader ground presented its own difficulties.

    Two questions therefore arise at the threshold of the argument in this case: (1) Which is the preferable approach to the appeal? And (2) What is the impact, if any, of the imminence of statutory reform of the old privity rule? I shall now consider the first of these two questions, which is a fundamental question which lies at the heart of the case. The second question I shall postpone to a later stage.

    Which, then, is the preferable approach - is it the narrow ground derived from the rule in Dunlop v. Lambert, 6 Cl. & F. 600 or is it Lord Griffiths' broader ground? To consider this question it is, I feel, desirable to stand back from the case now before the House, and to identify the nature of the problem with which we are concerned. For that purpose it is, I believe, essential to segregate in our minds two different problems. The first, is a problem which arises from the old common law doctrine of privity of contract. The second, is a problem concerned with damages. Let me explain.

    (A) As we all know, from an early time the common law adopted a rule of privity of contract, by virtue of which only a party to the contract could enforce the contract. The rule, seen in the abstract, is rational and very understandable in a law of contract which includes the doctrine of consideration; but it has given rise to great problems in practice - because, both in commerce and in the domestic context, parties do enter into contracts which are intended to confer enforceable rights on third parties, and a rule of law which precludes a right of enforcement by a third party can therefore fail to give effect to the intention of the contracting parties and to the reasonable expectations of the third party. The existence of these problems led first of all to the recognition of a number of exceptions to the rule and ultimately, only last year, to its abolition by the Contracts (Rights of Third Parties) Act 1999.

    (B) "There is, or is widely thought to be, a general rule that, where A commits a commits a breach of his contract with B, then B can recover damages only in respect of his own loss and not in respect of loss suffered by a third party, C." I adopt the words of Professor Treitel in (1998) 114 L.Q.R. 527, because, as I have already indicated, I share his scepticism about the existence of this "rule." Plainly it is right that a contracting party should not use the remedy of damages to recover what has been described by Oliver J. (as he then was) in a notable judgment (in Radford v. De Froberville [1977] 1 W.L.R. 1262, 1270 as "an uncovenanted profit," or indeed to impose on the other contracting party an uncovenanted burden. But if the supposed rule exists, it could deprive a contracting party of any effective remedy in the case of a contract which is intended to confer a benefit on a third party but not to confer on the third party an enforceable right. It is not surprising therefore to discover increasing concern on the part of scholars specialising in the law of contract that the supposed rule, if rigidly applied, can have the effect of depriving parties of the fulfilment of their reasonable contractual expectations, and to read of doubts on their part whether any such rule exists.

    It is, I believe, important to keep these two problems distinct in our minds when addressing the basic question which arises in the present case. With this distinction in mind, let us look first of all at the rule in Dunlop v. Lambert 6 Cl. & F. 600. As Lord Diplock himself explained, this rule should be seen in context of commercial contracts concerning goods, and in particular of contracts for the carriage of goods by sea. It is a commonplace of such contracts that the goods may be shipped pursuant to a contract of sale, under which the property in the goods may pass to the consignee while the goods are in transit. However, the rule of privity of contract requires that, if the contract of carriage is (as it usually is) made between the consignor and the carrier, it can be enforced only by the consignor and not by the consignee. This creates manifest problems where the goods are lost or damaged in transit after the property in them has passed to the consignee. The rule in Dunlop v. Lambert provided a practical solution to these problems by giving the consignor the right to recover damages for such loss or damage for the benefit of the consignee, to whom he was accountable. The shortcoming of this rule must, I imagine, have been that it left the initiative with the seller, rather than with the consignee who was the person who had suffered the loss of or damage to the goods. It is not surprising, therefore, that Parliament intervened only fifteen years later, in 1855, to pass the Bills of Lading Act of that year, under section 1 of which a person to whom the property in the goods had passed upon or by reason of the consignment to him of the goods or the indorsement to him of the bill of lading acquired a direct right of action against the shipowner on the terms of the bill of lading. (The Act of 1855 has recently been repealed and replaced by the Carriage of Goods by Sea Act 1992.) The more effective remedy given by statute must have meant that the useful life of the rule in Dunlop v. Lambert was relatively short. For present purposes, however, the important point is that the function of the rule was to escape the undesirable consequences of the privity rule in a particular context, though it had the incidental effect that, if there is a rule that a party can only recover damages for breach of contract in respect of his own loss, then the rule in Dunlop v. Lambert constitutes an exception to that rule.

    Let me turn next to consider in this context Lord Griffiths' broad ground in the St. Martin's case. It is at once plain that Lord Griffiths was not concerned with a problem of privity of contract; on the contrary, he was concerned that a contracting party who contracts for a benefit to be conferred on a third party should himself have an effective remedy. He was moreover addressing not a special problem which arises in a particular context, such as carriage of goods by sea, but a general problem which arises in many different contexts in ordinary life, notably in the domestic context where parties may frequently contract for benefits to be conferred on others, though it may well arise in other contexts, such as charitable giving or even, as the present case shows, a commercial transaction. His problem was not, therefore, privity of contract; it was the rule, or supposed rule, that a party can only recover damages in respect of his own loss.

    The purpose of this analysis is to demonstrate that, in my opinion, the invocation of the rule in Dunlop v. Lambert 6 Cl. & F. 600 in the present context is, I believe, inapposite. This is because we are not here addressing a problem of privity of contract. The problem is not that UIPL had no enforceable rights against McAlpine arising under the building contract: it was the evident intention that UIPL should not have such rights, its rights against McAlpine being restricted to different rights under a separate contract, the DCD. That the rule in Dunlop v. Lambert is inapposite in the present context is illustrated in particular by the irrelevance, in this context, of any contemplation that the property of the contracting party should be transferred to a third party - a feature which was regarded by Lord Diplock as a prerequisite of the application of the rule in Dunlop v. Lambert, and was fortuitously present in the St. Martin's case [1994] 1 A.C. 85. An indication that any such prerequisite is irrelevant in the present context may be derived from the fact that, in the next case in which the St. Martin's case was applied, Darlington Borough Council v. Wiltshier Northern Limited [1995] 1 W.L.R. 68, there was no such feature and yet its absence was ignored by the Court of Appeal, no doubt because they felt that it did not matter. The same applies to the judgment of the Court of Appeal in the present case. In truth, what we are concerned with here is the effectiveness of the rights conferred on Panatown under the building contract itself.

    In expressing this opinion I wish to stress that I fully understand, and indeed sympathise with, the hesitation of the majority in the St. Martin's case to follow Lord Griffiths down the route which he preferred. But, with the passage of time and the benefit of much useful academic writing, I feel more hesitant about adopting the rule in Dunlop v. Lambert in what I consider to be an inappropriate context than I do about adopting Lord Griffiths' approach. That the latter approach itself involves certain difficulties, I freely recognise; but I regard my appropriate course in the present case as being not to reject Lord Griffiths' approach, but to identify and confront these difficulties in order to reach a solution which is in accordance with principle and also does practical justice between the parties, without leaving too great a legacy of problems for the future. To that task I now address myself.

 
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