Judgments - Alfred McAlpine Construction Limited v. Panatown Limited

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    I start with the proposition that the interest of a contracting party (A) in the performance by the other party (B) of his contractual obligations to A has long been recognised, and is protected as such by a remedy by A against B in damages. The protection of this "performance interest" or "expectation interest" is today placed at the forefront of their treatment of damages by both Professor Treitel (see Treitel on Contract,10th ed., (1999) pp. 973 et seq.) and Professor Beatson (see Anson on Contract, 27th ed., (1998) pp. 364 et seq.). The question raised by McAlpine's argument in the present case is said to arise in circumstances in which the plaintiff attempts to enforce his right to damages where the "loss" has been suffered by a third party: see, e.g., Anson on Contract, 27th ed., pp. 412 et seq.

    The argument advanced by McAlpine in the present case appears more compelling in cases where the plaintiff is claiming damages in respect of loss of, or damage to a third party's property, than in cases such as the present, where the plaintiff is claiming damages in respect of failure by the defendant to carry out, or to carry out properly, work of improvement (or repair) on the land (or chattel) of a third party. It is in the former case that it can more readily be said that the third party has suffered loss, and indeed that the loss has fallen on the third party rather than on the plaintiff. It is in such cases that we have seen the development of the specific exception identified by Lord Diplock in The Albazero [1977] A.C. 774. In the latter case, however, it is difficult to see why the fact that the land (or chattel) is owned by a third party should of itself prevent the plaintiff from recovering damages in respect of the failure by the other contracting party to fulfil his side of the bargain with the plaintiff (for which the plaintiff has ex hypothesi furnished consideration). Indeed, if the law should in such circumstances deny the plaintiff a remedy in damages, it can be said with force that his performance or expectation interest is insufficiently protected in law. Historically this may have been the position; but, if so, it appears that this defect in the law has, in recent years, been addressed and remedied in cases which the point has arisen for decision and furthermore that those decisions have been generally welcomed by the academic legal community.

    I add that, if Lord Griffiths' approach was to be rejected, it would follow that, for example, the employer under a building contract for work on another's property would have no remedy in damages if the builder was to repudiate the contract or to fail altogether to perform the contractual work. In other words, the builder could repudiate with impunity. It is no answer, or an insufficient answer, to this point that money paid in advance by the employer may be recoverable on the ground of failure of consideration, any more than it is an answer to other cases that there may be an abatement of the price.

    In the light of this preamble I wish to state that I find persuasive the reasoning and conclusion expressed by Lord Griffiths in his opinion in the St. Martin's case [1994] 1 A.C. 85, that the employer under a building contract may in principle recover substantial damages from the building contractor, because he has not received the performance which he was entitled to receive from the contractor under the contract, notwithstanding that the property in the building site was vested in a third party. The example given by Lord Griffiths of a husband contracting for repairs to the matrimonial home which is owned by his wife is most telling. It is not difficult to imagine other examples, not only within the family, but also, for example, where work is done for charitable purposes - as where a wealthy man who lives in a village decides to carry out at his own expense major repairs to, or renovation or even reconstruction of, the village hall, and himself enters into a contract with a local builder to carry out the work to the existing building which belongs to another, for example to trustees, or to the parish council. Nobody in such circumstances would imagine that there could be any legal obstacle in the way of the charitable donor enforcing the contract against the builder by recovering damages from him if he failed to perform his obligations under the building contract, for example because his work failed to comply with the contract specification.

    At this stage I find it necessary to return to the opinion of Lord Griffiths in the St. Martin's case. In the passage from his opinion, [1994] 1 A.C. 85, 96-97, which I have already quoted, he gave the example of a husband placing a contract with a builder for the replacement of the roof of the matrimonial home which belonged to his wife. The work proved to be defective. Lord Griffiths expressed the opinion that, in such a case, it would be absurd to say that the husband has suffered no damage because he does not own the property. I wish now to draw attention to the fact that, in his statement of the facts of his example, Lord Griffiths included the fact that the husband had to call in and pay another builder to complete the work. It might perhaps be thought that Lord Griffiths regarded that fact as critical to the husband's cause of action against the builder, on the basis that the husband only has such a cause of action in respect of defective work on another person's property if he himself has actually sustained financial loss, in this example by having paid the second builder. In my opinion, however, such a conclusion is not justified on a fair reading of Lord Griffiths' opinion. This is because he stated the answer to be 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." It is plain, therefore, that the payment to the second builder was not regarded by Lord Griffiths as essential to the husband's cause of action.

    The point can perhaps be made more clearly by taking a different example, of the wealthy philanthropist who contracts for work to be done to the village hall. The work is defective; and the trustees who own the hall suggest that he should recover damages from the builder and hand the damages over to them, and they will then instruct another builder, well known to them, who, they are confident, will do the work well. The philanthropist agrees, and starts an action against the first builder. Is it really to be suggested that his action will fail, because he does not own the hall, and because he has not incurred the expense of himself employing another builder to do the remedial work? Echoing the words of Lord Griffiths, I regard such a conclusion as absurd. The philanthropist's cause of action does not depend on his having actually incurred financial expense; as Lord Griffiths said of the husband in his example, he "has suffered loss because he did not receive the bargain for which he had contracted with the first builder."

    There has been a substantial amount of academic discussion about the difference of opinion in the Appellate Committee in the St. Martin's case and in particular about the merits of Lord Griffiths' opinion in that case. The Appellate Committee in the present case was supplied with copies of a number of relevant articles, which I have studied with interest and respect. I have not detected any substantial criticism of Lord Griffiths' broader ground, whereas there has been some criticism of the narrower ground adopted by the majority of the Appellate Committee in the St. Martin's case [1985] 1 A.C. 85 - see in particular the articles by Professor Treitel in (1998) 114 L.Q.R. 527, and by Mr. Duncan Wallace Q.C. (the editor of Hudson on Building Contracts) in (1994) 110 L.Q.R. 42 and (1999) 115 L.Q.R. 394 (in which the writer supports Lord Griffiths' broader ground). I have found nothing in the academic material with which we were supplied which should deter those who are attracted to the broader ground from giving effect to it in an appropriate case. In this connection, I wish to draw attention in particular to articles by Professor Brian Coote in (1997) 56 Camb. L.J. 557 and in (1998) 13 J.C.L. 91; to the articles by Mr. Duncan Wallace Q.C. to which I have already referred; and to a Paper presented by Janet O'Sullivan (the Director of Studies in Law at Selwyn College, Cambridge) at a conference held in Cambridge in 1999 on Comparative Unjustified Enrichment (the Papers for which will , I understand, shortly be published) in which she considered the whole question of damages awarded to protect contractual expectations with special reference to "restitutionary damages," and in particular to the judgment of the Court of Appeal in Attorney-General v. Blake [1998] Ch. 439. In so doing, she reviewed a number of cases in which damages were, or might usefully have been, awarded to protect contractual expectations, and in particular regarded Lord Griffiths' opinion in St. Martin's, together with the recent decision of your Lordships' House in Ruxley Electronics and Construction Ltd. v. Forsyth [1996] A.C. 344, as providing examples of steps recently taken to recognise and attack a deficiency in the remedial regime for breach of contract, arising from the "perceived failure of the English law of contract to recognise that the plaintiff's interest lies in the performance of the contract." Her review provides the context within which Lord Griffiths' opinion can usefully be set, and in this way provides further justification for Lord Griffiths' broader ground.

    Turning to the authorities, I think it right to start with the decision of your Lordships' House in East Ham Corporation v. Bernard Sunley & Sons Ltd. [1966] A.C. 406, which is regarded as the leading authority for the proposition that, in cases in which the plaintiff is seeking damages for the defective performance of a building contract (which is a contract for labour and materials), the normal measure of his damages is the cost of carrying out remedial work. On the issue of damages in that case, there appears to have been no difference of opinion among the members of the Appellate Committee. Lord Upjohn accepted at p. 445 that the normal measure of damages is the cost of reinstatement, as both Lord Guest and Lord Pearson appear to have done at pp. 440 and 451 respectively. Lord Cohen was however careful to qualify this proposition by reference to a principle of reasonableness which he drew from Hudson on Building and Engineering Contracts, 8th ed. (1859). The statement of the law (which he drew from that book) was as follows at p. 434:

    "There is no doubt that wherever it is reasonable for the employer to insist upon reinstatement the courts will treat the cost of reinstatement as the measure of damage."

    I turn next to the authoritative judgment of Oliver J. in Radford v. De Froberville [1977] 1 W.L.R. 1262, for which I wish to express my respectful admiration. The case was concerned with a contract for the sale of a plot of land adjoining a house belonging to the plaintiff (the vendor) but occupied by his tenants, under which the defendant (the purchaser) undertook to build a house on the plot and also to erect a wall to a certain specification on the plot so as to separate it from the plaintiff's land. The plaintiff obtained judgment against the defendant for damages for breach of contract by reason of her failure to erect the dividing wall, but an issue arose as to the measure of the damages. The defendant having failed to build the dividing wall on the land purchased from the plaintiff, the plaintiff proposed to build a dividing wall on his own land, and claimed the cost of doing so from the defendant; whereas the defendant maintained that the appropriate measure of damages was the consequent diminution in the value of the plaintiff's property, which was nil. Oliver J. rejected the defendant's contention. He held that the plaintiff had a genuine and serious intention of building the wall on his own land, and that this was a reasonable course of action for him to take. With regard to an argument by the defendant that, since the plaintiff did not himself occupy the property, he could not be said to have himself suffered damage by reason of the defendant's failure to build the wall, because he was not there to enjoy it, and that his only loss, therefore, was the diminution of the value of his reversion, Oliver J. gave the following answer at [1977] 1 W.L.R. 1262, 1285:

    "Whilst I see the force of this, I do not think that it really meets the point that, whatever his status, the plaintiff has a contractual right to have the work done and does in fact want to do it . . . . 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." Oliver J. here referred to Jackson v. Horizon Holidays Ltd. [1975] 1 W.L.R. 1468.

    The reference in this passage to the persons who would benefit by the building of the wall was a reference to the plaintiff's tenants.

    Oliver J.'s reliance on the simple fact that the plaintiff had a contractual right to have the wall built constitutes a plain assertion of the plaintiff's right to recover damages on the basis of damage to his performance interest, and is surely inconsistent with the submission of McAlpine, in the present case, that the mere fact that the buildings were to be constructed on the land of UIPL, rather than on the land of Panatown, debars Panatown from recovering substantial damages for the defective performance of McAlpine in the construction of the buildings. Indeed the decision of Oliver J. that the plaintiff in the case before him was entitled to substantial damages is of itself inconsistent with McAlpine's submission, since the damages were awarded in respect of a failure by the defendant to build on land which was not the property of the plaintiff.

    In the course of his judgment Oliver J., relying on a passage from the judgment of Megarry V.-C. in Tito v. Waddell (No. 2) [1977] Ch. 106, 331-334, concluded, at p. 1283, that there were three questions which he had to answer:

    "First, am I satisfied on the evidence that the plaintiff has a genuine and serious intention of doing the work? Secondly, is the carrying out of the work on his own land a reasonable thing for the plaintiff to do? Thirdly, does it make any difference that the plaintiff is not personally in occupation of the land but desires to do the work for the benefit of his tenants?"

The first two questions he answered in the affirmative; the third he answered in the negative. I think it right however to record that the issue of reasonableness which arose in the second question was not the same issue as that raised in Lord Cohen's statement of principle in East Ham Corporation v. Bernard Sunley & Sons; [1996] A.C. 406 it arose because Oliver J. had to consider whether, although the defendant's breach of contract related to a failure to build the wall on her land which she had purchased from the plaintiff, the plaintiff was entitled to claim the cost of building a similar wall on his own land. It followed that the second question was, as Oliver J. said (see [1977] 1 W.L.R. 1284E-F) "really one of mitigation," and that it was in that context that he had to consider whether the proposed action of the plaintiff was a reasonable step for him to take.

    In Ruxley Electronics and Construction Ltd. v. Forsyth [1996] A.C. 344, the defendants contracted to construct a swimming pool on the plaintiff's land. The contract specification required that the deep end of the pool should be 7 feet 6 inches deep. The pool was constructed, but the deep end was only 6 feet deep. The plaintiff claimed damages in the sum required to reconstruct the pool to the specified depth, viz. £21,560. The trial judge rejected that claim, but awarded the plaintiff damages in the sum of £2,500 for loss of amenity. The Court of Appeal allowed the plaintiff's appeal from that decision, and awarded him the full sum claimed by him. The House of Lords allowed the defendants' appeal from the decision of the Court of Appeal, on the ground that the expenditure required to reconstruct the pool to the specified depth was out of all proportion to the benefit to be obtained, and restored the judgment of the trial judge. The plaintiff invoked the decision of Oliver J. in Radford v. De Froberville as showing that he was entitled to damages for failure to comply with the contract to provide a swimming pool to his specification, notwithstanding that the extra depth was of no objective value; but on the facts of the case your Lordships' House held that the award of damages which the plaintiff sought was unreasonable and so could not be upheld. In support of this conclusion, the House was able to invoke not only English authority, notably the speech of Lord Cohen in East Ham Corporation v. Bernard Sunley & Sons, but also authoritative statements of principle from the High Court of Australia (viz. Bellgrove v. Eldridge (1954) 90 C.L.R. 613, 617-618) and the United States (viz. Jacob & Youngs v. Kent 129 N.E. 889, 891-2, per Cardozo J.). It is however plain from the opinions of the Appellate Committee that they regarded Oliver J.'s judgment in Radford v. De Froberville [1977] 1 W.L.R. 1262 as an authoritative and useful statement of legal principle: see, e.g., [1996] 1 A.C. at p. 360, per Lord Mustill. And, as Oliver J. said in Radford v. De Froberville [1977] 1 W.L.R. 1262, 1270:

    "If [the plaintiff] 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."

I respectfully agree with this proposition, the last few words of which can be regarded as concerned with the issue of reasonableness which arose in the Ruxley Electronics case [1996] A.C. 344. It cannot be said that, in the present case, the breach of contract alleged by Panatown is "technical", or that Panatown is seeking an "uncovenanted" profit. Moreover Oliver J.'s proposition, and indeed his decision, are, as I have already indicated, inconsistent with the argument now advanced on behalf of McAlpine 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. Oliver J.'s proposition is, in my opinion, equally applicable where the work contracted for is to be performed on another person's property for family reasons, or (as in the present case) for the benefit of a group of companies of which the plaintiff is a member, or for purely charitable reasons, or for any other reason for which the plaintiff thinks it appropriate to enter into such a contract --as for example in the case of a contract by the defendant to build a wall on her own land, as in Radford v. De Froberville [1977] 1 W.L.R. 1262 itself.

    It follows, in my opinion, that the principal argument advanced on behalf of McAlpine is inconsistent with authority and established principle. This conclusion may involve a fuller recognition of the importance of the protection of a contracting party's interest in the performance of his contract than has occurred in the past. But not only is it justified by authority, but the principle on which it is based is supported by a number of distinguished writers, notably Professor Brian Coote and Mr. Duncan Wallace Q.C.

    However, as I have already recorded, it was the submission of McAlpine that your Lordships should regard any such development in the law as a matter for legislation, presumably after a reference to the Law Commission. This submission was made on the basis that the Lord Chancellor had introduced into Parliament a Bill - the Contract (Rights of Third Parties) Bill, based on a Report by the Law Commission, designed to bring about a radical reform of the privity rule, and that the prospect of this imminent legislation rendered illegitimate any further judicial activism in the field which was the subject of the present appeal. That Bill is now on the statute book: see the Contracts (Rights of Third Parties) Act 1999.

    I am unable to accept this submission. As I have previously explained, this case is not concerned with privity of contract. There is no question of a third party here seeking to enforce a jus quaesitus tertio - i.e., of UIPL enforcing a right arising under the contract between McAlpine and Panatown. On the contrary, the reason why Panatown contracted as employer under the building contract with McAlpine was so that UIPL, although the owner of the site, should not do so. Even if the new Act had been in force at the material time, it would not have given UIPL any right to enforce the building contract, or any provision of it, against McAlpine. Section 1 of the Act, which is concerned with the right of a third party to enforce a contractual term, provides as follows:

1.

    (1) Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if

(a) the contract expressly provides that he may, or

    (b) subject to subsection (2), the term purports to confer a benefit on him.

(2)

      Subsection (1) (b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

It is plain that the building contract in the present case did not expressly provide that UIPL might in its own right enforce a term of the contract; and, in so far as the contract, or any term of it, purported to confer a benefit on UIPL, it is plain that the parties did not intend any such term to be enforceable by UIPL, the rights of the latter against McAlpine being limited to those which arose under a separate contract, the DCD.

    In truth, no question of a jus quaesitum tertio arises in this case at all. Lord Griffiths' broader ground is not concerned with privity of contract as such. It is concerned with the damages recoverable by one party to a contract (the employer) against another (the contractor) for breach of a contract for labour and materials, viz. a building contract. It does not seek to establish an exception to the old privity rule, though it may provide a principled basis for the recovery of damages (by a contracting party, not by a third party) in some cases, such as Jackson v. Horizon Holidays Limited [1975] 1 W.L.R. 1468, in which the privity rule has been seen as a barrier to recovery (not by a contracting party but by a third party).

    Furthermore, as Professor Hugh Beale stated some years ago (see (1995) 9 J.C.L. 103 at p. 108).

    "Even if the basic doctrine of privity were to be reformed along the lines suggested by the Law Commission, I think it is vital that the promisee should have adequate remedies to take care of those cases in which the third party does not acquire rights."

I would however go further. I do not regard Lord Griffiths' broader ground as a departure from existing authority, but as a reaffirmation of existing legal principle. Indeed, I know of no authority which stands in its way. On the contrary, there have been statements in the cases which provide support for his view. Thus in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 W.L.R. 68, 80, Steyn L.J. (as he then was) described Lord Griffiths' broader ground as based on classic contractual theory, a statement with which I respectfully agree. Moreover, Lord Griffiths' reasoning was foreshadowed in the opinions of members of the Appellate Committee in Woodar Investment Development Ltd. v. Wimpey Construction U.K. Ltd. [1980] 1. W.L.R. 277; see especially the opinion of Lord Keith of Kinkel (at pp. 297-8), and in addition the more tentative statements of Lord Salmon (at p. 291) and Lord Scarman (at pp. 300-1). Furthermore, as I have just indicated, full recognition of the importance of the performance interest will open the way to principled solution of other well-known problems in the law of contract, notably those relating to package holidays which are booked by one person for the benefit not only of himself but of others, normally members of his family (as to which see Jackson v. Horizon Holidays Ltd. [1975] 1 W.L.R. 1468), and other cases of a similar kind referred to by Lord Wilberforce in his opinion in the Woodar Investment case at p. 283 - cases of an everyday kind which are calling out for a sensible solution on a principled basis. Even if it is not thought, as I think, that the solution which I prefer is in accordance with existing principle, nevertheless it is surely within the scope of the type of development of the common law which, especially in the law of obligations, is habitually undertaken by appellate judges as part of their ordinary judicial function. That such developments in the law may be better left to the judges, rather than be the subject of legislation, is now recognised by the Law Commission itself, because legislation within a developing part of the common law can lead to ossification and a rigid segregation of legal principle which disfigures the law and impedes future development of legal principle on a coherent basis. It comes as no surprise therefore that, in its Report on "Privity of Contract: Contracts for the Benefit of Third Parties, (1996) (Law Com. No. 242) para. 5.15, the Law Commission declined to make specific recommendations in relation to the promisee's remedies in a contract for the benefit of a third party (here referring to The Albazero [1977] A.C. 774 and Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd. (the St. Martin's case) [1994] 1 A.C. 85 as cases in which "the courts have gone a considerable way towards developing rules which in many appropriate cases do allow the promisee to recover damages on behalf of the third party"), and stated that the Commission "certainly . . . would not wish to forestall further judicial development of this area of the law of damages." This certainly does not sound like a warning to judicial trespassers to keep out of forbidden territory; see also para. 11. 22, concerned with the problem of double liability - which I shall have to consider at a later stage.

    The present case provides, in my opinion, a classic example of a case which falls properly within the judicial province. I, for my part, have therefore no doubt that it is desirable, indeed essential, that the problem in the present case should be the subject of judicial solution by providing proper recognition of the plaintiff's interest in the performance of the contractual obligations which are owed to him. I cannot see why the proposed statutory reform of the old doctrine of privity of contract should inhibit the ordinary judicial function, and so prevent your Lordships' House from doing justice between the parties in the present case. As I have said, the principal function of this submission of McAlpine appears to have been to restrict the argument of Panatown to the narrower ground in Dunlop v. Lambert 6 Cl. & F. 600 and by so doing to enable McAlpine to argue that, on that basis, the cause of action by Panatown under the building contract was excluded by the separate contractual right afforded to the building owner, UIPL, under the DCD. That is a matter which I will have to address when I come to consider the second issue in the case.

 
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