|Judgments - Alfred McAlpine Construction Limited v. Panatown Limited
There are however four specific matters to which I should refer before I leave the main issue in this appeal.
(1) The first relates to damages for delay. Here we are concerned, first, with the question of principle, viz. whether an employer under a building contract who does not own the building site can recover damages for delay. However the building contract in the present case, like most building contracts, contains a liquidated damages clause (condition 24). The question therefore arises whether that clause is enforceable by an employer who does not own the site. I should add that the sum specified in the contract (by Appendix 1) as payable by way of liquidation damages for delay is £35,000 per week. In the present case, the delay for which liquidated damages are claimed is potentially very great, and so the sum claimed on this basis must be very substantial.
The Court of Appeal held that the fact that Panatown was not the building owner did not preclude it from recovering damages for delay, either liquidated or unliquidated. In so holding, the Court of Appeal must have rejected the conclusion of both the arbitrator and Judge Thornton Q.C. that the liquidated damages clause in the contract was unenforceable because it was a penalty. In this connection, however, it must be borne in mind that the Court of Appeal decided the case on the basis of the narrower ground, based on the rule in Dunlop v. Lambert, 6 Cl. & F. 600.
I myself prefer to proceed on the basis of the broader ground in Lord Griffiths' opinion in the St Martin's case  1 A.C. 85. On that basis, I can see no reason in principle why my conclusion should not apply to damages for delay, as well as to damages for defective work. The employer has, after all, contracted not only for the work to be performed by the contractor as specified, but also for it to be performed within a specified time, and has given consideration for the contractor's promise to perform his obligations. He has therefore a contractual right to the performance by the contractor of his obligation as to time, as much as he has to his performance of the work to the contractual specification.
But, in the case of delay, there appears at first sight to be a problem of quantification. In the case of defective work, the employer who does not own the building site can have recourse to an objective standard for the quantification of the damage, viz. the reasonable cost of remedying the defects. At first sight, however, this approach is not so easily applicable in the case of delay, where the damages fall to be assessed by reference to the loss of the opportunity to take advantage of the completed building, either by disposing of it through a sale or long lease, or by putting it to profitable use. It appears to be suggested that loss of such an opportunity will inevitably fall on the owner of the building, and not on the employer who does not own it; and it appears to have been on this basis that condition 24 of the present building contract was held to be unenforceable as a penalty both by the arbitrator and by Judge Thornton Q.C.
I am however unable to accept the reasoning on which that conclusion appears to have been based. In the case of a commercial development such as the present, the impact of delay on the completion of the development can be measured objectively in financial terms with reference to the anticipated profitability of the development; and this can provide an appropriate yardstick for measuring the estimated damages for delay in the performance for which the employer has contracted, even where the development was to be carried out on a site belonging to another person. There is no reason to imagine that the figure included in condition 24 Appendix 1 was not calculated in some such way. It should not be forgotten that, in the present case, the contractual documents included assignable DCDs granted to UIPL, obviously as the owner of the site; and it must have been plain to all concerned that Panatown was not the owner of the site. For my part, I cannot see why the liquidated damages clause in the building contract should not be regarded as a genuine pre-estimate of the damage suffered by Panatown by reason of the delay in receiving the benefit of the building work to be performed by McAlpine under the building contract.
Even so let me, like Lord Griffiths, take an example from the context of the family. Suppose that a married woman divorces her husband, and as a result of her unhappy experiences suffers what used to be called a nervous breakdown with the effect that she is incapable of managing her own affairs. The matrimonial home always belonged to her, and remained her property after the divorce settlement; but it is decided among her family that, because of her illness, she should live with her parents, and that her house should be sold to provide her with an income from the capital sum so raised. The house needs to be put in order before it is put on the market. Her father decides to do this at his own expense, as a present to his daughter. He places a contract with a builder, which contains a liquidated damages clause. Is it to be said that, if the building work is delayed, the father cannot enforce the liquidated damages clause on the ground that it is not, and cannot be, a genuine pre-estimate of his loss? I do not think so. The sum specified in the clause for liquidated damages is intended to reflect the economic circumstances prevailing at the time, and to be related to the enhancement in the value of the house when the work is done. It may perhaps have been proposed by the builder as a rate which was, on that basis, acceptable to him and have been accepted by the father as such. The whole purpose of the father in placing the contract at his own expense is to ensure that his daughter is in a position to reap the benefit of that enhancement; and I do not see why the sum so specified should not constitute a genuine pre-estimate of the damage suffered by him by reason of delay in receiving the benefit of the building work. Indeed, he will then be in a position to make good the gift which he intended to make to his daughter, by handing the damages over to her; and he will, if necessary, have no difficulty in satisfying a court of his intention to do so. If that is not right, it is difficult to see how there could be an effective liquidated damages clause in such a contract, although such clauses are a manifest convenience to both parties in building contracts.
At all events, the foregoing reasoning is in my opinion applicable in the present case, if damages are awarded on the basis of Lord Griffiths' broader ground; though the same conclusion would be reached if damages were awarded on the basis of the rule in Dunlop v. Lambert 6 Cl. & F. 600, where the damages are recoverable on behalf of the owner. I would therefore decline to interfere with the conclusion of the Court of Appeal on this point, and I would uphold Panatown's claim to liquidated damages under condition 24 of the building contract at the rate specified in Appendix 1. I should add that, even if there had been no liquidated damages clause in the contract, in my opinion Panatown would have been entitled to recover substantial damages from McAlpine for delay, on the basis that McAlpine's assumed breach of contract had pro tanto defeated Panatown's contractual expectations. I wish to add that I understand my approach to this issue to be consistent with the views expressed by Professor Brian Coote in his article, "Contract Damages, Ruxley and the Performance Interest" in  C.L.J. 537, 552, to which I wish to express my indebtedness.
(2) The second relates to the relevance of the plaintiff's intention. It is plain that Oliver J. regarded the plaintiff's intention as material to the issue before him. He therefore asked himself (see Radford v. De Froberville  1 W.L.R. 1262, 1283E) whether the plaintiff had "a genuine and serious intention of doing the work," thereby satisfying himself that the plaintiff was "seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit" (see p. 1270E). In the St. Martin's case  1 A.C. 85, 97G, Lord Griffiths took a similar view when he expressed the opinion that, in awarding damages to the plaintiff on his broader ground, the court "will of course wish to be satisfied that the repairs have been or are likely to be carried out". It has however been suggested that to have regard in these cases to the intention of the plaintiff as to the use to which he intends to put his damages is contrary to the general principle that the court is not concerned with what the plaintiff does with his damages: see Darlington Borough Council. v. Wiltshier Northern Ltd.  1 W.L.R. 68. 80, per Steyn L.J. For my part, however, I cannot see why it should not be appropriate to have regard to such a matter when the reasonableness of the plaintiffs claim to damages is under consideration. This was the view expressed by Lord Lloyd of Berwick in Ruxley Electronics and Construction v. Forsyth  1 A.C. 344, 372C-D when he said:
I respectfully agree.
(3) I have yet to consider the impact on the main issue of the fact that the decision within the Unex Group that the contract for the development of the site owned by UIPL should be placed by Panatown rather than by UIPL was made with the purpose of avoiding the incidence of VAT. Mr. Pollock for McAlpine, submitted that your Lordships should be unwilling to assist Panatown to escape from the predicament created by this arrangement, when its cause was so unmeritorious; and in this he had a distinguished supporter in the person of Professor Treitel (see "Damages in Respect of a Third Party's Loss" (1998) 114 L.Q.R. 527, 534). I am however unable to accept this submission. It seems to me that, in modern business, where the incidence of tax can be of great importance to the viability of any enterprise such as the present, companies such as those in the Unex Group are fully entitled to take lawful measures open to them to minimise the incidence of tax. Indeed, their shareholders might well have reason to complain if they did not have this purpose in mind when they arranged their affairs. I for my part cannot see that the tax reasons underlying the arrangements in the present case have any impact upon the question whether Panatown is entitled to recover substantial damages from McAlpine. In any event, I do not conceive my function in the present appeal as being to assist Panatown to escape from their predicament. I regard it as being to ascertain the relevant principles of law, and to apply them to the facts of the case. If a consequence of this exercise is that the companies in the Unex Group have successfully avoided the incidence of VAT by a legitimate tax avoidance scheme, then so be it.
(4) Your Lordships were assisted by a presentation by Mr. Jeremy Nicholson, junior counsel for Panatown, on the applicable German law, for which I was grateful. This was founded upon advice received from Dr. Hannes Unberath, recently a graduate student at Worcester College, Oxford, and the author of an interesting case note on the present case in the Law Quarterly Review: see (1999) 115 L.Q.R. 535. His thesis is that, in Germany, the present case would be decided in favour of Panatown on the basis of a principle called Drittschadenliquidation, which has been loosely translated into English as "transferred loss" - an expression which I have myself adopted from time to time, though not I fear with any great accuracy. Indeed the concept is not an easy one for a common lawyer to grasp; and, with all respect to Dr. Unberath, I do not feel sufficiently secure to adopt it as part of my reasoning in this opinion. Even so, I find it comforting (though not surprising) to be told that in German law the same conclusion would be reached as I have myself reached on the facts of the present case. I have however also been struck by the provisions of paras. 633 and 635 of the BGB, falling within the Seventh Title entitled Contract for Work. I note (from Ian Forrester's translation of 1975) that the remedies under these two paragraphs (for defective work and for non-fulfilment) are vested in "the customer," and that there is no indication that the situation might be different if the property on which the work is to be done is vested in a person other than the customer.
Conclusion on the first issue.
For the reasons I have given, I would decide the first issue in favour of Panatown. I therefore find myself to be in agreement with the conclusion of the Court of Appeal on that issue, though not with their reasoning, since they proceeded (as I believe they were bound to do) on the basis of the narrower ground in the St Martin's case  1 A.C. 85, and I, as I am free to do, have preferred Lord Griffiths' broader ground. I wish to add in parenthesis that I have difficulty with the suggestion of the Court of Appeal that the broader ground is not a possible alternative route to the same conclusion as that reached by them on the narrower ground, but is "rather the underlying principle on which the Dunlop v. Lambert 6 Cl. & F. 600 and St. Martin's decisions are based." I myself regard the two grounds as different routes to a similar conclusion.
I now turn to the second issue in the case, which relates to the possible impact of the DCD on Panatown's remedy against McAlpine in damages.
It was the submission of McAlpine that the existence of the building owner's remedy under the DCD had the effect of precluding Panatown from recovering damages from McAlpine under the building contract. I have to say that this is, on its face, a remarkable submission; it is a strange conclusion indeed that the effect of providing a subsidiary remedy for the owner of the land (UIPL), on a restricted basis (breach of a duty of care), is that the building employer, who has furnished the consideration for the building, is excluded from pursing his remedy in damages under the main contract, which makes elaborate provision, under a standard form specially adapted for this particular development, for the terms upon which the contractor has agreed to design and construct the buildings in question.
As I have previously indicated, however, this argument was advanced by McAlpine on the basis that Panatown could only recover damages in respect of defects in a building to be constructed on land which was the property of another by invoking the narrow ground under the rule in Dunlop v. Lambert as formulated by Lord Diplock in The Albazero  A.C. 774. By so confining the argument, McAlpine was able to invoke the exception identified by Lord Diplock in The Albazero at pp. 847-848, that
The conclusion flowed from
In other words the rule in Dunlop v. Lambert, 6 Cl. & F. 600 which is a rule of law, will not apply to recognise a right of action in the original party to recover damages for the loss of, or damage, to goods, for the benefit of another person who has acquired an interest in the goods, where it is contemplated that such a person will or may enter into a separate contract of carriage with the carrier on different terms. The possibility of confusion if the rule in Dunlop v. Lambert were to apply in such circumstances is obvious.
This reasoning has, however, no application to Lord Griffiths' broader ground, under which the employer is seeking to recover damages for his own account in respect of his own loss, i.e. the damage to his interest in the performance of the building contract to which he, as employer, is party and under which he has contracted to pay for the building. The mere fact that the building contractor, McAlpine, has entered into a separate contract in different terms with another party with regard to possible defects in the building which is the subject of the building contract cannot of itself detract from its obligations to the employer under the building contract itself. In other words, it is plain that the exception identified by Lord Diplock in The Albazero  A.C. 774 is confined to the circumstances of the special rule in Dunlop v. Lambert as formulated by him. There is no basis for extending it to the circumstances of the present case. It was, I imagine, for this reason that McAlpine was concerned to confine Panatown, if possible, to advancing its case on the narrower ground based on the rule in Dunlop v. Lambert, rather than on Lord Griffiths' broader ground. However I have already explained why, in my opinion, Panatown's argument should not be restricted in this way.
For this reason alone, therefore, I am of the opinion that McAlpine's submission founded on the DCD, as advanced by it, must fail. But I wish to add that, in any event, I can see no likelihood of double recovery from McAlpine in respect of the same damage, by Panatown under the building contract and by UIPL under the DCD, and that for that reason there is no inconsistency between the two remedies.
In this connection I have been impressed by the suggestion of Mr. David Lewis (in (1997) 115 L.Q.R. at p.402) that the real purpose of the DCD was to provide a contractual remedy in negligence (comparable to that formerly available in tort under Anns v. London Merton Borough Council  A.C. 728 before that case was departed from by your Lordships' House in Murphy v. Brentwood District Council  2 A.C. 398) against McAlpine by subsequent owners of the building. For that purpose, the remedy was made available in the first instance to UIPL so that it could assign the benefit of the DCD to subsequent purchasers of the development, to whom clause 3 of the DCD expressly contemplated and authorised assignment, as and when they became identified. The purpose must, primarily at least, have been to enable such assignees to enforce their rights under the DCD in respect of defects which came to light after the property in the building passed to them; any defects which had previously come to light would have been remedied by McAlpine under the building contract or, if not, would have been the subject of a claim by Panatown for damages which, if recovered, would (for reasons which will appear) have been available and used directly or indirectly to make good the defects.
But what about the rights of UIPL under the DCD? It is arguable that, having regard to the evident purpose of the DCD, it was not intended that UIPL should itself enforce its rights under the DCD against McAlpine. After all, it was only sensible that UIPL should leave it to Panatown, as a member of the same group of companies, to enforce its more valuable rights under the building contract. The fact remains, however, that those rights of action under the DCD must in law have been vested in UIPL, for otherwise UIPL would have been in no position to assign them to subsequent purchasers.
I approach the matter as follows. First of all, it seems to me that where one party (A) is permitted by the owner of land (B) to procure the carrying out of building work on B's property, A, if he procures a builder to do the work and the work is commenced, must be under some obligation with regard to its completion. Let me take an example. Suppose that a wealthy philanthropist who lives in a village undertakes as an act of charity to renovate the village hall at his own expense. The trustees who own the hall gladly agree that he should do so. A contract is placed by the philanthropist with a builder, and the work is commenced. Unfortunately the work is defective. The builder fails or refuses to rectify the defects; the philanthropist therefore claims damages from him under the building contract, and recovers substantial damages. I cannot believe that, in those circumstances, the philanthropist can simply put the damages in his pocket and leave the building in its defective state. In my opinion, it must be implicit in the licence under which he was permitted to renovate the hall and for that purpose to contract with a builder for the work of renovation that, if the work was begun, he should at least take reasonable steps to procure its satisfactory completion. Accordingly, if he recovers damages from the builder for defective work, he should procure the rectification of the defects by another builder, the damages recovered by him being available to finance that work; though he might, by agreement with the trustees, hand the money over to them to enable them to instruct another builder of their own choice to carry out the necessary remedial work. In the present case, although it was held by Judge Thornton Q.C. that there was no contractual obligation on Panatown (vis a vis UCL or UIPL) to carry out and complete the development satisfactorily, nevertheless there was a contractual obligation on Panatown to procure a building contract. By parity of reasoning with the example I have given, it must have been implicit in that contractual obligation that, if the builder's work was defective and the defects were not rectified by him, and Panatown should in consequence recover damages from the builder for breach of contract, Panatown should instruct another builder to rectify the defects, using the damages recovered by it to finance the remedial work. (I add in parenthesis that, in the present case, the point will be reinforced if, as my noble and learned friend Lord Millett has persuasively suggested, Panatown, having received the finance for the development through the Unex Group, must hold any damages recovered from McAlpine on the same trusts as it held the money originally advanced to it.) The materiality of this point in the present case is that any damages recovered by Panatown from McAlpine by reason of the defective state of the building will be available for making good the defects in the structure, and will no doubt be used, directly or indirectly, for that purpose.
It is against this background that the materiality of UIPL's rights under the DCD must be judged. It is, of course, plain that the DCD provides a limited remedy which is subsidiary to that which arises under the main contract, i.e. the building contract itself, in the sense that, if defects come to light before completion of the work under the contract, the prime remedy lies under the building contract where the right of recovery does not depend on proof of negligence and the making good of defects is specially legislated for (in condition 16 of the Conditions of Contract). Moreover, the principal function of the DCD is to enable UIPL to assign its limited rights under it to subsequent purchasers of the development. In ordinary circumstances, therefore, there will be no need for UIPL itself to enforce its rights against McAlpine under the DCD. This is because any defects which come to light before completion of the work under the building contract should be remedied by McAlpine under the contract in the ordinary way or, if not so remedied, will be the subject of a claim for damages by Panatown; and in the latter event the damages so received by Panatown will be available, and no doubt used, directly or indirectly, to finance the necessary remedial work. In such circumstances, UIPL will naturally leave it to Panatown, as the employer, to enforce its more valuable rights under the building contract, rather than have recourse to its more uncertain remedy under the DCD under which it has to prove negligence on the part of McAlpine. Moreover, if Panatown is successful in its claim, the benefit will, as I have indicated, enure to UIPL which, in consequence, will suffer no damage.
It is conceivable that UIPL, as owner of the land, may suffer some damage distinct from that covered by Panatown's claim. In theory this could, I imagine, occur if a defect came to light after the completion of the works under the building contract, in which event a claim by Panatown against McAlpine in respect of such defect would be excluded by the terms of condition 16 of the Conditions of the Contract (concerned with practical completion and defects liability period) but would appear to be preserved for UIPL by clause 4 of the DCD which provides that "Notwithstanding the completion of the current development or any part thereof the provisions of this agreement shall continue to have effect." But a successful claim by UIPL against McAlpine in respect of such damage could not give rise to any double recovery. In any event, no such claim is relevant in the present case where, as appears from Panatown's statement of case in the arbitration, the defects complained of were identified by Panatown during the currency of contract and indeed led to the purported determination by Panatown of McAlpine's employment though McAlpine denies that Panatown were entitled to determine its employment.
For these reasons, in my opinion, there can in practice be no possibility of double recovery from McAlpine in respect of the defects which are the subject matter of Panatown's present claim against McAlpine. If any such possibility should exist, it can be disposed of in the manner indicated by my noble and learned friend Lord Millett in his opinion, by joinder of the relevant party or parties to the proceedings.
It follows that, on the second issue, I have reached the same conclusion as that reached by the Court of Appeal, viz., that the existence of the DCD does not stand in the way of the enforcement by Panatown of its right to recover substantial damages from McAlpine under the building contract.
For the reasons I have given, I would dismiss McAlpine's appeal from the decision of the Court of Appeal, and I would order that McAlpine pay the costs of the appeal to your Lordships' House.
LORD JAUNCEY OF TULLICHETTLE
This inordinately protracted arbitration/litigation has already been running in one form or another for more than 7 years and appears to have many more years of life ahead of it, howsoever this appeal is decided. My noble and learned friend Lord Goff of Chieveley in his speech has set out in detail the circumstances of the dispute between the parties which account I gratefully adopt and I can therefore refer to them very briefly. Panatown, the appellants, entered into a contract ("the building contract") with McAlpine, the respondents, whereby the latter were to design and construct an office block in Cambridge on land owned by UIPL, a company in the same group. Panatown were put in funds from within the group to meet their financial obligations under the contract, and were chosen as the contracting party for VAT reasons. On the same date McAlpine in pursuance of the building contract executed a duty of care deed (DCD) in favour of UIPL who were therein referred to as the building owners whereby they undertook inter alia that they had exercised and would continue to exercise all reasonable care, skill and attention in respect of all matters which lay within the scope of their responsibilities under the building contract and that they would owe a duty of care to UIPL in respect thereof. The situation is unusual in that no contractual obligation by Panatown to UIPL in relation to the performance of the building contract has been shown to exist.