|Judgments - Alfred McAlpine Construction Limited v. Panatown Limited
The theoretical objection to giving the contracting party A substantial damages for breach of the contract by B for failing to provide C with a benefit which C itself can enforce against B is further demonstrated by great practical difficulties which such a view would entail. Let me illustrate this by postulating a case where, before the breach occurred, U.P.I.L. had with consent assigned the benefit of the D.C.D. to a purchaser of the site, X. What if Panatown itself was entitled to, and did, sue for and recover damages from McAlpine? Presumably McAlpine could not in addition be liable to X for breach of the D.C.D.: yet Panatown would not be liable to account to X for the damages it had recovered from McAlpine. The result would therefore be another piece of legal nonsense: the party who had suffered real, tangible damage, X, could recover nothing but Panatown which had suffered no real loss could recover damages. Again, suppose that X agrees with McAlpine certain variations of McAlpine's liability under the building contract. What rights would Panatown then have against McAlpine? The Law Commission in its Report "Privity of Contract: Contracts for the Benefit of Third Parties (1996) (Law Com. No. 242) considered at length questions like these (see in particular paragraphs 11.14, 11.21 and 11.22) and many other problems such as set off and counter-claims. The Law Commission recommended that in certain defined circumstances third parties should be entitled to enforce the contract. But in the draft Bill annexed to the Report and in the Act of Parliament which enacted the recommendations, the Contract (Rights of Third Parties) Act 1999, specific statutory provisions were included to deal with the difficulties arising. Although both the Law Commission's Report (paragraphs 5.10 and 5.11) and sections 4 and 6(1) of the Act make it clear that the Act is not intended to discourage the courts from developing the rights of third parties when it is appropriate to do so, in my judgment there is little inducement in a case such as the present where a third party has himself the right to enforce the contract against the contract breaker, to extend the law so as to give both the promisee and the third party concurrent rights of enforcement.
For these reasons I would allow the appeal .
In 1989 the Unex Group of companies decided to develop a piece of land at Hills Road, Cambridge by constructing an office building and car park on the site. Financing for the project was obtained by the Group, probably by the parent company Unex Corporation Ltd., and provided to one of its wholly owned subsidiaries Panatown Ltd. ("Panatown"). Panatown duly entered into a building contract as employer with Alfred McAlpine Construction Ltd. ("McAlpine"). At all material times the site was owned by another member of the Group, Unex Investment Properties Ltd. ("U.I.P.L."). Ordinarily of course it is the company which owns the land which enters into the building contract as employer. The choice of Panatown rather than U.I.P.L. was entirely tax-driven. The principal question in this appeal is whether the fact, known to McAlpine, that the site was owned by another member of the Group and not by the building employer should affect the employer's remedies under the building contract.
The building contract was a modified standard form of contract. Like all such contracts, it was lengthy and extremely elaborate. It contained an arbitration clause. The contract sum was in excess of £10 million. The contractual documentation, which was voluminous, included a Duty of Care Deed ("the D.C.D.") entered into directly between McAlpine and U.I.P.L. This gave UIPL as building owner a direct remedy against McAlpine in the event of any failure by McAlpine to exercise reasonable skill, care and attention in respect of any matter within the scope of its responsibilities under the building contract. The D.C.D. was expressly made assignable by U.I.P.L. to its successors in title with McAlpine's consent, such consent not to be unreasonably withheld. It was a short form of contract and contained no arbitration clause. The structural and M.& E. engineers entered into similar Duty of Care Deeds in favour of U.I.P.L. McAlpine also undertook to enter into an unqualified warranty with any future lessee of the site that it had complied with its obligations under the building contract. The facts that U.I.P.L. was a party to the D.C.D. and that it gave McAlpine permission to enter on its land and carry out the works there (which it had no contractual obligation to do) show that it knew and approved of the proposed works.
In 1992 Panatown served notice of arbitration on McAlpine under the building contract claiming damages for defective work and delay. Although breach is disputed the existence of defects in the building is not. McAlpine has acknowledged that there are significant defects in the steel frame and foundations of the building and has accepted that insofar as those defects arise out of a breach of the building contract it is responsible for any necessary remedial works. Panatown alleges that the defects are so serious that the existing building may have to be demolished and entirely rebuilt. It estimates the total costs of rebuilding and the losses due to consequential delay at some £40 million.
In the ordinary way this dispute would be decided by arbitration and result, if Panatown were successful, in an award of substantial damages. McAlpine, however, contends that Panatown is not entitled to substantial damages; it is entitled to nominal damages only because it is not the owner of the site and has accordingly suffered no loss. The loss, McAlpine claims, has been suffered by U.I.P.L., which must sue under the D.C.D.
In the Court of Appeal Panatown successfully countered this argument by relying on what has variously been described as "the rule in Dunlop v. Lambert (1839) 6 Cl. & F. 600" or "the narrow ground" in St. Martins Property Corporation Ltd. v. Sir Robert McAlpine Ltd.  1 A.C. 85. This acknowledges that the loss was suffered by U.I.P.L. but allows Panatown to recover damages in respect of such loss on the footing that it will account for them to U.I.P.L. Before your Lordships Panatown, while maintaining this as a fall-back position, has primarily contended for "the broad ground" suggested by Lord Griffiths in the St. Martins case. This way of putting the case treats the loss occasioned by McAlpine's breach of the building contract as a loss sustained by Panatown itself. This would entitle Panatown to retain the damages for its own benefit, though since it is a member of the same Group as U.IP.L., and must be under the same equitable obligation in relation to the damages as it was in relation to the building finance in the first place, the difference between the two approaches would appear to have no commercial significance. There is certainly no reason to suppose that U.P.I.L. has any objection to the result for which Panatown contends.
Before your Lordships Panatown has advanced an even more far-reaching argument by challenging the existence of the supposed rule of English law that a plaintiff cannot recover damages for breach of contract in respect of a loss suffered by a third party. It is convenient to deal with this submission first.
The general rule.
There is no direct authority for the rule which, so Panatown submits, has been criticised so often and has been subjected to so many exceptions that we should take this opportunity to lay it to rest.
Discussion of the rule almost invariably begins with the well-known passages to which your Lordships have referred in the judgments of Parke B. in Robinson v. Harman (1848) 1 Exch. 850 and Lord Blackburn in Livingstone v. Rawyards Coal Company (1880) 5 App. Cas. 25. Yet neither passage is concerned with the supposed rule, or even with the still more general rule that only compensatory damages may be awarded for breach of contract. As their opening words make clear, they are concerned with the measure of compensatory damages in respect of loss sustained by the plaintiff. The general rule is that damages for breach of contract are compensatory, and both Parke B. and Lord Blackburn were speaking of the ordinary case where the plaintiff seeks to recover compensation for his own loss. Neither of them was concerned with the question whether there were exceptions to the general rule. Neither of them had in mind the possibility of a claim for restitutionary damages in a proper case or the award of compensatory damages to a party other than the party who has suffered the loss. A more relevant statement of the rule in relation to compensatory damages can be found in the reference by Lord Diplock in The Albazero  A.C. 774, 845G to:
The necessity of such a rule in relation to compensatory damages is, in my opinion, self-evident. Compensation is compensation for loss; its object is to make good a loss. It is inherent in the concept of compensation that only the person who has suffered the loss is entitled to have it made good by compensation. Compensation for a third party's loss is a contradiction in terms. It is impossible on any logical basis to justify the recovery of compensatory damages by a person who has not suffered the loss in respect of which they are awarded unless he is accountable for them to the person who has. As my noble and learned friend Lord Goff of Chieveley observes, allowing the contracting party to recover damages for the benefit of a third party is not an exception to the rule regarding compensatory damages but a means of circumventing the privity rule.
Although there is no direct authority for the rule, it has been stated or assumed so often, and has been the basis upon which so many cases have been decided, that it is far too late for it to be challenged now. It is far from clear that the rule is subject to numerous exceptions; the rule in Dunlop v. Lambert 6 Cl. & F. 600 is probably the only true exception. If the failure of English law to award substantial damages in proper cases defeats the parties' expectations and leads to injustice, the fault does not lie in the general rule but in the unduly narrow way in which the Courts have approached the concept of loss.
The narrow ground.
There are several apparent but well-established exceptions to the general rule of English law that in an action for breach of contract a plaintiff can only recover substantial damages for the loss which he has himself sustained. I say "apparent exceptions," for I regard most of them as explicable in a manner consistent with the rule. The first is the right of a trustee to recover damages for breach of contract in respect of the loss sustained by the beneficiaries. But an action for damages for breach of contract is an action at common law, and in the eyes of the common law it is the trustee who sustains the loss. The fact that a Court of Equity will compel him to hold the benefit of the contract and any damages recovered for its breach in trust for the beneficiaries is neither here nor there.
A second apparent exception arises where the action is brought by an agent to recover in respect of the loss sustained by an undisclosed principal. In such a case the agent can both sue and be sued on the contract. But the agent is treated as suing in respect of his own loss, not his principal's, and it is no defence to the party in breach that by reason of the agent's dealings with a third party the actual incidence of the loss may fall elsewhere: see Bowstead on Agency 15th ed. (1985), p. 431 and Bovis International Inc. v. The Circle Ltd. Partnership (1995) 49 Con. L.R. 12). A third is the right of a bailee in possession to recover for loss or damage to his bailor's goods even though he would have had a good defence to an action by the bailor: The Winkfield  P. 42 (and see sections 7 and 8 of the Torts (Interference with Goods) Act 1977). The principle here is that as between bailee and stranger possession gives a complete title and entitles the bailee to damages for the loss or injury to the property itself, whereas as between bailee and bailor the real interests of each must be ascertained. As the bailee must account to the bailor for the thing bailed, so he must account for its proceeds. What he receives above his own interest he receives to the use of the bailor; the wrongdoer, having paid damages in full to the bailee, has a good defence to any action by the bailor. This is not a true exception to the rule; so far as the wrongdoer is concerned, the bailee has full ownership and recovers damages for his own loss. There is an analogy with the case of the trustee, though the analogy is incomplete, for the bailor can bring his own proceedings and cannot compel his bailee to sue. But in both cases the fact that the contracting party is not the full owner of the property which has been lost or damaged is disregarded in ascertaining the extent of the wrongdoer's liability.
A further exception is the right of a person who has insured goods in appropriate terms to recover under the policy the full value of the goods even though the loss or part of it has been sustained by another party. The underlying rationale of this rule is uncertain. It has been explained as resting on agency, but this is doubtful. But the plaintiff must have an insurable interest in the goods, and this generally means that he is either a part-owner or bailee (see Waters v. The Monarch Fire & Life Assurance Co. (1856) 5 El. & Bl. 870), in which case the rule may be an extrapolation from the exception last-mentioned and so not a true exception at all.
In all these cases the common law, following the law merchant, has been able to reconcile the practical needs of commercial men with principle by attributing the loss to the contracting party. The remaining, and probably only true, exception is the so-called rule in Dunlop v. Lambert as rationalised by Lord Diplock in The Albazero  A.C. 774. This allows a consignor of goods to recover from the carrier in full in respect of loss or damage to the goods in transit even though he has parted with all property in the goods before they are lost or damaged and thus suffers no loss. The rule may be excluded by the contract of carriage, and is excluded where the consignee has his own action. Where the rule applies, the consignor must account to the consignee for the damages recovered on his behalf.
My noble and learned friend Lord Clyde has convincingly demonstrated that the rule is in fact based on a misunderstanding of the actual decision in Dunlop v. Lambert. But Lord Diplock's rationalisation of the rule has been recently considered and applied in a different context by your Lordships House, and where applicable it must be taken to represent the law today. It is encapsulated in the following passage of Lord Diplock's speech at p. 847:
I do not with respect accept the Court of Appeal's analysis of this doctrine as "contract-based," leading to the conclusion that the general rule that a plaintiff cannot recover damages for the loss of a third party can be excluded or modified by agreement. Lord Diplock's language ("is to be treated in law") shows that it is a rule of law. My noble and learned friend Lord Goff of Chieveley so described it in White v. Jones  2 A.C. 207, 267. It does not depend on the proper construction of the contract. The parties cannot by contract create an exception to the general rule; any attempt to do so is likely to be struck down as a penalty. Still less can they contract out of the privity rule. But they may by their contract exclude the application of the doctrine, for it applies only "if such be the intention of them both." Lord Diplock used the language of imputed intention, and to this extent the doctrine can be said to be contractual; but imputed intention is merely a legal construct employed to justify a legal consequence which the law attaches to a particular factual situation.
The scope of the rule as enunciated by Lord Diplock is relatively narrow. It is not confined to contracts of carriage, but it appears to be limited in two respects. First, Lord Diplock confined it to cases where the breach of contract leads to property in the possession of the defendant being lost or damaged, so there is some affinity with the bailment cases. Indeed, Lord Diplock considered whether the law of bailment might provide an explanation for the rule, though in the end he did not think it did. Secondly, it must have been in the contemplation of the parties that the ownership of the property would or might in the ordinary course of business be transferred by the contracting party to a successor in title during the currency of the contract. In such a case the identity of the person who suffers loss if the property is lost or damaged depends on whether the breach of contract occurs before or after the ownership of the property has been transferred. It would be contrary to the expectation of commercial men if this were to affect the extent of the wrongdoer's liability. Accordingly, in the absence of a contrary indication, Lord Diplock's rationalisation of the rule allows the contracting party to sue on the contract and recover substantial damages in respect of breaches whether occurring before or after the ownership of the property has been transferred. Where they have occurred after the transfer the contracting party recovers damages for the benefit of his successor in title and must account to him for the proceeds.
In The Albazero itself the rule in Dunlop v. Lambert was not applied, because the goods were shipped under a bill of lading which gave the consignee his own cause of action against the carrier. As my noble and learned friend Lord Goff observes, this is because the function of the rule was to escape the undesirable consequences of the privity rule, and it does not apply where it is not needed. Curiously, while the scope and utility of the rule have been much reduced in its original context of the carriage of goods by sea, it has in recent years gained a new lease of life in an entirely different context. In the St. Martins case  1 A.C. 85 it was applied to a building contract where the building employer was the owner of the site at the date of the contract but it was in the contemplation of both parties that the site might be sold or transferred to a third party before the completion of the works. My noble and learned friend Lord Browne-Wilkinson explained at p. 114:
Lord Browne-Wilkinson made it clear that if the ultimate purchaser is given a direct cause of action against the contractor, as is the consignee under a bill of lading, the case falls outside the rationale of the rule. The original contracting party will not be entitled to recover damages for loss suffered by others who can themselves sue for such loss.
The St. Martins case did not merely apply the rule in Dunlop v. Lambert 6 Cl. & F. 600 in a new factual context. It extended it from contracts for the carriage of goods to contracts for the supply of services, and in particular to building contracts. By doing so it applied the rule in a different legal context, where the problem is not caused by the privity rule but by the unduly narrow approach which the courts have adopted towards the concept of loss. In the case of a contract of carriage where the breach of contract causes loss or damage to property, the loss is suffered by the party who owns the property at the date of breach. In the case of a contract for the supply of services, however, the loss arising from defective or incomplete performance is normally suffered by the party who ordered the services. A building contract would seem to occupy the middle ground. It is a contract for the supply of services in relation to land. It is to my mind far from axiomatic that the loss arising from defective or incomplete performance is suffered exclusively by the building owner and not, or not also, by the building employer who ordered and promised to pay for the works to be carried out.
Both The Albazero and St. Martins were concerned with a contract in relation to property where it was within the contemplation of both parties that the ownership of the property might be transferred to a third party before the completion of the contract. In Darlington B.C. v. Wiltshier Northern Ltd.  1 W.L.R.. 68, however, the principle was extended still further to a case like the present where the building employer did not own the property either at the date of the contract and or at the date of the breach and where no transfer of ownership had taken place.
The Court of Appeal treated this as an a fortiori case, or at best only a small extension of the principle. I do not think it was either. It not only applied the rule in Dunlop v. Lambert in a different legal context where damages were not being claimed for loss or damage to property, following the St. Martins case  1 A.C. 85 in this respect; but applied it in a situation where the rationale of the rule was wanting. It is one thing to treat the consignor of goods as contracting with the carrier for the safety of the goods on behalf of his successors in title the owners of the goods from time to time while they are in transit. It is another to treat the building owner as contracting for works to be done on land on behalf of his successors in title the owners of the land from time to time before the completion of the works. But it is quite another to treat a building employer with no title to the land as contracting on behalf of the owner of the land who, unlike the succeeding owners in the other cases, is identifiable and perfectly capable of contracting on his own behalf. This last step uncouples the rule from the need to deal with potential successors in title and eliminate the effect of the fortuitous distinction between breaches which occur before and those which occur after the ownership of the property has been transferred, and causes a beneficent rule to lose all contact with the grounds which originally sustained it.
I think that this further extension is very difficult to justify. It extends the benefit of the rule in Dunlop v. Lambert, itself an exception to the general rule applicable to compensatory damages, beyond successors in title of the original contracting party to everyone with an interest in the property. This is too extensive for an exception, particularly where damages are not claimed for loss or damage to property; it comes near to repealing the general rule. But I am far from saying that Darlington Borough Council v Wiltshier Northern Ltd.  1 W.L.R. 68 was wrongly decided. It was obvious to the contractor throughout that the building employer was not the building owner and that the works were to be carried out for the benefit of the owner. It would have been unjust to allow the contractor to escape liability because, to its knowledge, the works were to be carried out on land not owned by the building employer. On the other hand, I find it difficult to understand why a contractor's liability should depend upon his knowledge of the building employer's lack of title. He would, no doubt, normally assume that the land belonged to the building employer, and that he would be liable to substantial damages for incomplete or defective performance of his contract. He might be mildly interested to learn that in fact the land belonged to a third party, but I doubt that it would occur to anyone but a lawyer - and evidently not to every lawyer - that this would exonerate him from liability to substantial damages for breach of contract. These considerations indicate to my mind that cases like the Darlington Borough Council case and the present ought to be accommodated, if at all, within some wider principle independently of the rule in Dunlop v. Lambert.
The broad ground.
In the St. Martins case  1 A.C. 85, 96-98 Lord Griffiths refused to accept the proposition that in the case of a contract for work, labour and the supply of materials the recovery of more than nominal damages should depend on the plaintiff having a proprietary interest in the subject matter of the contract at the date of breach. He observed that in every day life contracts for work and labour are constantly placed by persons who have no proprietary interest in the subject matter of the contract. He instanced the common case where the matrimonial home is owned by the wife, the couple's other assets belong to the husband and he is the sole earner. The house requires a new roof and the husband places a contract with a local builder to carry out the work. The husband contracts as principal and not as agent for his wife because only he can pay for the work. The builder fails to repair the roof properly and the husband has to call in and pay another builder to complete the work. Lord Griffiths considered that it would be absurd to say that the husband has suffered no loss because he does not own the property. He suggested that the husband has suffered loss because he did not receive the bargain for which he contracted with the first builder and the measure of damages is the cost of securing performance of that bargain by having the repairs done properly by the second builder.