| Date | 3 December 1997 |
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| Judgment | Strathford East Kilbride Ltd -v- HLM Design Ltd Outer House Court of Session, 24 July 1997 |
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| The Issue | Third party rights to sue upon contract. |
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| Implication |
Under Scots law, where a contract plainly establishes an intention to confer a benefit upon a third party to sue, such a right will exist. No similar doctrine applies in English law but this is subject to the application of the Linden Gardens and St Martins Corporation cases. |
printConstruction projects are frequently constructed by funding institutions or developers who have no long term interest in the project as a whole, the intention being to sell or lease the property to third parties at or prior to practical completion of the works. Thereafter it will be that third party who will take occupation of the property, and they will be intent on ensuring that the contractor has carried out and completed the works in accordance with the terms of the construction contract. They are not, however, a party to that contract and in the event of substantial defects, they may become embroiled in complex legal questions concerning the manner in which they can recover the losses which they might face. To overcome this type of problem, contracts will typically allow for the assignment of the employer's interest under the contract to the third party and, for example, the JCT forms contain such a clause which requires that 'the employer shall not assign the contract without the written consent of the contractor'. This question of assignment was examined in the joint cases Linden Gardens Trust -v- Lenesta Sludge Disposals and St Martins Corporation -v- Sir Robert McAlpine and Sons in 1993. The House of Lords held that the JCT assignment clause, which was operative only with the consent of the contractor, meant what it said. 'A party to a building contract…..can have a genuine commercial interest in seeking to ensure that he is in contractual relations only with a person whom he has selected as the other party to the contract'. It was held therefore that clauses such as these prohibit the assignment without consent of the benefit and the burden of a contract to a third party. In each of these cases the employer had purported to assign the contract without obtaining the written consent of the contractor, and in each case the House of Lords held that the assignment was therefore invalid. Notwithstanding this, in something of a fudge, the House of Lords held that '(the employer) 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 (the contractor) liable for breach.' Thus, third parties cannot easily overcome the general rules of privity of contract and will be unable to sue to recover losses arising from a breach of contract to which they are not a party. However, the employer may be able to 'stand in their shoes', and sue in order to recover the third party's losses, even though the employer itself may have suffered no loss. In one of the first cases in 1993 to touch upon this decision, the court refused to apply this approach. In Darlington Borough Council -v- Wiltshire Northern, the assignor who was a funding institution with no interest in the works during the life of the contract and who had incurred no real loss by virtue of the contractor's breach, was denied a right to substantial damages. These matters have once again come before the courts in the more recent decision in the Outer House of the Court of Session in Scotland, between Strathford East Kilbride Ltd -v- HLM Design Ltd. HLM had entered into contract with the Ford Motor Company to design and supervise the construction of a new dealership facility. When completed the project would be occupied by Strathford East Kilbride who were authorised dealers of Ford vehicles and who were in effect a company affiliated to Ford. Upon completion substantial structual defects were discovered in the building which required extensive remedial works. This involved relocating parts of their business which gave rise to a reduction in profits. Accordingly Strathford sued HLM on the basis that their loss and damage had been caused by HLM's breach of an implied obligation to exercise the care and skill expected of architects of reasonable competence. They argued that they were entitled to this duty as a consequence of having a direct interest in the property as the operators or tenants. Alternatively, they argued they were one of the parties for whom the benefit of the contract was arranged and executed. Under Scots law it has always been the case that a third party will be permitted to sue to enforce a contract where the parties to the contract have intended to confer a benefit upon him. Latin scholars will be interested to know that this is called 'ius quaesitum tertio'. This third party right only arises when the intention to confer the benefit is made plain in the contract. In the event the court held that neither HLM nor Ford had intended to create this right. The words of the contract did not clearly express such an intention. Thus HLM were held to owe no duty of care towards Strathford, the tenants of the property.
CJ-9743
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