| Date | 25 February 2008 |
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| Judgment | Alfred McAlpine Construction Ltd -v- Panatown Ltd, Court of Appeal 5th February 1998 |
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| The Issue | Whether a building owner may recover substantial damages for building defects where losses are incurred by a third party. |
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| Implication |
When an employer can demonstrate that the contract intended or contemplated that it should recover substantial damages in this type of situation this will operate as an exception to the general rule of privity of contract. |
printIn August 1996 I reported the case of Alfred McAlpine -v- Hannah Reed and Others. This case concerned the construction of a speculative office development in Cambridge for a developer named Panatown Ltd. Panatown was a special vehicle set up to develop the project on behalf of the funders in order to avoid paying VAT on the works. The project and subsequent litigation has been a disaster for all concerned. There have been allegations of major design faults including that the foundations and structural frame are inadequately calculated and constructed. Other alleged defects in the works have led to the suggestion that the building may have to be demolished and re-built. The owner and developer of the site, an associated company of Panatown, allege it has suffered substantial loss as a consequence of this project. However, since the building owner was not in direct contract with the design and build contractor, an issue arose as to whether Panatown, the construction client, could recover these losses. Initially an arbitrator sitting with a legal assessor held that it could, but an appeal to the High Court on this decision was successful. In other words it was held that Panatown had no proprietary interest in the building and therefore its claim for damages could be no more than nominal. Leave to appeal that decision to the Court of Appeal was granted and the matter decided by the Court of Appeal on 5th February 1998. The decision was to allow the appeal, over-turning the decision of the earlier judgment, and restoring the interim award of the arbitrator to the effect that the employer Panatown was not debarred from recovering substantial damages. The general rule of English law is essentially that a Plaintiff can not recover compensation for the consequences of breach of contract, when the actual loss is suffered not by it, but by a third party who is not a party to the contract. As with all rules of law however, there are exceptions. An exception was established in the 1839 case of Dunlop -v- Lambert in which it was stated that the right to recover substantial damages would arise where the parties to the contract intended or contemplated that it should, their intention being ascertained from the contracts terms and the circumstances in which it was made. This approach was followed in the 1994 decision in the case of St Martins Property Corporation -v- Sir Robert McAlpine and Sons Ltd. In that case, the House of Lords held that the employer had suffered loss because it was liable to indemnify the third party for money spent by it in remedying damages. This case was therefore to be treated as direct authority for such an approach when the claim was for damages for defective work by an employer against a contractor under a building contract. One further question remained to be answered however. The developers and funders of the project had entered into a separate duty of care deed with the contractor and it was questioned whether this would preclude that the building contract with Panatown should be interpreted in a similar manner to the St Martins case. After all, would there not be a risk of double recovery by the building owner if it was entitled to substantial damages through both the duty of care deed as well as through the vehicle of the employer under the building contract. In the Court's view there was no such risk since if damages were recovered by the employer on behalf of the building owner, such damages would have to be taken into account if the building owner made a separate claim. It was clear that the duty of care deed, a separate contract from the building contract, was intended to create a right of action in contract for the building owner against the contractor, if the contractor was in breach of its terms. It was not intended to preclude the employer's right to receive substantial damages for the contractor's breach. Accordingly the appeal was to be granted in favour of Panatown, and notwithstanding that it was not the owner of building, it was entitled to recover substantial damages, that is the appropriate measure of damages, for the contractor's failure to carry out the work in accordance with its obligations under the contract. Had this case fallen to be decided north of the border, perhaps a more direct approach would have occurred. In Strathford East Kilbride Ltd -v- HLM Design (reported in Contract Journal on 3rd December 1997) it was noted that 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 it. This third party right only arises when the intention to confer the benefit is made plain in the contract, although in that case it was held in the event that neither party had intended to create such a right by the terms of their contract.
CJ-9807
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