· The employer can enforce a building
contract even where the building is being erected for someone else
· The employer cannot recover
substantial damages if that ‘someone else’ has been given an independent right
to enforce
Once upon a time
(in the 1980s, to be more precise), a person who purchased a building and then
found defects in it was entitled to recover damages under the tort of
negligence from whichever of the contractors, subcontractors or designers was
responsible. However, this reassuring (for purchasers) state of affairs, which
derived from the decision of the House of Lords in Anns v Merton London
Borough Council [1978] AC 728, lasted for little more than a decade before
it was overturned by another of their lordships’ rulings.
Murphy v Brentwood District Council [1991] 1 AC 398 insisted that a
claim for negligence was no longer available in such circumstances and provoked
a flurry of activity among construction lawyers, who wished to find other forms
of protection for purchasers. One outcome of their concern was the development
of the collateral warranty as a means of bringing the purchaser into a direct
contractual relationship with those who had constructed the building. These
remain a familiar feature of the commercial property landscape.
However, collateral warranties were not all
that emerged from the post-Murphy wreckage. Linden Gardens Trust Ltd v
Lenesta Sludge Disposals Ltd; St Martins Property Corp Ltd v Sir
Robert McAlpine & Sons Ltd [1994] 1 AC 85, another House of Lords
decision, offered an alternative remedy. This ruled that where a subsequent
owner had suffered loss as a result of defects in a building, the original
owner (ie the client for whom the building was originally constructed) could
bring an action for breach of the building contract and then hand over the
damages to the subsequent owner. This was a highly controversial decision (if
only because it seemed to permit the original owner to recover damages for
someone else’s loss), and it is hardly surprising that subsequent litigants
have sought to explore its limits. And the latest result? Yet another decision
of the House of Lords; Panatown Ltd v Alfred McAlpine Construction
Ltd [2000] 4 All ER 97.
Panatown was, in fact, rather different from the earlier cases, in that the
building in question, and the land upon which it was constructed, was owned not
by Panatown Ltd, but by UIPL, a company in the same group. Nevertheless, it was
desirable, for VAT purposes, to name Panatown as the employer under the
building contract. This was duly done, while, at the same time, the contractor
entered into a separate agreement with UIPL (a duty of care deed), under which
it effectively undertook to exercise all reasonable care in carrying out its
duties under the building contract. When serious defects were found in the
building, Panatown commenced arbitration proceedings against the contractor.
However, the latter raised a preliminary objection that Panatown, having
suffered no actual loss from the defects, could not be entitled to anything
more than nominal damages for any breach of contract. It was this preliminary
point that made its way to the House of Lords.
It is impossible to
do justice to the 70 pages of closely reasoned argument by the five members of
the House of Lords. However, they clearly approved of the decision in Linden
Gardens. Hence, as a matter of general principle, a party to a building
contract (A) can undoubtedly recover substantial damages for breach of that
contract, even though the building (and its defects) now belongs to someone
else (B).
However, in the
view of the majority of their lordships, the law in this situation is, quite
exceptionally, permitting one person to recover damages for a loss suffered by
another, and the only justification for this is to prevent the claim from
falling into what has been described as a ‘legal black hole’ (ie avoiding a
situation where neither A nor B would be able to sue, and the contractor would
get off scot-free). It follows that, where there is no such ‘black hole’
(because B has an independent right to recover damages for himself), there is
no need to permit A to sue. In the case itself, the duty of care deed was fatal
to Panatown’s claim, even though the rights that it gave to UIPL were not
identical to Panatown’s rights under the building contract.
Perhaps the most
interesting aspect of this case was not its endorsement of Linden Gardens,
nor even its exploration of the limits of that decision, but its detailed
examination of a separate legal issue that arose in both cases. This issue,
upon which the House of Lords was divided 3-2, came from the way in which Lord
Griffiths had approached the earlier case. In his view, an employer under a
building contract that sues the contractor for breach of contract should,
despite no longer owning the defective building, nevertheless be regarded as
seeking damages for its own loss, not that of a third party (the current
owner). The ‘loss’ in question lies in the fact that the employer has not
received the contractual performance to which it was entitled, and this can, in
normal circumstances, be measured by the cost of obtaining that performance
from an alternative source (ie whatever it would cost to put right the
contractor’s breach).
This approach,
which had attracted favourable academic comment, and which was supported by two
members of the present court, was rejected by the other three. As Lord Clyde
explained:
A more realistic and
practical solution is to permit the contracting party to recover damages for
the loss which he and a third party has suffered, being duly accountable to
them in respect of their actual loss, than to construct a theoretical loss in
law on the part of the contracting party, for which he may be under no duty to
account to anyone since it is to be seen as his own loss.