Construction contract – Employer alleging building seriously defective – Employer not owner of construction site – Preliminary issue whether claim for damages for any defective work by contractor failed because employer not owner of site – Arbitrator concluding claim not debarred – Official Referee reaching opposite conclusion – Court of Appeal allowing appeal
In order to avoid VAT on a contract for the development of a site in Cambridge, the owner of the site, Unex Investment Properties Ltd (UIPL), arranged for an associated company, Panatown Ltd (Panatown), the employer, to enter into a construction contract (the contract) with Alfred McAlpine Construction Ltd (McAlpine), the contractor, to design and build an office building and multi-storey car park on the site. The contract was in JCT standard form with contractor’s design (1981 ed amended in 1986) and contained an arbitration clause. On the same day, a deed (the deed) was entered into by UIPL and McAlpine, which gave UIPL a right of action against McAlpine. The deed did not contain an arbitration clause. The building was completed, but Panatown alleged that it was so seriously defective that it needed to be demolished and rebuilt. Panatown commenced arbitration proceedings against McAlpine for defective works. McAlpine claimed that, as an issue of law, Panatown was not entitled to recover damages for the alleged breaches of contract because it was not the owner of the site. Therefore the loss which Panatown claimed had been suffered, not by Panatown but by UIPL, who could not recover damages for breach of the contract because it was neither a party to the contract nor the arbitration. The matter was heard as a preliminary issue. The arbitrator held that Panatown was not debarred from recovering substantial damages if the alleged breaches were proved. The Official Referee concluded that it was debarred from recovering substantial damages. Panatown appealed.
Held The appeal was allowed.
1. A contracting party could recover substantial damages for breach of contract, notwithstanding that the loss had not been borne by him, subject to the qualification that such a right had been intended by the parties. Therefore the question of whether Panatown was entitled to recover substantial damages from McAlpine depended on what they had intended or contemplated when the contract was made. That was to be ascertained from the terms of the contract and the circumstances in which it was made: see Dunlop v Lambert(1839) 6 Cl&F 600 and Albacruz (Cargo Owners) v Albazero (Owners) [1977] AC 774.
2. Under the contract Panatown was entitled to set off any damages recovered for defective work against the amount it would otherwise have been required to pay to McAlpine. Accordingly, it could be concluded that it had been intended that Panatown was to be entitled to recover substantial damages for defective work, notwithstanding that it had no proprietary interest in the land.
3. Whether Panatown’s right to substantial damages was displaced by the deed which gave UIPL a right to recover damages from McAlpine, depended on what the parties had intended and contemplated when they had entered into the deed. However, it could be concluded from the elaborate provisions of the standard form contract, which had been amended, that the parties had not intended or contemplated that Panatown’s rights to any damages by way of arbitration where to be replaced by UIPL’s rights against McAlpine: see St Martin Property Corp v Sir Robert McApline Ltd [1994] 1 AC 85.
David Friedman QC and Jeremy Nicholson (instructed by Cameron McKenna) appeared for the employer, Panatown; Rupert Jackson QC and Paul Sutherland (instructed by Masons, of Manchester) appeared for the contractor, McAlpine.