Contract: third party rights

Citation

Lee, R. and Waterson, G. (2001), "Contract: third party rights", Property Management, Vol. 19 No. 1. https://doi.org/10.1108/pm.2001.11319aab.001

Contract: third party rights

Contract: third party rights

Alfred McAlpine Construction Ltd v. Panatown Ltd, The Times, 15 August 2000 HL

This case raised a familiar problem in the construction industry. If a client enters a contract with a contractor for the contractor to construct a building on land belonging to a third party and the building so erected turns out to be defective, has either the client or the third party any remedy against the contractor? The general rule is well known; the client could only recover compensation for damage that he has suffered. Since neither the land nor the building belong to the client, he has suffered no loss for which he can be compensated. As the owner of the land and building the third party has suffered loss but as he is not a party to the contract he cannot claim against the contractor. This problem has now been resolved by the Contracts (Rights of Third Parties) Act 1999: however, it was not in force at the time that the current case arose.

The facts of this case were straightforward. Panatown Ltd. entered a contract with McAlpine Construction Ltd. whereby McAlpine would design and construct an office building on land owned not by Panatown itself, but by another member of the group of companies to which it belonged. The owner of the site was Unex Investment Properties Ltd. Defects appeared in the building and Panatown brought arbitration proceedings against McAlpine claiming substantial damages.

Their Lordships had considered a similar problem in the cases of St Martins Property Corporation v. Sir Robert McAlpine Ltd and Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd [1994] AC85. In those cases their Lordships extended the reasoning in the case of The Albazero [1977] AC774 so as to hold that where it was envisaged by the parties to the contract that ownership of the property might be transferred to a third party, so that the consequences of any breach of contract would be suffered by the third party, the client had a cause of action to recover from the contractor the loss suffered by the third party. However, both the Albazaro and the St Martins cases established in addition first, that the client was accountable to the third party for any damages recovered from the contractor as compensation for the third party's loss. Second that the principle allowing the client to recover compensation on the third party's behalf did not apply at all if the third party had a direct remedy against the contractor because it was not needed. This second situation existed in the current case and distinguished it from the St Martins case.

When negotiating the original contract, the Unex Group had obtained a direct contractual obligation between Unex Investment Properties Ltd and McAlpine. Under a duty of care deed McAlpine had undertaken to Unex Investment Properties that in all matters within the scope of McAlpine's responsibilities under the building contract they would exercise all reasonable skill, care and attention and owed a duty of care in respect of such matters to Unex Investment Properties Ltd. It was also agreed that the duty of care deed could be assigned to Unex Investment Properties' successors in title or to any other party with the consent of the contractor, such consent not to be unreasonably withheld.

In their Lordships' view, if the contractual arrangements between the parties in fact provided the third party with a direct remedy against the wrongdoer the whole rationale of the rule in the St Martins case disappeared. In the present case the whole contractual scheme was designed to give Unex Property Investments and its successors in title a legal remedy against McAlpine for failure to perform the building contract with due care. Thus Panatown had suffered no damage to its interests. Consequently, subject to any defence based on limitation of actions, the physical and economic loss suffered by Unex Property Investments could be redressed by it exercising its own cause of action against McAlpine.

The appeal was allowed.