Alfred McAlpine Construction Ltd v Panatown Ltd [2001] AC 518

Key point

If contracting parties provided a remedy for loss to the third party, the Albazero exception does not apply

Panatown (C) hired McAlpine (D) to build an office building for UIPL (U), a company in the same group as C
D entered into a duty of care deed to U under which it was liable to U for any failure to exercise reasonable care
There was defect and delay and the loss were suffered by U
C sued D for breach of contract
C argued that the broader ground (stated by Lord Griffiths in the St Martins case) should be applied

C’s claim failed; C is only entitled to nominal damages
The duty of care deed gave U direct contractual rights against D, hence the Albazero exception did not apply
The broader ground was rejected by the majority

The Albazero exception: p. 530B

It is preferable to regard it as a rule of law rather than being based on the intention of the parties as parties may in reality not have applied their minds to the point
Where parties deliberately provided for a remedy for a third party it can be readily concluded that they have intended to exclude the operation of the exception
The terms and provisions of the contract will then require to be studied to see if the parties have excluded the operation of the exception

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Current case: p. 532

In this case the exception did not apply since contracts of the deed of duty of care and collateral warranties were entered
Even though the remedies available under contract and those under the duty of care deed do not absolutely coincide, the exception is excluded
On a more general approach the difference between a strict contractual basis of claim and a basis of reasonable care makes the express remedy more clearly a substitution for the operation of the exception

The narrow ground

The Albazero exception prevents claims to damages falling into ‘some legal black hole’ where no remedy is available to the third party: p. 568B
But the exception is not only displaced by rights vested in a third party which are identical to those of the innocent contracting party: p. 568B

The broader ground

Lord Griffith’s reasoning was directed to reject the proposition that entitlement to more than nominal damages was dependent upon the claimant having a proprietary interest, but it is predicated upon the claimant having to make good the effects of the breach to the third party: p. 574B
This avoids the recovery of an “uncovenanted” profit by an employer who does not intend to take steps to remedy the breach: p. 574B

Duty of care deed refutes both the narrow and broader ground: p. 574C

Both seek to avoid the “black hole” where there is no remedy for loss by a third party but here the third party has a remedy against D
If both C and U have claims against D, D would have to pay twice in damages
C’s claim for loss of expectation can only have nominal value when U has an enforceable claim and C does not intent to spend to remedy the breach

Narrower ground

It is based on the need to provide a remedy to third parties for loss which “under a rational legal system ought to be compensated by the person who has caused it”
But where the third party has a direct remedy against the wrongdoer the whole rationale of the rule disappears: p. 577A

Broader ground

Even if the broader ground is sound in law it is not applicable
It requires that the innocent contracting party suffer a loss of performance interest in failing to confer on the third party the benefit it had contracted for: p. 577B
In the current case the broader ground is excluded since C has not suffered any loss of performance interest since U can sue D for its losses: p. 578A
There is also the double liability problem: presumably if the innocent contracting party recovered damages, the third party should not be allowed to sue as well, but this denies the party that actually suffered loss a claim: p. 578B

C was entitled to recover substantial damages for its own loss based on Lord Griffith’s broad ground in the St Martins v McAlpine