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

Facts

  • 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

Held (House of Lords)

  • 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

Lord Clyde

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

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

Lord Jauncey

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

Lord Browne-Wilkinson

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

Lord Goff and Lord Millet dissenting

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