"No loss" arguments - the effects of the Alfred McAlpine Construction Ltd v Panatown Ltd decision

United Kingdom

Court of Appeal decision: "No Loss" arguments

Caroline Cummins of the Construction department discusses the decision in Alfred McAlpine Construction Ltd -v- Panatown Ltd and its effects

The decision

On 5 February and 13 March, 1998 the Court of Appeal rejected the technical "no loss" defence of contractor Alfred McAlpine against a claim brought against it by Panatown Ltd (subsidiary company of the Newmarket based Unex Group) for damages for breach of contract. However, they have also allowed McAlpine leave to appeal their decision to the House of Lords.

The Court of Appeal's decision follows but enlarges upon recent trends in "no loss" arguments seen in the well-known cases of Darlington -v- Wiltshier and St Martins.

The decision may be important in situations (of which surprisingly there are many) where:

  • an employer in a building contract is not the owner of the land on which a development is built; and
  • he does not have a legal obligation to indemnify the owner of the land for losses flowing from breach of the building contract.

If the employer can demonstrate that the parties to the building contract intended (expressly or impliedly) that the employer should be able to recover damages on behalf of the owner, then he will be able to recover damages on the owner's behalf.

The "No Loss" issue

The multi million pound dispute between Panatown and McAlpine concerns alleged defects in and delay to the completion of the office building and car park known as City House which is located in Hills Road in Cambridge.

Although Panatown was the employer under the building contract (and McAlpine the contractor), McAlpine had contended that Panatown was not entitled to recover substantial (as opposed to nominal) damages for breach of the building contract because Panatown could suffer no loss as a result of any breach because it was not the owner of the land. The owner and developer is Unex Investment Properties Ltd ("UIPL"), a sister company of Panatown. UIPL was not a party to the building contract and therefore could not itself sue McAlpine under that contract. UIPL did have the benefit of a collateral contract with McAlpine (the duty of care deed) but the Court ruled that the deed was not intended to preclude Panatown's right to receive substantial damages under the building contract.

To support its argument, McAlpine had relied upon the general rule that a person cannot recover substantial damages for breach of contract where he himself has suffered no loss. A non-owning employer under a building contract may find it difficult to establish a loss unless he has back to back contractual obligations with the owner of the land.

The effect

The Court of Appeal's Judgment enables Panatown to recover substantial damages from McAlpine for any defects in the building and delay to its completion arising from McAlpine's breach of the building contract on the basis of "classic contractual theory" namely, that both Panatown and McAlpine must have intended that Panatown should be able to recover damages under the building contract on behalf of the owner of the land UIPL. As the damages recovered by McAlpine will be recovered by it "on behalf of " UIPL, there will be no issue of double jeopardy for McAlpine, as such damages would have to be taken into account if UIPL made a separate claim under the duty of care deed.

Panatown will continue to fight for compensation from McAlpine despite the Court of Appeal's decision to grant McAlpine leave to appeal to the House of Lords. Their Lordships' judgment is unlikely to be available for 1-2 years.