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
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
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 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.