Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518

KEY POINTS

• The general principle in contract law is that a plaintiff can only claim damages for a loss they have personally suffered.

• However, an exception arises when a party expressly enters into a contract as an agent or trustee for another. In such cases, the contracting party may be entitled to recover damages for all the losses suffered by their principal.

FACTS

• Panatown Ltd, employed McAlpine, to construct a building on land owned by Unex Investment Properties Ltd. (UIPL). The construction work was defective, and Panatown sought to terminate the contract due to McAlpine's failure in performance.

• While Panatown suffered no loss directly, UIPL, the owner of the building, incurred significant expenses to repair the defects and couldn't profitably use the building for an extended period.

• Panatown sought to recover the loss suffered by UIPL from McAlpine through arbitration. The appeal raises the question of whether an employer in a service contract can claim damages from the contractor for a loss suffered by a third party due to a breach of contract.

COMMENTARY

• This case established an exception to the doctrine of privity of contract in specific circumstances where a third party, closely connected to the contracting parties, suffers a loss as a direct consequence of the contract's breach.

• The decision broadened the scope for third parties to claim damages in certain scenarios and recognized that contractual relationships can have broader implications beyond the immediate parties involved.

• However, it is essential to note that the exception is still limited to particular situations and does not undermine the general principle of privity in contract law.

ORIGINAL ANALYSIS

• Plaintiff constructed a building for X (a company within the same business group as Plaintiff) on X’s land, and employed Defendant as a subcontractor.

• In breach of their contract, Defendant built a disastrous structure that required large amounts of money to be paid in repairs. Defendant had also entered a separate “duty of care” contract with X in case Defendant’s work should be defective.

• However for procedural reasons, it was Plaintiff that sued Defendant to recover the cost of repairs.

• HL denied Plaintiff’s claim - the majority approach (Clyde, Jauncey and Browne-Wilkinson) on the grounds that:

  1. Plaintiff had suffered no loss itself and had no intention/had incurred no costs in repairing the building, and

  2. Could not apply the Albazero/Linden Gardens exception because X (TP) had its own “direct contractual right” and therefore there was “no legal black hole”.

• The minority approach (dissenting) (Goff and Millett) said that:

  1. The Albazero exception did not apply in cases of no transfer of ownership being contemplated by the parties (as here), but that

  2. Although Plaintiff had suffered no loss personally, he still had an interest in performance, prima facie evidence of which is that he contracted Defendant to build the thing. 

Lord Clyde

• He challenges Lord Griffith’s “broad view” in Darlington that failure to obtain the deal is itself a loss and no evidence of further damage is necessary.

• He dislikes it because:

  1. It is a contradiction to say that the loss is the disappointment at the non-performance and yet the damages to be awarded is the cost of repair, since to award such damages would be to say that the value disappointment necessarily = the value of repair. Furthermore, if this were true, then Plaintiff would at least intend to do the repairs upon the award being made since repair would cure the “disappointment” loss. A better way of valuing disappointment would be the difference in value between what was delivered and what was promised.

  2. The disappointment value may be less than the economic consequence of breach.

  3. There is no compulsion for Plaintiff to account to the person who has suffered the actual loss  e.g. give them the damage money (True, but deterrence is a consideration, + the “disappointment” factor IS actual loss).

  4. There is no difference between loss of expectation and breach of contract i.e. Lord Griffiths’ “broad view” would mean that all breaches of contract lead to substantial compensation. He would prefer to take an attitude that a party should be able to recover provided it has to account and pass over the money to TP who actually suffered the loss, while the fact that P didn’t suffer the loss shouldn’t be a ground for escaping liability.

• However “each case has to be judged on its own circumstances” and because there was an alternative method of claiming (the “duty of care” document with UIPA) the claim by Plaintiff should be dismissed. 

Lord BW

• Doesn’t actually say whether the “broader ground” is valid. He says on a “narrower” ground the appeal failed since the party with the proprietary interest here CAN bring an action, but even on Lord Griffith’s broader ground the claim fails.

• He says that the objection to allowing a party who hasn’t suffered loss to claim damages is that, since Defendant can’t be made liable twice, it would prevent the party that actually has suffered loss from claiming

  • (this doesn’t go against the broad ground per se since all that doctrine recognises is that it is possible for those without proprietary interests to suffer loss as in Lord Griffith’s example of the husband and wife). 

Lord Jauncey

• Lord Griffith’s example was only meant to apply to cases where Plaintiff intended to repair the damage - not in cases here where Plaintiff had no such intention.

Lord Goff (dissenting)

• The “broader ground” argument is valid- see husband-wife scenario.

• Because Plaintiff is suing on the grounds of his own interest, not in the interest of TP, the fact that another party has a different remedy for a different liability is irrelevant.

  • (Firstly, as Clyde said, “expectation interest”, to which Goff is referring is in reality no different to breach itself and secondly, the breach of duty document that UIPA have covers the same project and it is unfair to Defendant to make it liable twice for one breach of contract.) 

Lord Millett

• The broader ground would be useful for commerce.

• Radford (see week 3) established that a “performance interest/expectation interest” existed which could be sued on despite no apparent loss.

• It was held by Oliver J that the agreement spoke for itself in terms of showing that there was loss caused to Plaintiff by not having the agreement enforced (else why would Plaintiff be suing). 

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McKendrick says that Lord Millett and Lord Goff are right in saying that “expectation interest” is a valid and compensable interest: if A orders a kitchen to be fitted but the wrong one, of equal value, is fitted, it would seem unfair to grant no remedy + it would contradict Parke B’s dictum (see week 3 reading). He says that Ruxley is susceptible of various interpretations and, due to the uncertain position of Lord BW there is no clarity as to what the state of the law actually is regarding the proposition that P can claim despite having suffered no physical or financial loss (merely a loss of expectations). In this type of scenario principle must decide.

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