Linden Gardens Trust Limited v Lenesta Sludge Disposals Limited

The House of Lords held that a contractual clause prohibiting assignment of "this Contract" (clause 17) in standard Joint Contracts Tribunal building contracts is a valid prohibition on assigning the benefit of the contract and extends to accrued causes of action as well as to rights of future performance. Such a contractual prohibition is not void as being contrary to public policy. A purported assignment in breach of that prohibition is ineffective to vest causes of action in the assignee.

The court also held that, where the original contracting party has retained the cause of action, that party may nevertheless recover substantial damages for defective performance even if it no longer owned the property at the date of breach in circumstances where the contract was entered into for the benefit of persons who might later acquire an interest (an exception to the general rule that a plaintiff can only recover for his own loss). The House applied and distinguished authorities on remoteness and on third-party payments, and emphasised that loss founded on an assignor's own deliberate act in contravention of the contract (such as an unauthorised assignment) cannot be treated as a foreseeable loss of the defendant.

This appeal group concerned disputes arising from standard form building contracts containing a clause (clause 17) prohibiting assignment without consent. Two related actions were considered: Linden Gardens (Stock Conversion originally the employer) and St. Martin's (Corporation v McAlpine). The factual matrices involved (i) an employer who purported to assign the benefit of its building contract without the contractor's consent and (ii) claims for the cost of remedial works for defective performance carried out by a later owner or by the original employer.

Procedural history: At first instance Judge John Lloyd Q.C. had held the assignments ineffective and in Linden Gardens that the assignee could not recover for work after the assignment. The Court of Appeal (February 1992) reversed on key points in Linden Gardens, holding the assignment effective to transfer accrued causes of action. The appeals came before the House of Lords.

Relief sought: damages for breach of building contracts (including recovery of remedial costs) by assignees and by the original contracting parties.

Issues framed and decided:

• Whether clause 17 prohibited assignment of the benefit of the building contract and whether that prohibition extended to accrued causes of action;
• Whether a contractual prohibition on assignment is void as contrary to public policy;
• Whether a purported assignment in breach of such a prohibition nevertheless effectively vested causes of action in the assignee; and
• If the assignment is ineffective, whether the original contracting party can recover substantial damages even though it had parted with property before breach.

Reasoning (concise): the court concluded that clause 17 was intended to prevent an employer bringing a third party into contractual relations with the contractor and therefore prohibited assignment of the benefit of the contract, including accrued causes of action, absent consent. Existing authorities supported treating such prohibitions as valid contractual terms and not contrary to public policy. An attempted assignment in breach of clause 17 is therefore ineffective to transfer the chose in action. On the measure and victim of loss, the House accepted that the general rule is that a plaintiff recovers his own loss but recognised established mercantile exceptions (as explained in The Albazero and Dunlop v Lambert reasoning): where the parties contemplated that the benefit might pass to others and there would otherwise be no remedy for those who in fact suffer loss, the original contracting party may recover substantial damages for the benefit of those persons. The court rejected the defendant's argument that recoverable loss was too remote, and allowed recovery by the original contracting party (Corporation) in the St. Martin's facts, while dismissing the assignee claim in Linden Gardens because the assignment was ineffective.

Wider context: the Lords emphasised the commercial rationales for upholding prohibitions on assignment in standard building contracts, noted that some broader policy arguments were left open for future cases, and signalled caution before altering long-standing rules about assignability and remedies.

The House held that clause 17(1) of the standard form building contract validly prohibits assignment of the benefit of the contract (including accrued causes of action) without consent; such prohibitions are not contrary to public policy; a purported assignment in breach of that prohibition is ineffective to vest the causes of action in the assignee (so Linden Gardens' claim by assignee fails). The original contracting party (Corporation) nonetheless can recover substantial damages for defective performance in the St. Martin's facts, despite having parted with the property before breach, because the contract was entered into in circumstances fitting established mercantile exceptions (the normal remoteness rules did not preclude recovery).

High Court (Judge John Lloyd Q.C.) – held assignments ineffective and in Linden Gardens that assignee could not recover for post-assignment works (reported (1990) 52 B.L.R. 93). Court of Appeal (13–14 February 1992) reversed on key points in Linden Gardens (reported (1992) 57 B.L.R. 57). House of Lords ([1993] UKHL 4) allowed the appeal in the Linden Gardens matter (set aside the Court of Appeal order of 14 February 1992) and dismissed McAlpine's appeal in the St. Martin's matter, restoring the position as explained in the speeches of the House.