Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (St Martins Property Corpn Ltd v Sir Robert McAlpine Ltd (formerly Sir Robert McAlpine and Sons Ltd))

A contractual term prohibiting assignment of the contract ordinarily bars transfer of its benefit, including accrued causes of action, unless the language clearly distinguishes them. Such a restriction is valid. An assignment made in breach does not vest contractual rights in the assignee against the other contracting party.

An original building owner may nevertheless recover substantial damages for loss suffered by a later owner where transfer or occupation by third parties was contemplated and the later owner has no direct right against the contractor. The exception does not apply where the person suffering the loss can sue directly.

These conjoined appeals concerned two building contracts containing provisions against assignment without the contractor’s consent.

In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd, the original employer purported to assign accrued claims after transferring the premises. The trial judge held that the assignment was ineffective and that the assignee could not recover expenditure incurred after the assignment: (1990) 52 B.L.R. 93. The Court of Appeal reversed both conclusions: (1992) 57 B.L.R. 57.

In St Martin's Property Corporation Ltd v Sir Robert McAlpine and Sons Ltd, the employer transferred its property interest before the alleged breaches. The Court of Appeal held that the assignment was ineffective but that the original employer could recover substantial damages for the remedial work.

The central questions were whether the prohibitions covered accrued and future contractual rights, whether such restrictions were valid and effective, and whether the original employer could recover substantial damages for loss sustained by a later owner.

1. Disposition. The House unanimously allowed McLaughlin and Harvey plc’s appeal in the Linden Gardens action. It dismissed McAlpine’s appeal and Investments’ cross-appeal in the St Martin’s action. The first-instance order in Linden Gardens was restored, subject to revised answers to the preliminary issues.

2. Scope of the assignment prohibition. Lord Browne-Wilkinson delivered the leading speech. Lord Keith, Lord Bridge and Lord Ackner agreed with his reasoning, and Lord Griffiths agreed on the assignment issues. Although the burden of a contract cannot be assigned without novation, lawyers commonly use “assign this contract” to describe assignment of its benefit. Clause 17 therefore prohibited assignment of contractual benefits. It covered both rights to future performance and accrued causes of action. A division between those rights would create commercially incoherent results and required clear drafting.

3. Validity and effect. Per Lord Browne-Wilkinson, a restriction preventing an assignee from entering direct contractual relations with the other contracting party is not contrary to public policy. The contractor may have a legitimate commercial interest in dealing only with the chosen employer. An assignment made in breach of such a restriction is ineffective to vest the contractual rights in the assignee. An agreement between assignor and assignee concerning the proceeds may remain effective between them. The different rule governing assignment of leasehold property did not provide a valid analogy.

4. Indemnity-based loss. Per Lord Browne-Wilkinson, Corporation could not establish substantial loss merely from its liability to Investments arising out of the prohibited assignment. That liability was too remote under Hadley v Baxendale (1854) 9 Exch. 341. A contracting party is not liable for loss flowing from an act which the contract expressly forbids the other party to perform.

5. Loss sustained by a later owner. Lord Browne-Wilkinson, with Lord Keith, Lord Bridge and Lord Ackner, held that Corporation could recover substantial damages for defective performance. Both parties knew that the development would be occupied or acquired by third parties. No right of action would pass automatically to those suffering the loss, and the contract itself prevented assignment without consent. Applying the rationale of Dunlop v Lambert (1839) 6 Cl. & F. 600 and The Albazero [1977] A.C. 774, Corporation could enforce the contract for the benefit of those suffering the loss. The exception would not apply if the later purchaser possessed a direct contractual remedy against the contractor.

6. Broader measure of loss reserved. Lord Griffiths would also have held that a party contracting for work, labour and materials suffers loss when it does not receive the promised performance, irrespective of its proprietary interest or reimbursement by a third party. Lord Browne-Wilkinson declined to decide that broader proposition. Lord Keith and Lord Bridge likewise adopted the narrower ground.

1. House of Lords: In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (St Martins Property Corpn Ltd v Sir Robert McAlpine Ltd) [1994] 1 AC 85, the House allowed the Linden Gardens appeal, restored the first-instance order subject to revised answers, and dismissed the McAlpine appeal and Investments’ cross-appeal.
2. Court of Appeal: In the conjoined appeals reported at (1992) 57 B.L.R. 57, the court reversed the Linden Gardens decision on assignment and recoverable loss. In the St Martin’s action it held by a majority that the assignment was ineffective, but held unanimously that Corporation could recover substantial damages.
3. First instance: In the Linden Gardens action, Judge John Lloyd QC held that the assignment was ineffective and that the assignee could not recover the later expenditure: (1990) 52 B.L.R. 93. In the St Martin’s action, Judge Bowsher QC held that the assignment was ineffective and that Corporation was entitled only to nominal damages.