Darlington Borough Council v Wiltshier Northern Ltd

An employer under a building contract may recover substantial damages for defective work performed for the benefit of a third party where the contracting parties contemplated that the third party would suffer the loss and would otherwise lack an effective remedy. The principle applies even though the employer held no proprietary interest in the site and its contractual rights were assignable.

An assignee can recover no more than the assignor could have recovered. Where the assignor was obliged to assign its rights to the intended beneficiary, it would alternatively hold recovered damages as constructive trustee for that beneficiary. Damages are assessed on the normal basis applicable had the beneficiary itself been the employer.

A local authority wished to construct a recreational centre on its own land without directly borrowing the construction cost. A finance company therefore contracted with the builder as employer, paid the contract price and appointed the authority to exercise most employer functions. A covenant required the finance company, on request, to assign its rights against the builder to the authority.

After serious defects were alleged, the finance company assigned its contractual rights to the authority. Judge Newey QC determined as preliminary issues that the authority, as assignee, could not recover more than nominal damages because the finance company had suffered no loss.

The central questions were whether the assignor could have recovered substantial damages representing the authority's remedial loss and, if so, how those damages should be assessed.

1. The appeal was allowed unanimously. Per Dillon LJ, with Waite LJ agreeing, the rule in Dunlop v Lambert, as recognised in the building-contract context in St Martin's Property Corporation Ltd v Sir Robert McAlpine Ltd [1994] AC 85, applied directly. The contracts were plainly made to provide a building for the authority on its land. The builder knew that defective performance would cause loss to the authority rather than to the finance company.

2. The fact that assignment was permitted did not exclude the exception. On the contrary, the covenant expressly entitled the authority to demand an assignment. It would be absurd if a prohibition against assignment permitted the original employer to recover for the third party, while an express right of assignment deprived both assignor and assignee of substantial recovery.

3. The finance company's lack of a proprietary interest in the centre was immaterial. The authority owned the site throughout, and the builder knew that construction was being undertaken for its benefit. Steyn LJ likewise held that proprietary ownership by the contractual employer was not an indispensable condition of substantial contractual damages.

4. Per Dillon LJ, with Waite LJ agreeing, the same result followed in equity. Because the covenant obliged the finance company to assign its rights to the authority, any damages recovered before assignment would have been held on constructive trust for the authority. The finance company could therefore have recovered the authority's loss within the fiduciary exception illustrated by Lloyd's v Harper.

5. Steyn LJ additionally adopted Lord Griffiths's wider expectation-loss analysis, subject to a qualification. In building contracts, an employer's substantial recovery is not conditional upon proof that repairs have been or will be undertaken. Dillon LJ considered it unnecessary to decide that wider point, and Waite LJ rested his agreement on the narrower rule and constructive trust.

6. The orders below were set aside. Preliminary issue C(i) was answered “Yes”. On issue C(ii), damages were to be assessed on the normal basis as if the authority had been the employer under the building contracts.

1. Court of Appeal: The appeal was allowed unanimously. The orders below were set aside, preliminary issue C(i) was answered affirmatively, and damages were ordered to be assessed as if the authority had been the employer.

2. Construction Court: Judge Newey QC determined preliminary issues on 13 October 1993. He held that the assignee had no valid claim for more than nominal damages and consequently gave no answer on assessment. A further order was made on 3 December 1993.