Alfred McAlpine Construction Ltd v Panatown Ltd

A contracting party ordinarily recovers compensatory damages only for loss which it has sustained. The transferred-loss exception permits a promisee to recover a third party’s loss where otherwise that loss would fall into a legal black hole. The promisee must account to the third party.

The exception does not apply where the contractual arrangements give the third party its own direct remedy against the contract-breaker. A direct remedy may exclude the exception although its terms and scope differ from those of the principal contract. Accordingly, an employer which neither owned the building nor suffered financial loss could not recover the owner’s loss where the owner held a duty-of-care deed against the contractor.

Panatown employed McAlpine to design and construct an office building on land owned by UIPL, another company in the same group. McAlpine also executed a duty-of-care deed in UIPL’s favour. It gave UIPL a direct remedy for failure to exercise reasonable skill, care and attention.

After Panatown alleged serious defects and delay, an arbitrator decided as a preliminary issue that its lack of a proprietary interest did not bar substantial damages. Judge Thornton QC reached contrary conclusions on questions of law, but the Court of Appeal restored the arbitrator’s answer.

The issues were whether Panatown could recover UIPL’s loss under the transferred-loss exception or its own loss of contractual performance, and whether UIPL’s direct remedy under the deed precluded either basis of recovery.

1. Appeal allowed by a majority of three to two. Lord Clyde, Lord Jauncey of Tullichettle and Lord Browne-Wilkinson held that Panatown could not recover substantial damages. Lord Goff of Chieveley and Lord Millett dissented.
2. Per Lord Clyde, Lord Jauncey and Lord Browne-Wilkinson, compensatory damages are ordinarily recoverable only for loss sustained by the claimant. The exception rationalised in The Albazero [1977] AC 774 permits an original contracting party to recover a third party’s loss where otherwise no remedy would be available. The claimant then recovers for the third party and must account to it.
3. Per Lord Clyde, Lord Jauncey and Lord Browne-Wilkinson, that exception was excluded. The duty-of-care deed formed part of the agreed contractual structure and gave UIPL, the owner suffering the physical and economic loss, a direct claim against McAlpine. The exception exists to prevent a legal black hole and is unnecessary where the third party has its own remedy. The deed need not confer rights identical to those under the building contract.
4. Lord Clyde rejected the proposition that breach or disappointed expectation is invariably itself a substantial loss measured by the cost of cure. Lord Jauncey considered that an employer without a proprietary interest could recover where it had made good or intended to make good the breach, but Panatown had neither incurred such expenditure nor shown such an intention. Lord Browne-Wilkinson assumed that the broader performance-interest ground was sound, but held that Panatown’s performance interest had not been defeated because the contractual scheme gave UIPL its own remedy.
5. Lord Goff and Lord Millett dissented. They would have held that an employer under a building contract may recover for its own defeated performance interest despite having no proprietary interest in the site. Subject to reasonableness, damages may be measured by the cost of obtaining proper and timely performance. In their view the deed raised only a problem of coordinating claims and preventing double recovery; it did not extinguish Panatown’s contractual remedy.
6. The Court of Appeal’s order confirming the arbitrator’s answer was reversed. Panatown’s claim was confined to nominal damages on the preliminary issue.

1. House of Lords: Allowed McAlpine’s appeal by a majority of three to two and held that Panatown could not recover substantial damages on the preliminary issue.
2. Court of Appeal: Allowed Panatown’s appeal, confirmed the arbitrator’s answer that Panatown was not debarred from substantial damages, and set aside Judge Thornton QC’s contrary answers.
3. High Court, Official Referee’s Business: Judge Thornton QC remitted the matter to the arbitrator but answered the relevant questions of law adversely to Panatown.
4. Arbitration: By an interim award dated 12 August 1994, the arbitrator answered the preliminary issue in Panatown’s favour.