Alfred McAlpine Construction Limited v. Panatown Limited

The House considered whether an employer under a building contract who is not the legal owner of the site can recover substantial contractual damages for defective performance when the actual loss falls on a third-party owner. The judgment analysed (i) the historic rule arising from Dunlop v. Lambert and as rationalised in The Albazero (the so-called consignor/"Albazero" exception), and (ii) the alternative "performance" or "loss of bargain" approach developed in St. Martins (the broader ground).

The majority held that where the contractual matrix provides the third-party owner with a direct contractual remedy (for example by a duty of care deed or collateral warranties), the rationale for treating the employer as suing on behalf of the owner under the Albazero exception is displaced. The Court therefore gave weight to the existence and scope of direct remedies to the owner (the DCD and collateral warranties) when deciding entitlement to recover substantial damages.

Although the House recognised the theoretical and practical force of the broader performance-interest approach (that an employer may recover for his disappointed expectation in appropriate building-contract cases), it concluded that, on the facts and contractual arrangements in this case, Panatown could not recover substantial damages because the contractual package had given the building owner a direct remedy. The appeal by Alfred McAlpine was allowed by the majority.

Background and parties

Alfred McAlpine Construction Ltd (contractor) built an office and car park under a modified JCT contract for Panatown Ltd (employer). The land was owned by UIPL, another company in the same group. A Duty of Care Deed (DCD) and collateral warranties gave UIPL a direct contractual remedy against McAlpine; those documents were assignable to subsequent owners. Substantial defects were alleged and Panatown commenced arbitration claiming large damages under the building contract.

Procedural history

• An arbitrator issued an interim award on preliminary questions (12 August 1994).
• Judge Thornton Q.C. (Official Referee) answered certain points of law adversely to Panatown and remitted; on appeal the Court of Appeal (13 March 1998) set aside those answers and confirmed the arbitrator's interim award in Panatown's favour.
• McAlpine appealed to the House of Lords. The House delivered multi-opinion judgments on 27 July 2000.

Issues framed

• Whether an employer who is not the owner of the land can recover substantial contractual damages for defective performance (or only nominal damages) where the actual loss lies with a third-party owner.
• Whether the so-called Dunlop/Albazero exception (treating the contracting party as suing for the third party) or the broader "performance interest" approach applies.
• Whether the existence of the DCD and collateral warranties in favour of the owner precludes the employer's claim to substantial damages.

Court's reasoning and disposition

The House reviewed Dunlop v. Lambert and Lord Diplock's exposition in The Albazero, and considered St. Martins and subsequent authorities. The majority rejected an expansive application of the Albazero exception where the contracting parties had provided the third-party owner with a direct contractual remedy as part of the same contractual matrix. The majority concluded that the presence of direct remedies to the owner (the DCD and collateral warranties) excluded treating the employer as contracting for the owner's loss under the Albazero rationale. The Lords also engaged with the broader performance-interest thesis: some speeches endorsed that approach in principle for building-contract cases, but the majority held that, on these facts and given the express contractual arrangements, Panatown could not recover substantial damages. As a result the appeal by McAlpine (seeking to prevent Panatown recovering substantial damages) was allowed by the majority.

Wider implications

The House emphasised careful analysis of the contractual package: express third-party remedies (collateral warranties, DCDs) will often exclude application of the Albazero-type exception; courts may recognise a performance-interest basis for damages in appropriate cases, but the existence and scope of direct third-party remedies is pivotal.

Appeal allowed. The majority concluded that where the contractual arrangements (including duty of care deeds and collateral warranties) provide the building owner with a direct remedy, the rationale for treating the employer as recovering for the owner's loss under the Dunlop/Albazero exception does not apply. Although the House recognised the potential validity of a "performance-interest" (expectation) basis for damages in building-contract cases, on the facts the contractual package gave the owner direct remedies and consequently the employer could not recover substantial damages under the building contract; the appellant's challenge therefore succeeded.