Third Party Rights to Damages

As a result of recent developments in the law of contract, contractors can now find themselves directly or indirectly liable to third parties with whom they have no contract.

The common feature of all these cases (and which led to the litigation) was that the original employer transferred his interest in the property to a subsequent owner or occupier for full value.

Defects were alleged to have appeared in the building, and the cost of repairing the defects fell on the subsequent owner or occupier. The original owner suffered no loss.

In each case, the contractor was sued under its building contract by or on behalf of a subsequent owner or occupier. Each contractor argued that he could not be liable to the subsequent owner/occupier because he had not contracted with him and the party he had contracted with had suffered no loss.

In the St Martins Property and Darlington cases the contractor lost.
In the Linden Gardens and Alfred McAlpine cases he won.

In the St Martins case, the House of Lords held that this principle could be adapted to construction cases.

In Darlington, the court followed the decision in St Martins, as did the Court of Appeal when it heard the Panatown case.

This dramatically changed English contract law - a party to a contract who has suffered no loss can now sue and recover substantial damages on behalf of a third party.

The decision was based on presumed intentions of the parties to the original building contract. This was despite contrary indications as to their intentions contained in non-assignment clauses and collateral warranty/duty of care deeds, which are analysed below.

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In the Panatown case, the House of Lords came close to developing English law still further. The court picked up a theory that had been advanced by Lord Griffiths (but not adopted by the rest of the court) in the St Martins case.

This theory suggests that a party to a contract where the other party had not performed does not have to show a financial loss. Rather, he could recover substantial damages (as opposed to nominal damages) for loss of bargain - because he did not receive what he had contracted for.

Two of their Lordships (Goff and Millett) found in favour of Panatown on this ground, and two against (Clyde and Browne-Wilkinson). Lord Jauncey agreed in principle with the loss of bargain theory, but thought that it was not appropriate to apply it in this case. This provides an important indicator to those who want to rely on it in the future to argue that the loss of bargain theory is now part of English law