Alfred McAlpine Construction Ltd v Panatown Ltd (No 1)
House of Lords
Citations:  1 AC 518;  3 WLR 946;  4 All ER 97;  CLC 1604;  BLR 331;  EG 102 (CS); (2000) 150 NLJ 1299.
A contractor contracted with the employer to build an office block and car park. This would take place on a site owned by another company (‘the site owner’). The contractor then entered into a separate ‘duty of care’ deed with the site owner. This gave the site owner a direct cause of action against contractor for negligent execution of the building contract.
The contractor’s work was defective. The parties went into arbitration. The arbitrator rejected the contractor’s claim that the employer was not entitled to damages. The contractor had contended that since the employer did not own the site, they suffered no personal losses. The contractor appealed the arbitrator’s ruling.
- Could the employer recover substantial losses for breach of contract?
The House of Lords held in favour of the contractor. The site owner had their own rights of action against the contractor. This meant that the employer could not sue for damages suffered by the site owner. They could only sue for their own losses, which in this case would be nominal.
This Case is Authority For…
The Lords discussed the ruling in Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd  1 AC 85. That case, like this one, involved a contract designed to benefit a third party. Like Panatown, the contracting party did not personally suffer any loss when the contract was breached. Normally, a party can only recover damages for their own losses.
The ‘narrow’ ground for the decision in Linden was that there is an exception to the rule that parties can only sue for their own losses where the parties knew or intended that the contract was for the benefit of a third-party. In such cases, parties to the contract can sue and recover damages on behalf of the third party.
The majority in Panatown endorsed the narrow ground. They also clarified that it only applies where the third party does not have any legal remedy against the defendant. The third party here had their own remedy under the ‘duty of care’ deed, making the exception inapplicable.
Lord Goff and Lord Millet dissented. They endorsed the minority view in Linden, known as the ‘broad ground’. This states that a contracting party can sue for substantial damages in his own right in this kind of situation. These damages are calculated to reflect the loss of his ‘performance interest’ in the contract. Lord Goff did not think that the third-party’s right of action or the ability to sue on the third-party’s behalf solved the problem. He thought that the contracting party should be entitled to a proper remedy in their own right.
The majority in this case disapproved of the broad ground. Lord Clyde identified four problems with it:
- It is not clear how the monetary value of the ‘performance interest’ is to be calculated;
- It may not account for the full losses caused by the breach, such as where the third-party has suffered consequential losses;
- The third party would not be able to compel the contracting party to account for any damages received. By contrast, under the narrow ground the contracting party holds the damages on trust for the third party;
- The courts have traditionally awarded nominal damages to reflect technical breaches of contract.
Lord Browne-Wilkinson added that in a case where the third-party has their own right to sue the defendant, the contracting party has not actually suffered harm to their performance interest. Therefore, he did not think the broader ground applied in this case even if it was valid in law.
This controversy has somewhat less relevance in the modern era. This is because in cases where the Linden ‘narrow ground’ applies the third party is likely to have their own remedy under the Contracts (Rights of Third Parties) Act 1999.
This may mean that the Act has largely wiped out the Linden ‘broad ground’ exception, since it does not apply where the third party has their own legal remedy. However, there may be some cases in which it still applies. An example is where the contract explicitly states that the third-party cannot enforce it.