Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd
St Martins Property Corp Ltd v Sir Robert MacAlpine & Sons
House of Lords
Citations: [1994] 1 AC 85; [1993] 3 WLR 408; [1993] 3 All ER 417; [1993] EG 139 (CS); (1993) 143 NLJ 1152; (1993) 137 SJLB 183; [1993] CLY 303.
Facts
This was a joint appeal involving two cases. In the first case, the lessee of a building contracted D2 to remove asbestos from the premises. D2 subcontracted the work to D1, who did not perform properly and left asbestos in the building. The lessee then contracted D3 to remove the asbestos, which they also failed to do. The lessee then assigned their leasehold interest and all rights and actions associated with it to C2.
In the second case, C1 began developing commercial premises. On completion, the local authority would grant them a 150-year lease of the site, which they intended to sub-let to third-parties. C1 contracted the defendants to complete the work, and then assigned their rights in the contracts and the site to C2. They later discovered that part of the defendants’ work on the site was defective.
In both contracts, a clause stated that ‘The employer shall not without written consent of the contractor assign this contract.’ When the claimants sued for breach of contract, the defendants argued that each assignment to C2 was invalid because the original parties had not obtained their permission. The claimants argued that the non-assignment clause was void for public policy reasons.
Issue(s)
- Were the assignments effective?
- Are non-assignment clauses contrary to public policy?
If the assignments were not effective, a privity of contract problem arose in the second case. C1 would be the only party able to sue for breach of contract. However, by that point C1 had no property rights in the site – C2 did. This would mean that C2 had suffered substantial loss but could not sue, while C1 had suffered no loss but could sue. This led to the third issue: could C1 recover more than nominal damages?
Decision
The House of Lords held that there were legitimate commercial reasons to ensure that one’s contractual relations stay with a particular party. As such, there was no reason to hold that non-assignment clauses are void for public policy reasons. The effect of the non-assignment clause in both cases was to render the purported assignments invalid. The first claim therefore failed.
However, in the second case, the House of Lords thought that that it was foreseeable that the site would be occupied or used by third-parties. As such, on a proper construction of the contract, the parties intended C1 to be able to sue on behalf of third-party users like C2 and obtain substantial damages. Therefore, in regards to the second claim, C2 failed but C1 succeeded.
This Case is Authority For…
Non-assignment clauses are valid and will usually prevent any assignment other than in accordance with their requirements. However, Lord Browne-Wilkinson noted that a clause which both prevented assignments and prohibited a party from agreeing to account to a third-party for the fruits of the contract would be impermissible.
Other
The finding in the second case is an example of the courts coming up with novel solutions to the problems caused by the common law rule of privity of contract. The court got around the problem by holding that in some cases, a party to the contract can sue for the losses incurred by a third-party. This is an exception to the rule that normally a party can only sue for their own losses. Presumably, the contracting party would hold the damages received on trust for the third-party.
In the modern era, the Contracts (Rights of Third Parties) Act 1999 may enable a third-party to sue for their own damages. As such, this kind of case is likely to be rare.
Lord Browne-Wilkinson characterised the case as a specific exception to the rule that claimants can only recover their own losses. Later cases would call this the ‘narrow ground’ for the decision. The narrow ground has been applied in numerous other cases.
Lord Griffiths, by contrast, did not think it was an exception to that rule. Rather, he thought that it was part of a broader principle that a contracting party suffers personal loss whenever he does not get what he bargained for. That party should therefore recover damages in their own right for the loss of their performance interest. This came to be known as the ‘broader ground’ for the decision. Lord Griffiths was in the minority on this point. Majority judges in later cases have largely disapproved of the narrow ground: see Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518.
