BetterLawNotes-5 (2)

CONTRACT LAW

‘Compensation is compensation for loss; its object is to make good a loss. It is inherent in the concept of compensation that only the person who has suffered the loss is entitled to have it made good by compensation. Compensation for a third party’s loss is a contradiction in terms.’

The point is well-illustrated by the following case:

Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 (HL)

C agreed to sell to D certain land for £850,000. The parties agreed that on completion D would pay £150,000 to T. The House of Lords held that even if D had broken the contract, C could not have recovered damages for the non-payment to T.

Nevertheless, there are various significant exceptions:

Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468 (CA)

J contracted with H for the provision of a holiday for himself, his wife and two children. The accommodation provided was not of the stipulated quality and the family suffered distress and discomfort. The judge held that he could only take account of the disappointment experienced by J and not that of his wife and children.

In the CA, Lord Denning MR (with whom Orr LJ agreed) thought that the party who entered into a contract for the benefit of others should ‘be able to recover for the discomfort, vexation and upset which the whole party have suffered by reason of the breach of contract, recompensing them accordingly out of what he recovers’. (At 1473).

Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] AC 85 (HL)

An owner of property engaged a builder to develop a site which the owner then transferred to a third party. The third party incurred expenditure remedying breaches of the building contract committed by the builder after the transfer of the site by the owner. When the owner sued the builder to recover this expenditure, the builder argued that the owner had suffered no loss since it no longer owned the land when the breach occurred.

The House of Lords held that the owner was entitled to recover the loss.

‘. . . it seems to me proper .  .  . to treat the parties as having entered into the contract on the footing that [the owner] would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold [the builder] liable for breach. It is truly a case in which the rule provides “a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it”.’ (Lord Browne-Wilkinson).

Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68 (CA)

MG, a bank, contracted with W for W to construct a building on land owned by D. The contract with W was made by MG and not D in order to avoid government restrictions on local authority borrowing. MG assigned its rights under the contract to D. D sought to recover the costs of remedying defects in the building work. As assignee, D could only recover against W if MG might have recovered. The Court of Appeal held that W was liable to D in respect of the defects.

Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (HL)

P contracted with AMC for the construction of a building on land owned by UIPL, a member of the same group of companies as P. The contract was made by P and not UIPL for tax reasons. Under the contract with P, AMC entered into a deed with UIPL under which AMC acknowledged that it owed a duty of care to UIPL in respect of the building work and that UIPL could assign the benefit of the deed to successors in title to the land. Subsequently, P sued AMC for substantial defects in the building work.

The House of Lords held that P was not entitled to recover substantial damages from AMC as UIPL had its own right of action.

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