Breach of Contract

Panatown Ltd v Mcalpine Construction Ltd [2000] 4 All ER 97

McAlpines entered into a contract with Panatown Ltd to design and construct a building on a site owned by U Ltd, a company in the same group as Panatown. In a claim for damages for delay and defective work could Panatown recover substantial damages under the building contract even though it had no proprietary interest in the site and had therefore suffered no loss? Yes, said the arbitrator. No, said the judge on appeal. Yes, said the Court of Appeal. No, said the House of Lords by a majority of three to two. Where a contractor was in breach of a contract with the employer to construct a building for a third party, the employer could not recover substantial damages on behalf of the third party if it had been intended that the latter should have a direct cause of action against the contractor to the exclusion of any substantial claim by the employer. The exception was where it had been within the contemplation of the contracting parties that breach by one was likely to cause loss to an identified or identifiable stranger to the contract, rather than to the other contracting party. The exception was necessary to avoid the disappearance of a substantial claim into a legal ‘black hole’, and that necessity disappeared where the third party, as in this case, had a right to recover substantial damages, even if those damages might not be identical to those which would have been recovered under the main contract in the same circumstances.