Here is the story. UNEX Group decided to buy land in Cambridge and build an office block. A group company, UNEX Investment Properties, bought the land. Another member of the group, Panatown, was to be the employer. This move was intended to take advantage of VAT relief, and made sense. Panatown entered into a design-and-build (JCT81) contract with Alfred McAlpine Construction. That was 13 years ago. The bargain was struck at £10.5m, the champagne flowed and glasses were raised to the future.
Three years later, Panatown was withholding £840 000 in liquidated damages for late completion. McAlpine rejected this and demanded payment of £4m. An arbitrator was appointed, but then the dispute took another turn. Panatown said the office block was defective. So much so that the edifice, it said, should be demolished. It reckons the consequences amount to a £40m claim! Indeed, McAlpine acknowledges that significant defects do exist and, if the defects arise from a breach of contract, it acknowledges responsibility for the necessary remedial works. Notice the word "if".
Here come the legal arguments that have taken all these years. If – and only if – McAlpine is liable, it says Panatown is entitled to £1, not £40m or any other figure. The reason is that Panatown itself has suffered no loss. Someone else in UNEX suffered the loss. Ordinarily, UNEX would sue Panatown in contract and Panatown would sue McAlpine, but that couldn't happen because no contract was drawn up between Panatown and anyone in the group. Panatown has no proprietary interest in the building and is subject to the fundamental principle that you can only sue for the actual losses suffered by you.
Panatown has argued that there is an exception to this rule; that it is possible to sue for someone else's loss so as to provide a remedy where no other would be available, "which under a rational legal system ought to be compensated by the person who has caused that loss". Otherwise, the injured party would fall into a legal black hole.
The arbitrator accepted that argument, and said Panatown could sue McAlpine for substantial damages. On appeal, the judge disagreed and said Panatown could sue only for nominal damages (£1). That decision was attacked on the basis that the judge was biased. Another judge kicked that out. Then three more appeal judges decided the arbitrator was right. Panatown was pleased.
Balls were put on the penalty spot. Two law lords netted the ball for Panatown. Three netted for McAlpine
Meanwhile, McAlpine sued UNEX Group for the wrongly withheld money. UNEX went to court to stop that because an arbitration clause existed. The judge said no. So UNEX took that decision to three appeal judges. They also said no. Meanwhile (phew!), McAlpine sued 33 other firms, subcontractors and suppliers, alleging they were obliged to pay up in respect of any loss that McAlpine might – only might – be liable for. Meanwhile (again), McAlpine didn't like the decision that Panatown could sue for more than £1, so it took the issue to five more judges.
It went to the House of Lords. Balls were put on the penalty spot. Two law lords netted the ball for Panatown. Three netted for McAlpine. They all agreed, however, that if there really were a black hole, a party could sue for a third party's loss.
But the hole has to be a complete void. There wasn't a complete void because the other UNEX companies had entered into a "duty of care" deed with McAlpine. Therefore, the whole contractual scheme was designed to give the third party a direct legal remedy against the builder. Panatown has a complaint about defects, but no loss. The party with the loss has a collateral contract via the duty of care deed. Whatever that document says binds McAlpine.
So, McAlpine won on the preliminary point. Panatown can't sue for anything more than a breach of contract causing £1 loss. Lord Browne-Wilkinson said UNEX's actual physical and financial loss can be dealt with under the collateral contract/duty of care deed. He couldn't understand why that direct route hadn't occurred before. Subject to certain qualifications, he said: "There is no reason even now why UNEX should not be bringing proceedings against McAlpine."
Tony Bingham is a barrister and arbitrator specialising in construction. You can write to him at 3 Paper Buildings, Temple, London EC4 7EY, or e-mail him on firstname.lastname@example.org.