A company that hasn’t suffered direct loss from defective work can’t sue for damages under the provisions of common law, according to the judgment in one of the longest disputes in construction history.

“My Lords, this inordinately protracted arbitration/litigation has already been running in one form or another for more than seven years, and appears to have many more years of life ahead of it, howsoever this appeal is decided.” Thus begins the judgment of Lord Jauncey in the House of Lords’ decision in Alfred McAlpine Construction vs Panatown which was handed down on 27 July.

Construction lawyers have not been slow in recent years to criticise the House of Lords for some of its judgments. The higher up the judicial tree one goes, it is said, the more out of touch the judges appear to be. Let us therefore give credit where it is due for the sensible and pragmatic judgment in McAlpine that closes a fascinating chapter in the story of third party rights. The judgment will be compulsory reading for all those concerned with property transactions.

In 1989, the Unex Group of companies decided to develop a piece of land in Cambridge owned by a company in the group. The company that signed the building contract with McAlpine – Panatown – did not own the land. It was named as employer in order to effect a substantial saving in VAT. McAlpine also signed a duty of care deed in favour of UIPL, the group company that did have title to the land.

After completion, Panatown began arbitration proceedings against McAlpine alleging defective works and delay. This was met by the plea that Panatown, having no proprietary interest in the site, had suffered no loss. What began as a preliminary point before the arbitrator ended up as a cause célèbre in the Lords.

In a nutshell, their verdict was that Panatown had no claim because UIPL had its own direct contractual remedy against McAlpine and could accordingly look after itself. There was no justification, therefore, for invoking the exception to the usual common law rule, that only the party that suffers a loss can sue. If the duty of care deed had not been in place, the law would have given Panatown its remedy because otherwise there would have been a “legal black hole”.

One cannot help feeling that the Lords’ view is much to be preferred to that of the Court of Appeal, which had upheld Panatown’s claim. One of the issues influencing the Court of Appeal was the fact that UIPL’s remedy under the warranty was less extensive than Panatown’s under the building contract, because it was based on negligence. The majority judgments in the Lords had little difficulty in dealing with that point. The common law rule permitting party A to sue for recovery of party B’s loss could only apply where no other remedy was available. Still unresolved is the question of what obligation does party A have in that situation to account for moneys recovered to party B, which has actually suffered the loss?

If a developer were asked which class of legal remedy it would be most happy to pass on to a purchaser, there is only one answer: a piece of paper with the builder’s signature on it

If a developer were asked the question today: “Which class of legal remedy would it be most happy to pass on to an investment purchaser or tenant, a common law right, a statutory right or a contractual right?” there is now only one answer. The purchaser wants its own piece of paper with the builder’s or professional’s signature on it giving him a personal right to complain if problems arise.

Why, one wonders, did UIPL not exercise its own right eight years ago?

Talk of a “legal black hole” is misplaced. The line of cases of which this is (I hope) the last should be consigned to the bottom of a very deep hole. Quite simply, there is no need for any of this today. All that parties to a contract want to achieve or public policy dictates should be achieved can be dealt with through a sensible use of third party rights under the new Contracts (Rights of Third Parties) Act 1999.

Under this new law, those who are not a party to a contract can still be given rights under it that they can enforce themselves without having to involve the contracting party. These rights of a third party can arise where the contract expressly states that they may enforce a contract term or where the contract term “purports to confer a benefit” on the third party.

The McAlpine vs Panatown case is an example of a situation where third party rights could have been used if the building contract had been entered into in May 2000 not November 1989. In their contract, Panatown and McAlpine could have provided for UIPL (the group company which owned the land) to enjoy the benefit of the contract terms relating to quality of work, time and performance.

UIPL would then have had the same rights to enforce as Panatown (the employer) and, being the party which suffered the loss, would have recovered substantial damages. There would have been no need for a separate duty of care deed for UIPL. Everything could have been dealt with in the building contract itself.