Introduction
Bodgit & Run Limited is a commercial building contractor specialising in the construction of high specification offices. It was contracted by Gullible Developments Limited under a JCT design and build contract to construct a new 18,000 square feet high spec office building. Gullible Developments Limited simultaneously entered into a Development and Forward Sale Agreement with Sharp Practice LLP, a well known firm of local accountants, to construct new prestigious headquarter offices for the Firm, with Sharp Practice LLP completing the purchase of the building from Gullible Developments Limited once practical completion of the building was achieved.
Everything seemed to go well with the project and the building was completed on time, Sharp Practice completing the purchase of the property, fitting the offices out and going into occupation by its target date. The contractor returned 12 months after practical completion to make good some relatively minor snagging items. However, 6 months later, you are consulted by the managing partner of Sharp Practice LLP and he tells you the following:-
- A substantial defect in the roof has come to light and water pours through onto the first floor every time there is a heavy rainfall.
- The building contract permits assignment of the benefit of the contract but no provision was made in the Development and Forward Sale Agreement for the benefit of the building contract to be assigned to Sharp Practice nor was any provision made for Bodgit & Run Limited to novate its contractual obligations to Sharp Practice LLP pursuant to a collateral warranty entered into by the contractor, the developer and the end user/purchaser.
- Gullible Developments Limited is sympathetic to the Firm’s position and has agreed to assign the benefit of the building contract to Sharp Practice as long as its legal costs are met.
- Bodgit & Run Limited has refused to rectify the defect in the roof, although it does have the financial resources to meet a claim for substantial damages. The contractor has put forward the following arguments in its defence:-
- the building contract excludes the rights of third parties to enforce the terms of the contract under the Contracts (Rights of Third Parties) Act 1999.
- Gullible Developments Limited has not assigned the benefit of the building contract to Sharp Practice LLP.
- Even if an assignment of the benefit of the building contract to Sharp Practice LLP now took place, Sharp Practice can have no greater claims against it than Gullible Developments Limited would have if it enforced its rights under the building contract and since Gullible Developments Limited has sold the building at full open market value to Sharp Practice, it has suffered no financial loss, so the damages Gullible Developments Limited could claim (and hence the damages available to Sharp Practice) are nominal only.
The managing partner asks you to advise him in writing as to the Firm’s position.
Advice
1. It is normal for building contracts and appointments of members of the professional team to exclude the rights of third parties to enforce contractual terms under the Contracts (Rights of Third Parties) Act 1999 and indeed this would almost certainly be a requirement of their respective professional indemnity insurers. However, Sharp Practice LLP was badly advised in completing the purchase without ideally both a collateral warranty from the building contractor and provision for the assignment of the benefit of the building contract to Sharp Practice. It should perhaps be asking its solicitors how this serious omission has come about.
2. The managing partner would be well advised to take up Gullible Developments Limited’s kind offer to assign the benefit of the building contract to Sharp Practice pursuant to a formal Deed of Assignment. Notice of the Assignment should be given to Bodgit & Run Limited under section 136 of the Law of Property Act 1925 to perfect a legal assignment of the benefit of the building contract.
3. What then of the “no loss” argument? There was historically a legal argument along the lines of that put forward by Bodgit & Run Limited. For example in Dawson v Great Northern & City Railway Co the assignment of the statutory claim for compensation for damage to land was held not to entitle the assignee to recover extra loss suffered by the assignee as a result of his personal trade, which the assignor would not itself have suffered. That was a 1905 decision but in subsequent cases, the Courts have bent over backwards to try to assist innocent parties and to prevent those who breach their contracts from escaping liability on a technicality. Thus, in St Martin’s Property Corporation v Sir Robert McAlpine, (where the building contract expressly prohibited assignment) the House of Lords held that since the property comprised a large commercial development which was going to be occupied and purchased by third parties, it was right to treat the parties as having entered into the contract on the understanding that the assignor would be entitled to sue on behalf of those who sustained losses from the breaches but who could not themselves, under the terms of the contract, acquire any right to hold the wrongdoer liable.
This area of the law has been further clarified in the recent Court of Appeal decision in Technotrade v Larkstore Limited. The factual background to the case is as follows:-
Technotrade, a geo-technical surveying company, produced a report in relation to some residential development land dated 14th December 1998. The report was addressed to Starglade which at that time owned the development site. The report contained no prohibition on assignment and indicated that the site was suitable for residential development. In June 1999 Starglade sold the site to Larkstore Limited, a residential developer, with the benefit of planning permission and building regulation consent. The benefit of Technotrade’s report was not assigned to Larkstore at the time of the sale but a copy of the report was provided to Larkstore during the due diligence process. Larkstore Limited then appointed Bess Limited to carry out the development. In October 2001, whilst the works on site were in progress, a landslip occurred, causing damage to adjoining properties. The adjoining property owners sued Larkstore and Bess for damages. Larkstore also suffered substantial additional costs in carrying out stabilisation works to the site in order to complete the development. Bess Limited became insolvent so took no further part in the proceedings. In February 2004 Starglade assigned the benefit of the Technotrade report and all of Starglade’s rights relating to it to Larkstore by way of a Deed of Assignment and notice of the assignment was served on Technotrade as required under section 136 of the Law of Property Act 1925 thereby perfecting a legal assignment of the benefit of the report to Larkstore.
Larkstore then brought an action against Technotrade for amongst other things damages for breach of contract. The Court of Appeal held that the argument that Starglade had suffered no loss as a result of the breach of contract, having sold the site for full value to Larkstore and that Larkstore therefore only had a claim for nominal damages was untenable. The Court agreed with the judge at first instance that the principle of law to apply was as stated by the Court of Appeal in Linden Gardens Trust Limited v Lenesta Sludge Limited (1992) (that “the assignee can recover no more damages than the assignor could have recovered if there had been no assignment and if the building had not been transferred to the assignee” (our emphasis).
Summary
The Court of Appeal decision in the case of Technotrade v Larkstore Limited confirms that the right to sue in contact can be assigned to subsequent owners of a property and the date of the assignment and whether it occurs before or after the loss is suffered is of no relevance. Of course, the managing partner of Sharp Practice LLP could have avoided a lot of time, grief and costs if he had used a firm of solicitors who specialised in commercial development work, who would have advised the Firm to obtain a collateral warranty from Bodgit & Run Limited thereby giving rise to a direct contractual relationship between the builder and the end user/purchaser!
Who can help?
If you would like further advice about any issue concerning residential or commercial development please get in touch with your usual contact at plainlaw or Philip Horn on 01865 240202 or e-mail him at philip.horn@plainlaw.co.uk
This edition of “The Law made plain” is written to provide you with general information. It is recommended that you seek specific professional advice before taking any action.
© Copyright plainlaw 2007
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