Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4 (22 July 1993)

Two appeals concerning building contracts with clauses prohibiting assignment without consent. The House of Lords held that such prohibition clauses are valid and effective to prevent assignment of contractual rights. However, an original contracting party can recover substantial damages for breach even after parting with property, applying the Dunlop v Lambert principle.

Facts

Two separate actions raised similar issues concerning building contracts containing clauses prohibiting assignment without consent. In the Linden Gardens case, Stock Conversion contracted with McLaughlin & Harvey for asbestos removal works. Stock Conversion later sold its leasehold interest to Linden Gardens and purported to assign its rights under the building contract without the contractor’s consent. Defective work was discovered after the assignment.

In the St Martin’s case, Corporation contracted with McAlpine for building works. Corporation assigned its property interest and purported to assign the building contract to Investments before any breach occurred. Defects in a podium deck were later discovered, costing approximately £800,000 to repair.

Issues

The key legal issues were:

1. Whether clause 17 of the building contracts prohibited assignment of the benefit of the contracts

2. Whether such prohibition extended to assignment of accrued causes of action

3. Whether a prohibition on assignment is void as contrary to public policy

4. Whether assignments made in breach of prohibition are nonetheless effective

5. Whether the original contracting party can recover substantial damages after parting with the property

Judgment

The House of Lords, in a judgment delivered principally by Lord Browne-Wilkinson, held:

On the construction of clause 17, it prohibited the assignment of any benefit of or under the contract. The phrase ‘assign this contract’ was held to refer to assignment of the benefit of the contract, as the burden cannot be assigned. The distinction drawn by the Court of Appeal between assignment of rights to future performance and assignment of accrued causes of action was rejected as unworkable in the context of complex building contracts.

Contractual prohibitions on assignment are not void as contrary to public policy. Unlike real property where there is a defined and limited supply, there is no public need for a market in choses in action. A party to a building contract can have a genuine commercial interest in ensuring contractual relations only with a chosen party.

An assignment made in breach of a contractual prohibition is ineffective to vest contractual rights in the assignee. The Tom Shaw case was distinguished or doubted, and the Helstan Securities approach was approved.

On damages, whilst the assignment to Investments was ineffective, Corporation was entitled to substantial damages applying the principle from Dunlop v Lambert as explained in The Albazero. Where it is contemplated that proprietary interests may be transferred after contract formation and before breach, and the transferee cannot acquire rights to sue, the original contracting party may recover damages for the benefit of those who suffer loss.

Implications

This case is of fundamental importance to construction law and contract law generally. It establishes that contractual prohibitions on assignment are enforceable and that assignments in breach are ineffective. However, it also provides protection for subsequent owners by allowing the original contracting party to recover substantial damages on their behalf where the contract contemplated transfer of property and prohibited assignment of contractual rights. The case has significant implications for drafting building contracts and for the ability of parties to enforce contractual rights following property transactions.

Verdict: The appeal by McLaughlin & Harvey in the Linden Gardens case was allowed, with the assignment held ineffective. The appeal by McAlpine in the St Martin’s case was dismissed, with Corporation entitled to substantial damages. The cross-appeal by Investments was dismissed.

Source: Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4 (22 July 1993)