Darlington Borough Council v Wiltshier Northern Ltd [1994] EWCA Civ 6 (28 June 1994)

A council arranged for a finance company to commission a building on its land. When defects arose, the builder argued the council couldn't sue for substantial damages. The court permitted the claim, extending an exception to privity of contract for a known third party.

Facts

Darlington Borough Council (‘the Council’) wished to construct a recreational centre on its own land. To navigate public sector borrowing controls, it entered into a complex arrangement. A finance company, Morgan Grenfell (Local Authority Finance) Limited (‘MG’), contracted with Wiltshier Northern Ltd (‘WNL’) to carry out the construction work. The Council was not a party to this building contract. However, WNL was fully aware that the work was for the benefit of the Council. Upon completion of the work, the contract stipulated that MG would assign all its rights under the building contract to the Council. After the assignment took place, the Council discovered serious defects in the construction and brought an action against WNL for damages. WNL sought to strike out the claim, arguing that the Council, as an assignee, could have no greater rights than the assignor, MG. Since MG never owned the land and had been fully paid, it had suffered no financial loss and could therefore only claim nominal damages. This created a potential ‘legal black hole’ where a clear breach of contract had caused substantial loss, but the party with the formal right to sue had suffered none.

Issues

The central legal issue was whether the Council, as an assignee of a building contract, could recover substantial damages for a breach of that contract, when the original contracting party (the assignor, MG) had suffered no financial loss. This required the court to consider:

1. Whether the established exception to the general rule on damages, as articulated in The Albazero, which allows a party to a contract to sue for loss suffered by a third party, could be extended from contracts for the carriage of goods to a building contract.
2. Whether the Council, stepping into the shoes of MG via assignment, could recover the substantial damages which MG would have been entitled to claim on the Council’s behalf.

Judgment

The Court of Appeal, by a majority, allowed the appeal, finding that the Council was entitled to pursue a claim for substantial damages.

The Majority Opinion (Lord Justice Steyn)

Lord Justice Steyn, giving the leading judgment, held that the principle existing in shipping cases should be extended to this building contract scenario. He reasoned that the underlying rationale of the exception in The Albazero was to provide a remedy and avoid a situation where a party who had clearly suffered a loss was left with no recourse simply because they were not a party to the contract. It was foreseeable to WNL that any breach of contract would cause loss to the Council, not MG.

"There is no reason of principle or policy why the exception should be confined to contracts for the carriage of goods… Faced with the choice between a legal black hole and a sensible and just solution, I have no doubt that it is our duty to opt for the latter. In my view the principle enunciated by Lord Diplock is of general application."

Steyn LJ concluded that MG would have been entitled to sue WNL for substantial damages, holding those damages for the benefit of the Council. Consequently, the assignment of MG’s contractual rights to the Council was an assignment of a right to sue for those substantial damages, not merely a worthless right to claim nominal damages.

"If the defendants’ argument is correct, it was a worthless right to claim nominal damages. That seems to me an astonishing proposition… the assigned right was the right to sue for and recover the damages which MG could have recovered for the benefit of DBC."

The Majority Opinion (Lord Justice Waite)

Lord Justice Waite agreed, emphasising the commercial context and justice of the situation. He described the case as a ‘classic example of a contract for the benefit of a third party’ and argued that the law should not produce a result that defies commercial common sense.

The Dissenting Opinion (Lord Justice Saville)

Lord Justice Saville dissented. He took a stricter view, arguing that an assignee can be in no better position than the assignor. Since MG had suffered no loss, it could only recover nominal damages, and thus the Council could recover no more. He believed the Albazero exception did not apply because the parties had made express provision for a remedy for the Council through a separate deed of care, meaning there was no ‘legal black hole’ that required filling by the courts.

Implications

This decision was a significant development in English contract law prior to the Contracts (Rights of Third Parties) Act 1999. It broadened the scope of the exception to the doctrine of privity of contract established in The Albazero, confirming that it could apply to building contracts on land and was not confined to contracts for the carriage of goods. The judgment demonstrated the court’s pragmatic willingness to prevent a defendant from escaping liability for a clear breach of contract on a technicality, particularly in complex commercial arrangements where the party suffering the loss is not the formal contracting party. It affirmed that an assignment of contractual rights could include the right to sue for substantial losses suffered by a third party, for whom the assignor was effectively acting as a trustee of the contractual performance.

Verdict: The appeal was allowed. The Council was found to be entitled to pursue its claim against the builder for substantial damages.

Source: Darlington Borough Council v Wiltshier Northern Ltd [1994] EWCA Civ 6 (28 June 1994)