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

Darlington Borough Council sought to recover damages for defective construction of the Dolphin Centre from Wiltshier, despite not being a party to the building contract. Morgan Grenfell had contracted with Wiltshier as employer, then assigned its rights to Darlington. The Court of Appeal held Darlington could recover substantial damages as assignee.

Facts

Darlington Borough Council wished to construct the Dolphin Centre on its own land but faced restrictions on local authority borrowing. To circumvent these restrictions, Morgan Grenfell (Local Authority Services) Ltd acted as financier and entered into building contracts with Wiltshier Northern Ltd as ‘the Employer’. A Covenant Agreement between Darlington and Morgan Grenfell provided that Morgan Grenfell would assign to Darlington all rights against Wiltshier upon request. The building was constructed in two phases between 1979 and 1981.

Darlington alleged serious defects in the Dolphin Centre, including defective masonry walls, prematurely deteriorated roofing tiles, and inadequate fire protection for structural steelwork, claiming remedial costs of approximately £2 million. In 1991, Morgan Grenfell assigned all its rights against Wiltshier to Darlington, who then commenced proceedings.

Issues

The key preliminary issues were: (i) whether Darlington as assignee could claim damages other than nominal damages for breach of contract; and (ii) upon what principles such damages should be assessed. The fundamental question was whether Morgan Grenfell, having suffered no loss itself, could have recovered substantial damages from Wiltshier for Darlington’s benefit.

Judgment

Lord Justice Dillon

Dillon LJ noted that Darlington as assignee could recover no more than Morgan Grenfell could have recovered. He acknowledged the general rule that a plaintiff can only recover for his own loss, but applied the exception recognised in St Martin’s Property Corporation Ltd v Sir Robert McAlpine Ltd (the Linden Gardens case). He held that the present case was even stronger than Linden Gardens because, rather than prohibiting assignment, the Covenant Agreement expressly provided for assignment of Morgan Grenfell’s rights to Darlington.

Dillon LJ also found that Morgan Grenfell held any rights against Wiltshier as constructive trustee for Darlington, given the terms of Clause 3(4) of the Covenant Agreement, providing an alternative basis for recovery.

Lord Justice Steyn

Steyn LJ delivered a notable critique of the privity of contract doctrine, describing it as having ‘no place in our more complex commercial world’ and noting that Morgan Grenfell had contracted with Wiltshier ‘for the benefit of Darlington’. He applied the rationale from Lord Browne-Wilkinson’s speech in Linden Gardens and also endorsed Lord Griffiths’ wider principle that a party who engages a builder and receives defective work suffers a loss of bargain that can be recovered. However, he disagreed with Lord Griffiths’ suggestion that the plaintiff must show intention to carry out repairs, stating:

On this point I am in agreement with the observations of Kerr L.J. In Dean v. Ainley [1987] 1 W.L.R 1729, at 1737H 1738A and Staughton L.J. In Ruxley Electronics Ltd v. Forsyth [1994] 1 W.L.R. 650, at 656A 657D.

Lord Justice Waite

Waite LJ agreed that the appeal should be allowed by direct application of the rule in Dunlop v Lambert as recognised in Lord Browne-Wilkinson’s speech in Linden Gardens, and also by the alternative route of constructive trust.

Implications

This case significantly extended the circumstances in which a contracting party can recover substantial damages for a third party’s loss. It confirmed that where a contract is made for the benefit of a third party who was intended to have the benefit of performance, the contracting party can recover damages reflecting the third party’s actual loss. The case also demonstrates the courts’ willingness to use constructive trust analysis as an alternative route to achieve the same result. The judgments contain important criticism of the privity doctrine and support for reform.

Verdict: Appeal allowed. Preliminary issue C(i) answered ‘Yes’ – Darlington as assignee has a valid claim for substantial damages. Issue C(ii) – damages to be assessed on the normal basis as if Darlington had been the Employer under the building contracts. The judge’s order was set aside with costs to the appellants.

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