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

A building contract prohibited assigning rights without consent. The property was sold to a third party. The House of Lords held the prohibition was valid, but allowed the original owner to sue the builder for defects on behalf of the new owner, creating an exception to prevent a legal 'black hole'.

Facts

This case involved two conjoined appeals concerning building contracts and the assignment of rights. Both contracts contained a clause prohibiting the employer from assigning the benefit of the contract without the contractor’s written consent.

Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd

Stock Conversions plc contracted with Lenesta for the removal of blue asbestos from their property. Clause 17(1) of the contract prohibited assignment without Lenesta’s consent. Stock Conversions later leased the property and subsequently assigned their rights under the contract to the new lessee, Linden Gardens, without obtaining Lenesta’s consent. When more asbestos was discovered, Linden Gardens sued Lenesta for breach of contract. The key question was whether the assignment was valid despite the prohibition.

St. Martins Property Corporation Ltd v Sir Robert McAlpine & Sons Ltd

St. Martins Property Corporation (Corporation) contracted with McAlpine to construct a development. The contract again contained a clause prohibiting assignment. Before the building work was complete, Corporation transferred the property to another group company, St. Martins Property Investments (Investments), for tax reasons. No formal assignment of the building contract was made. After the transfer, defects were discovered. Both Corporation and Investments sued McAlpine. As Corporation no longer owned the property, it had arguably suffered no financial loss. Investments suffered the loss but was not a party to the contract.

Issues

The House of Lords considered two primary legal issues common to both appeals:

1. Is a contractual clause prohibiting the assignment of contractual rights without the consent of the other party void on the grounds of public policy?
2. If such a prohibition is valid and effective, can the assignor (the original contracting party) sue for and recover substantial damages for a breach of contract that has caused loss to the assignee (the subsequent owner), even though the assignor itself has suffered no loss?

Judgment

The leading speech was delivered by Lord Browne-Wilkinson. He addressed each issue in turn.

Validity of the Prohibition on Assignment

The court held that a clause prohibiting the assignment of contractual rights without consent is not contrary to public policy and is therefore valid. Lord Browne-Wilkinson reasoned that a contracting party has a legitimate commercial interest in knowing who they are dealing with and in preventing the burden of the contract from being performed by a third party of unknown solvency or competence. He distinguished between the assignment of a right to performance and the assignment of the ‘fruits’ of a contract (e.g., a debt already accrued), noting the prohibition applied to the former.

I therefore reach the conclusion that the prohibition in clause 17(1) is a valid provision and that the purported assignment of the rights under the J.C.T. contract by Stock Conversions to Linden Gardens was ineffective to assign the right to sue for damages for breach of that contract.

As a result, in the Linden Gardens appeal, the assignment was invalid, and Linden Gardens could not sue Lenesta directly.

Recovery of Loss on Behalf of a Third Party

This was the more groundbreaking aspect of the decision. The general legal principle is that a claimant can only recover damages for their own loss. Here, the original contracting parties (Stock Conversions and Corporation) no longer owned the properties and so appeared to have suffered no direct financial loss from the defects.

Lord Browne-Wilkinson, extending the principle from The Albazero [1977] A.C. 774, created an exception. He held that where it was in the contemplation of the parties that the property would be transferred to a third party, the original contracting party can sue for damages on behalf of that third party. This prevents a ‘legal black hole’ where a clear breach has caused a genuine loss, but the party who suffered stripping has no right to sue, and the party with the right to sue has suffered no loss.

In my judgment the present case falls within the rationale of the exceptions to the general rule that a plaintiff can only recover damages for his own loss. The contract was for a large development of property which, to the knowledge of both Corporation and McAlpine, was going to be occupied, and possibly purchased, by third parties and not by Corporation itself. Therefore it could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the original contracting party, Corporation.

Applying this, the Court found that in the St. Martins case, Corporation could recover substantial damages from McAlpine, representing the loss suffered by Investments. In the Linden Gardens case, the same principle meant that Stock Conversions (the original party) could pursue a claim for the loss suffered by Linden Gardens.

Implications

The decision has significant implications for contract law. Firstly, it affirms the validity of clauses that prohibit or restrict the assignment of contractual rights, giving commercial certainty to parties wishing to control who they are in a contractual relationship with. Secondly, and more importantly, it establishes the ‘Linden Gardens exception’ (or ‘Albazero exception’), allowing a contracting party to recover substantial damages for a loss suffered by a third party where such a transfer of ownership was foreseeable. This provides a crucial remedy in construction and other commercial contexts, ensuring that a wrongdoer cannot escape liability simply because the property has changed hands.

Verdict: In the Linden Gardens appeal, the appeal was dismissed. In the St. Martins appeal, the appeal was allowed.

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