Law Report: Assignment of building contract ineffective

Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and others; St Martin's Property Corporation Ltd and another v Sir Robert McAlpine Ltd - House of Lords (Lord Keith of Kinkel, Lord Bridge of Harwich, Lord Griffiths, Lord Ackner and Lord Browne-Wilkinson), 22 July 1993.

An assignment of contractual rights in breach of a prohibition against such assignment was ineffective to vest the contractual rights in the assignee. A building owner who had parted with the property could recover substantial damages for breach of a building contract.

The House of Lords unanimously allowed an appeal by the second defendant, McLaughlin & Harvey plc, in the Linden Gardens appeal and dismissed McAlpine's appeal and the second plaintiff's, St Martin's Property Investments Ltd's, cross-appeal in the St Martin's appeal against the Court of Appeal's decision (1992) 57 BLR 57.

Linden Gardens appeal

In 1979, Stock Conversion and Investment Trust plc entered into a building contract with M & H under which M & H was to remove asbestos from Stock's property. The contract was in the Joint Contract Tribunal Standard Form of Building Contract (1963 ed revised July 1975). Clause 17 prohibited assignment of the contract. In 1985, when asbestos which should have been removed was found on the premises and removed by another company, Stock Conversion issued a writ. It disposed of its interest in the property in 1987 to Linden Gardens. More asbestos was found and further removal work undertaken. Linden Gardens claimed damages against M & H.

St Martin's appeal

In 1974, St Martin's Property Corporation Ltd entered into a building contract for a large development of property with McAlpine which also prohibited assignment. In 1976, Corporation assigned its interests to St Martin's Property Investments Ltd. In 1981, remedial work had to be carried out on the site. Both Corporation and Investment sued McAlpine for breach of contract.

Sydney Kentridge QC and Justin Fenwick (Masons) for M & H; John Dyson QC and Anthony Speaight (Jacques & Lewis) for Linden Gardens; Richard Fernyhough QC and Marcus Taverner (Glovers) for McAlpine; Humphrey Lloyd QC and David Westcott (Stephenson Harwood) for Corporation and Investments.

LORD BROWNE-WILKINSON said that lawyers frequently used the words 'assign this contract' inaccurately to describe an assignment of the benefit of a contract since every lawyer knew that the burden of a contract could not be assigned. Therefore, the clause prohibited the assignment of the benefit of the contract. That, by itself, was fatal to the claim by Investments as assignee in the St Martin's case.

It was impossible to construe clause 17 as prohibiting only the assignment of rights to future performance, leaving each party free to assign the fruits of the contract. The claim of Linden Gardens as assignee must therefore fail unless clause 17 was void or the assignment was effective to assign the existing cause of action to Linden Gardens.

A party to a building contract could have a genuine commercial interest in seeking to ensure that he was in contractual relations only with a person whom he had selected as the other party to the contract. There was no policy reason why a contractual prohibition on assignment of contractual rights should be contrary to public policy.

The existing authorities established that an attempted assignment of contractual rights in breach of a contractual prohibition was ineffective to transfer such contractual rights. The law was satisfactorily settled in that sense.

It followed that the Linden Gardens claim failed and its actions must be dismissed.

It was submitted that although Corporation retained its rights under the contract, it was only entitled to nominal damages as it had suffered no loss and had parted with the property at the date of the breach. However, the present case fell within the rationale of the exceptions to the general rule that a plaintiff could only recover damages for his own loss.

The property, to the knowledge of both Corporation and McAlpine, was going to be occupied by third parties. 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. It was proper to treat the parties as having entered the contract on the footing that Corporation would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who could no acquire any right to hold McAlpine liable for breach.

In the prolonged period of recession in the property market many developments have had to be sold off before completion, thereby producing the risk that the ownership of the property might have become divided from the right to sue on the building contract at a date before any breach occurred. The original building owner would not be entitled to recover damages for loss suffered by others who could themselves sue for such loss.

Therefore, Corporation was entitled to substantial damages for any breach by McAlpine of the building contract.