Assignment
Cases
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd
[1993] UKHL 4 [1994] 1 AC 85, [1993] UKHL 4, [1994] AC 85, [1993] 3 All ER 417
Lord Browne-Wilkinson
Notwithstanding the apparent logic of Mr Fernyhough’s submission,
I have considerable doubts whether it is correct. A contract for the supply of
goods or of work, labour and materials (a supply contract) is not the same as
a contract for the carriage of goods. A breach of a supply contract involves
a failure to provide the very goods or services which the defendant had
contracted to supply and for which the plaintiff has paid or agreed to pay. If
the breach is discovered before payment of the contract price, the price is
abated by the cost of making good the defects: see as to sale of goods Mondel
v. Steel (1841) 8 M. & W.858 and Sale of Goods Act 1979, section 53(1);
as to building contracts Modern Engineering (Bristol) Ltd. v. Gilbert-Ash
(Northern) Ltd. [1974] A.C. 689. Mr Fernyhough accepted that this right to
abatement of the price does not depend on ownership by the plaintiff of the
goods and it would be odd if the plaintiff’s rights arising from breach varied
according to whether the breach was discovered before or after the payment
of the price. No such similar principle of abatement applies to freight
charges: the freight charges have to be paid in full leaving the consignor to
bring a separate action for damages for breach of the contract of carriage:
Colonial Bank v. European Grain and Shipping Ltd. (The Dominique) [1989]
A.C. 1056, 1067-1068.
In contracts for the sale of goods, the purchaser is entitled to damages
for delivery of defective goods assessed by reference to the difference between
the contract price and the market price of the defective goods, irrespective of
whether he has managed to sell on the goods to a third party without loss:
Slater v. Hoyle & Smith Limited [1920] 2 K.B. 11; see also as to non-delivery
Williams Brothers v. Ed. T. Agius Limited [1914] A.C. 510. In those cases
the judgments contained no consideration of the person in whom the property
in the goods was vested although it appears that some of the sub-contracts had
been made prior to the breach of contract.
If the law were to be established that damages for breach of a supply
contract were not quantifiable by reference to the beneficial ownership of
goods or enjoyment of the services contracted for but by reference to the
difference in value between that which was contracted for and that which is
in fact supplied, it might also provide a satisfactory answer to the problems
raised where a man contracts and pays for a supply to others, e.g., a man
contracts with a restaurant for a meal for himself and his guests or with a
travel company for a holiday for his family. It is apparently established that,
if a defective meal or holiday is supplied, the contracting party can recover
damages not only for his own bad meal or unhappy holiday but also for that
of his guests or family; see Jackson v. Horizon Holidays Ltd. [1975] 1
W.L.R. 1468 as explained in Woodar In vestment Development Ltd. v. Wimpey
Construction U.K. Ltd. [1980] 1 WLR 277, 283-284. 293-294. 297 and
300-301.
There is therefore much to be said for drawing a distinction between
cases where the ownership of goods or property is relevant to prove that the
plaintiff has suffered loss through the breach of a contract other than a
contract to supply those goods or property and the measure of damages in a
supply contract where the contractual obligation itself requires the provision
of those goods or services. I am reluctant to express a concluded view on
this point since it may have profound effects on commercial contracts which
effects were not fully explored in argument. In my view the point merits
exposure to academic consideration before it is decided by this House. Nor
do I find it necessary to decide the point since, on any view, the facts of this
case bring it within the class of exceptions to the general rule to which Lord
Diplock referred in The Albazero.
In The Albazero Lord Diplock said (at p. 846B):
“Nevertheless, although it is exceptional at common law that a plaintiff
in an action for breach of contract, although he himself has not
suffered any loss, should be entitled to recover damages on behalf of
some third person who is not a party to the action for a loss which that
third person has sustained, the notion that there may be circumstances
in which he is entitled to do so was not entirely unfamiliar to the
common law and particularly to that part of it which, under the
influence of Lord Mansfield and his successors. Lord Ellenborough
and Lord Tenterden, had been appropriated from the law merchant.
“I have already mentioned the right of the bailee, which has been
recognised from the earliest period of our law, to sue in detinue or
trespass for loss or damage to his bailor’s goods although he cannot be
compelled by his bailor to do so and he is not himself liable to the
bailor for the loss or damage: The Winkfield [1902] P.42.
Nevertheless, he becomes accountable to his bailor for the proceeds of
the judgment in an action by his bailor for money had and received.
So too the doctrine of subrogation in the case of insurers, which was
adopted from the law merchant by the common law in the eighteenth
century, involved the concept of the nominal party to an action at
common law suing for a loss which he had not himself sustained and
being accountable to his insurer for the proceeds to the extent that he
had been indemnified against the loss by the insurer. In this instance
of a plaintiff being able to recover as damages for breach of contract
for the benefit of a third person a loss which that person has sustained
and he had not, the insurer is entitled to compel an assured to whom
he has paid a total or partial indemnity to bring the action. A third
example, once again in the field of mercantile law, is the right of an
assured to recover in an action on a policy of insurance upon goods the
full amount of loss or damage to them, on behalf of anyone who may
be entitled to an interest in the goods at the time when the loss or
damage occurs, provided that it appears from the terms of the policy
that he intended to cover their interest.”
In addition, the decision in The Albazero itself established a further exception.
This House was concerned with the status of a long-established principle based
on the decision in Dunlop v. Lambert (1839) 6 Cl. & F. 600 that a consignor
of goods who had parted with the property in the goods before the date of
breach could even so recover substantial damages for the failure to deliver the
goods. Lord Diplock (at p.847E) identified the rationale of that rule as being:
“The only way in which I find it possible to rationalise the rule in
Dunlop v. Lambert so that it may fit into the pattern of the English law
is to treat it as an application of the principle, accepted also in relation
to policies of insurance upon goods, that in a commercial contract
concerning goods where it is in the contemplation of the parties that
the proprietary interests in the goods may be transferred from one
owner to another after the contract has been entered into and before
the breach which causes loss or damage to the goods, an original party
to the contract, if such be the intention of them both, is to be treated
in law as having entered into the contract for the benefit of all persons
who have or may acquire an interest in the goods before they are lost
or damaged, and is entitled to recover by way of damages for breach
of contract the actual loss sustained by those for whose benefit the
contract is entered into.”
In The Albazero it was held that the principle in Dunlop v. Lambert no
longer applied to goods consigned under a bill of lading because both the
property in the goods and the cause of action for breach of the contract of
carriage passes to the consignee or indorsee by reason of the consignment or
indorsement: therefore, since the consignee or indorsee will in any event be
entitled to enforce the contract direct there is no ground on which one can
impute to the parties an intention that the consignor is entering into the
contract for the benefit of others who will acquire the property in the goods
but no right of action for breach of contract.
However, this House was careful to limit its decision to cases of
carriage by sea under a bill of lading, leaving in force the principle in Dunlop
v. Lambert in relation to other contracts for the carriage of goods where such
automatic assignment of the rights of action for breach does not take place.
Lord Diplock. after the passage referring to the exceptions which I have
already quoted, said (at p. 846G):
“My Lords, in the light of these other exceptions, particularly in the
field of mercantile law, to the general rule of English law that apart
from nominal damages the plaintiff can only recover in an action for
breach of contract the actual loss he has himself sustained. I do not
think that the fact that the rule which it is generally accepted was laid
down by this House in Dunlop v. Lambert. 6 Cl. & F. 600 would add
one more exception would justify your Lordships in declaring the rule
to be no longer law. Nor do I think that the almost complete absence
of reliance on the rule by litigants in actions between 1839 and 1962
provides a sufficient reason for abolishing it entirely. The
development of the law of negligence since 1839 does not provide a
complete substituted remedy for some types of loss caused by breach
of a contract of carriage. Late delivery is the most obvious example
of these. The Bills of Lading Act 1855 and the subsequent
development of the doctrine laid down in Brandt v. Liverpool, Brazil
and River Plate Steam Navigation Co. Ltd. [1924] 1 K.B. 575, have
reduced the scope and utility of the rule in Dunlop v. Lambert . . .
where goods are carried under a bill of lading. But the rule extends
to all forms of carriage including carriage by sea itself where no bill
of lading has been issued, and there may still be occasional cases in
which the rule would provide a remedy where no other would be
available to a person sustaining loss which under a rational legal
system ought to be compensated by the person who has caused it.
For my part, I am not persuaded that your Lordships ought to go out
of your way to jettison the rule.”
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. As in contracts for the carriage of goods by land, there would
be no automatic vesting in the occupier or owners of the property for the time
being who sustained the loss of any right of suit against McAlpine. On the
contrary, McAlpine had specifically contracted that the rights of action under
the building contract could not without McAlpine’s consent be transferred to
third parties who became owners or occupiers and might suffer loss. In such
a case, it seems to me proper, as in the case of the carriage of goods by land,
to treat the parties as having entered into 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. under the terms of
the contract, could not acquire any right to hold McAlpine liable for breach.
It is truly a case in which the rule provides “a remedy where no other would
be available to a person sustaining loss which under a rational legal system
ought to be compensated by the person who has caused it.”
Mr Fernyhough submitted that it would be wrong to distort the law in
order to meet what he described as being an exceptional case. He said that
this was a one-off or exceptional case since the development was sold before
any breach of contract had occurred and there was an express contractual
prohibition on assignment. He submitted that to give Corporation a right to
substantial damages in this case would produce chaos when applied to other
cases where the contractors have entered into direct warranties with the
ultimate purchasers of the individual parts of a development. I am not
impressed by these submissions. I am far from satisfied that this is a one-off
or exceptional case. We are concerned with standard forms of building
contracts which prohibit the assignment of the benefit of building contracts to
the ultimate purchasers. In the prolonged period of recession in the property
market which this country has experienced many developments have had to be
sold off before completion, thereby producing the risk that the ownership of
the property may have become divided from the right to sue on the building
contract at a date before any breach occurs. As to the warranties given by
contractors to subsequent purchasers, they will not, in my judgment, give rise
to difficulty. If, pursuant to the terms of the original building contract, the
contractors have undertaken liability to the ultimate purchasers to remedy
defects appearing after they acquired the property, it is manifest the case will
not fall within the rationale of Dunlop v. Lambert, 6 Cl. & F. 600. If the
ultimate purchaser is given a direct cause of action against the contractor (as
is the consignee or indorsee under a bill of lading) the case falls outside the
rationale of the rule. The original building owner will not be entitled to
recover damages for loss suffered by others who can themselves sue for such
loss. I would therefore hold that Corporation is entitled to substantial
damages for any breach by McAlpine of the building contract.
7. The answer to the preliminary issues
The Linden Gardens Case
The preliminary issues directed were as follows:
“(1). Are the plaintiffs entitled by virtue of the deed of assignment
pleaded at paragraph 1F. of the amended statement of claim to recover
damages against the defendants in respect of the various causes of action and
heads of loss pleaded
where the loss was incurred by Stock Conversion prior to
the said Deed of Assignment.
where the loss was incurred by the plaintiffs subsequent
thereto?
“(2). Were Stock Conversion precluded from lawfully assigning
rights of action to the plaintiffs against second defendants by clause
17(1) of contract dated 19 July 1979 made between Stock Conversion
and the second defendants? . . . “
Logically these questions should be posed in the opposite order. If, as I
would hold, the benefit to the rights of action were not effectively assigned to
– 24 –
Stock Conversion at all. there can be no question of the defendants being
liable to Stock Conversion for any loss whenever the breach occurred. I
would therefore answer question 2 “yes” and question 1 “does not arise”.
I would accordingly allow this appeal with costs both here and below.
ANC Ltd v Goldring & Ors
[2000] EWCA Civ 163
LORD JUSTICE ROBERT WALKER:
This is an appeal with the permission of Peter Gibson LJ from an order made on 6 September 1999 by Mr Ian Hunter QC, sitting as a deputy judge of the High Court, Chancery Division. He had heard two applications made in two different actions but raising substantially the same issues, as to the validity of assignments of causes of action in connection with a franchise agreement. The deputy judge held that the assignments were valid. The assigned causes of action are said to subsist against a company called ANC Limited (“ANC”), the appellant in this court.
ANC acted as a road haulage contractor and also as the franchisor of a parcel collection and delivery service within a network covering the whole country, but with each franchisee being appointed to operate within an identified locality. The contractual documents by which a franchisee was appointed consisted of a very short written agreement with annexed particulars and special provisions, and a lengthy set of standard terms and conditions.
The main issue turns on clause 16 of the standard terms and conditions (headed `Assignment, transfer and beneficial owners’), although that clause must of course be read in the context of the agreement as a whole, and also in its general commercial context. Clause 16 was in the following terms:
“16.1 The Agreement shall be fully transferable and assignable by ANC and shall enure to the benefit of any assignee, transferee or other legal successor to the interests of ANC herein
16.2 The Franchisee agrees that the Agreement is personal to the Franchisee and that neither the Agreement, nor the beneficial rights of the Franchisee may be voluntarily, involuntarily, directly or indirectly assigned or otherwise transferred by the Franchisee, without the prior written consent of ANC as hereinafter provided and any such attempted or purported assignment or transfer shall constitute a breach hereof and be void. ANC agrees not unreasonably to withhold its consent to any proposed assignment or transfer provided that the Franchisee is then in compliance with all provisions of the Agreement and the proposed assignee or transferee shall execute a written acceptance of and undertaking to be bound by the Agreement, the then current edition of the Operators’ Manual and all supplemental agreements to the Agreement signed by the Franchisee and to comply with all requirements imposed thereunder and shall:-
16.2.1 have procured that such persons as ANC shall reasonably require shall have signed Specified Persons’ Undertakings
16.2.2 reimburse such administrative and professional costs and expenses incurred by ANC in processing the application for transfer as have previously been agreed by the Franchisee
16.3 It shall not be unreasonable for ANC to withhold its consent to an assignment or transfer by the Franchisee where the proposed assignee or transferee or any person required to sign a Specified Persons’ Undertaking pursuant to this clause is in competition with ANC or where in the reasonable opinion of ANC such assignment will prejudice the interests of ANC, any Group Company or the Network.”
….
By clause 2 CGP agreed to indemnify Rapid (in liquidation) in respect of costs, and by clause 3 Rapid (in liquidation) agreed to cooperate with CGP and to provide it with such assistance as CGP might reasonably request. These are the two assignments whose validity was in issue before the deputy judge.
Miss Clare Hoffmann (appearing in this court, as below, for ANC) identified three issues raised on the appeal. The first is the correct construction and effect of the prohibition (in clause 16.2 of the standard terms and conditions) on assignment by the franchisee without ANC’s consent. On that issue Miss Hoffmann has relied strongly on the decision of the House of Lords in Linden Gardens Trust v Lenesta Sludge Disposals [1994] 1 AC 85. The second and third issues (which do not arise if ANC fails on the first issue) are the assignability of any right of action which Rapid had under the Misrepresentation Act 1967, and the allegedly champertous nature of the assignment by Compass, so far as it affected causes of action relied on in the counterclaim other than the claim for sums due under, or damages for breach of, the franchise agreement (that is, claims for trespass, conversion, and wilful injury to the goodwill of Compass’s business occasioned by steps taken by ANC in November 1995).
The deputy judge found what he described as a short and straightforward answer to the first issue. He said,
“The quality of any franchise operation is crucially dependent upon the quality and effectiveness of each individual franchisee. It is for that reason that clause 16.2 provides that the agreement is `personal’ to the franchisee.”
But after termination of the franchise there was no need for the prohibition on assignment to continue and on the proper construction of clause 16.2 it did not survive termination. The deputy judge said that the argument had ranged widely, but in reaching that conclusion he seems to have relied on much the same submissions as have been made in this court (and as are summarized later). There was no separate issue below as to the Misrepresentation Act 1967. On the third issue the deputy judge accepted the submission that Mr Griffiths had a sufficiently direct financial and commercial interest in the whole of Compass’s counterclaim, without the need to differentiate between the different causes of action.
In the Linden Gardens case the House of Lords heard two appeals concerned with JCT contracts in similar but not identical form. Each contract contained (in clause 17) a prohibition on assignment. In the first appeal clause 17 was in the following terms:
“(1) The employer shall not without the written consent of the contractor assign this contract. (2) The contractor shall not without the written consent of the employer assign this contract, and shall not without the written consent of the architect (which consent shall not be unreasonably withheld to the prejudice of the contractor) sublet any portion of the works. Provided that it shall be a condition in any subletting which may occur that the employment of the subcontractor under the subcontract shall determine immediately upon the determination (for any reason) of the contractor’s employment under this contract.”
In the second appeal it was in essentially the same terms. In each case the employer under the JCT contract had made an assignment to a successor in title of its cause of action against the building contractor, and the essential issue was whether the assignments were effective.
The leading speech was given by Lord Browne-Wilkinson. The whole speech calls for careful study, but for present purposes the crucial passage is at [1994] 1 AC pp.103-5. Lord Browne-Wilkinson referred to the distinction (drawn by the Court of Appeal) between the assignment of the right to require future performance of a contract and an assignment of benefits arising under the contract (notably the right to receive a payment or to enforce an accrued right of action). He referred to a case note by Professor Roy Goode ((1979) 42 MLR 55) on Helstan Securities v Hertfordshire CC [1978] 3 AER 262. Then he said (p.105 C-E),
“However, although I do not think that Professor Goode’s article throws any light on the true construction of clause 17, I accept that it is at least hypothetically possible that there might be a case in which the contractual prohibitory term is so expressed as to render invalid the assignment of rights to future performance but not so as to render invalid assignments of the fruits of performance. The question in each case must turn on the terms of the contract in question.
The question is to what extent does clause 17 on its true construction restrict rights of assignment which would otherwise exist? In the context of a complicated building contract, I find it 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 reason for including the contractual prohibition viewed from the contractor’s point of view must be that the contractor wishes to ensure that he deals, and deals only, with the particular employer with whom he has chosen to enter into a contract. Building contracts are pregnant with disputes: some employers are much more reasonable than others in dealing with such disputes.”
The House of Lords held, in the result, that both assignments were ineffective, that that result was not contrary to public policy, but that the purported assignor in the second appeal (which was a party to the action) could recover substantial damages.
On this appeal both sides (Miss Hoffmann for ANC, and Mr Robert Hantusch and Mr Christopher Boardman making common cause for CGP and Mr Griffiths respectively) agree that the first issue is essentially one of construction of the particular language of clause 16 of the standard terms and conditions, read in its particular commercial context. Both sides acknowledge that the language of clause 17 of the two JCT contracts was very different, not least because it contained a prohibition on either party assigning without the other’s consent.
Miss Hoffmann submitted that the language of clause 16, although open to criticism if closely analysed, evinced an intention to impose a single, wide prohibition on any assignment of rights under the franchise agreement. On that point she referred to the speech of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 912-3. The fact that each of the franchise agreements had for most purposes come to end did not prevent ancillary provisions (such as clause 16) continuing to have effect: Heyman v Darwins [1942] AC 356, 362-4; Yasuda Fire & Marine Insurance Co of Europe v Orion Marine Insurance Underwriting Agency [1995] QB 174; Hendry v Chartsearch (23 July 1998, CA, especially paragraph 37 of the judgment of Evans LJ).
Against that Mr Hantusch focused on the reference in clause 16.2 to the “beneficial rights” of the franchisee. That expression referred, he submitted, to the special provisions relating to Specified Persons’ Undertakings. So understood it provided the key to the whole of clause 16.2 and 16.3. These elaborate provisions were intended to give a franchisee freedom to assign his franchise, provided that ANC was protected (against unfair competition as well as incompetence on the part of the assignee) by new enforceable undertakings being put in place. But once the agreement had come to an end, a prohibition on assignment of outstanding rights was unnecessary and served no useful purpose. Where any provision of the agreement was intended to continue in force after its termination, it said so expressly (clause 15.3 being in point).
Mr Boardman added some further linguistic points. He drew attention to clause 15.4, emphasising the words “expressly or by implication”:
“The expiration or termination of the Agreement, howsoever caused, shall be without prejudice to any obligation or rights on the part of either party which have accrued prior to such expiration or termination and shall not affect or prejudice any provision of the Agreement which is expressly or by implication provided to come into effect on, or to continue in effect after, such expiration or termination PROVIDED THAT in no circumstances shall the Franchise Fee be repayable by ANC to the Franchisee.”
He pointed out that the provisions for ANC not unreasonably to withhold its consent provide a full and comprehensive code (foreshadowed by “as hereinafter provided” in the first sentence of clause 16.2) but that those provisions are simply incapable of being satisfied after termination of the franchise. The whole of clause 16.2 and 16.3 must be directed, Mr Boardman submitted, exclusively to the period when the franchise is a going concern.
These arguments were skilfully developed on both sides but, like the deputy judge, I find the arguments against the survival of clause 16.2 more powerful. Clause 16 comes immediately after clause 15.4, which states that terms shall continue after termination only if that is provided expressly or by implication. There is no express provision for continuation in clause 16.2, and the submissions made by Mr Hantusch and Mr Boardman persuade me that the implication of such a provision would be contrary to the commercial purpose of the clause. There is nothing in the Linden Gardens case laying down any inflexible rule. On the contrary Lord Browne-Wilkinson (with whom all their Lordships agreed on this point) emphasised, in the passage already cited, that in each case the issue must turn on the terms of the contract in question.
It is common ground that that is sufficient to dispose of this appeal and in those circumstances I think it best to say nothing about the second issue (on which there seems to be no relevant authority) and very little on the third issue. However counsel on both sides have made helpful submissions about a passage in the judgment of Lightman J in Grovewood Holdings v James Capel [1995] Ch 80, 87 (on which I ventured to comment in Re Oasis Merchandising [1995] 2 BCLC 493, 504-5, and on which this court also commented on an appeal from my decision, [1998] Ch 170, 179-80). Miss Hoffmann has in a supplementary skeleton argument sought to demonstrate that there is in fact no inconsistency between these passages, and that even if an assignment of the fruits of an action is a sale of property (within the meaning of section 436 of the Insolvency Act 1986) the sale is not within or even relevant to the exemption from champerty afforded to a liquidator. Her argument proceeds by the following steps:
“(1) The exemption from the rules of champerty arises from the liquidator’s statutory power of sale under Schedule 4 to sell property as defined in Section 436 Insolvency Act 1986.
(2) A legal assignment of a cause of action consists of the right to prosecute the action, to be named as the proper party to the action and to give good discharge to the judgement debtor: Section 136 Law of Property Act 1925.
(3) By contrast, an assignment of the fruits of an action is an equitable assignment being an agreement to assign such fruits if and when they are recovered in the future: Tailby v Official Receiver (1888) 13 App Cas 523. Such an agreement does not give the assignee any rights to prosecute or conduct the action and the assignee does not acquire any beneficial interest in the action itself: Glegg v Bromley [1912] 3 KB 474 at 484.
(4) Since the assignment of the fruits of an action does not include any rights in the action itself nor any right to prosecute the action no question of champerty arises, nor does the scope of the liquidator’s statutory exemption therefrom.
(5) Any agreement that an equitable assignee of the fruits should also have conduct of the action is entirely separate from and independent of the assignment of the fruits and nothing more than a funding agreement. It is subject to the usual rules on champertous agreements. It is entirely unconnected with the liquidator’s exemption arising from the statutory power to sell property and is subject to the usual rules on champertous agreements.”
Whether or not the fifth step is correct (as to which I express no view) this analysis is to my mind a valuable aid to clarification of the position.
I would dismiss this appeal.
SIR ROY BELDAM:
For the reasons stated by Lord Justice Robert Walker I agree this appeal should be dismissed.
LORD JUSTICE CHADWICK:
I also agree.
Alfred McAlpine Construction Limited v. Panatown Limited
[2000] UKHL 43; [2000] 4 All ER 97; [2000] 3 WLR 946 [2001] 1 AC 518
Lord Clyde
It is particularly this passage in Lord Diplock’s speech which has given rise to a question discussed in the present appeal whether The Albazero exception is a rule of law or is based upon the intention of the parties. The issue was identified by my noble and learned friend Lord Goff of Chievely in his speech in White v. Jones [1995] 2 AC 207, 267. The problem arises from two phrases in the speech of Lord Diplock the mutual relationship between which may not be immediately obvious. The two phrases, in the reverse order than that in which they appear, are “is to be treated in law as having entered into the contract” and “if such be the intention of the parties.” In my view it is preferable to regard it as a solution imposed by the law and not as arising from the supposed intention of the parties, who may in reality not have applied their minds to the point. On the other hand if they deliberately provided for a remedy for a third party it can readily be concluded that they have intended to exclude the operation of the solution which would otherwise have been imposed by law. The terms and provisions of the contract will then require to be studied to see if the parties have excluded the operation of the exception.
That appears to have been the conclusion adopted in St. Martins Property Corporation Ltd. v. Sir Robert McAlpine [1994] 1 AC 85, where my noble and learned friend Lord Browne-Wilkinson observed at p. 115:
“In such a case, it seems to me proper, as in the case of the carriage of goods by land, to treat the parties as having entered into 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, under the terms of the contract, could not acquire any right to hold McAlpine liable for breach.”
In that case the point was made that the contractor and the employer were both aware that the property was going to be occupied and possibly purchased by third parties so that it could be foreseen that a breach of the contract might cause loss to others than the employer. But such foresight may be an unnecessary factor in the applicability of the exception. So also an intention of the parties to benefit a third person may be unnecessary. Foreseeablility may be relevant to the question of damages under the rule in Hadley v. Baxendale (1854) 9 Exch 341, but in the context of liability it is a concept which is more at home in the law of tort than in the law of contract. If the exception is founded primarily upon a principle of law, and not upon the particular knowledge of the parties to the contract, then it is not easy to see why the necessity for the contemplation of the parties that there will be potential losses by third parties is essential. It appears that in the St. Martins case [1994] 1 AC 85 the damages claimed were in respect of the cost of remedial work which had been carried out. I see no reason why consequential losses should not also be recoverable under this exception where such loss occurs and the third party should have a right to recover for himself all the damages won by the original party on his behalf.
The Albazero exception will plainly not apply where the parties contemplate that the carrier will enter into separate contracts of carriage with the later owners of the goods, identical to the contract with the consignor. Even more clearly, as Lord Diplock explained at p. 848, will the exception be excluded if other contracts of carriage are made in terms different from those in the original contract. In The Albazero the separate contracts which were mentioned were contracts of carriage. That is understandable in the context of carriage by sea involving a charterparty and bills of lading, but the counterpart in a building contract to a right of suit under a bill of lading should be the provision of a direct entitlement in a third party to sue the contractor in the event of a failure in the contractor’s performance. In the context of a building contract one does not require to look for a second building contract to exclude the exception. It would be sufficient to find the provision of a right to sue. Thus as my noble and learned friend Lord Browne-Wilkinson observed in the St. Martins case [1994] 1 AC 85, 115:
“If, pursuant to the terms of the original building contract, the contractors have undertaken liability to the ultimate purchasers to remedy defects appearing after they acquired the property, it is manifest the case will not fall within the rationale of Dunlop v Lambert 6 Cl. & F. 600. If the ultimate purchaser is given a direct cause of action against the contractor (as is the consignee or endorsee under a bill of lading) the case falls outside the rationale of the rule.”
In the St. Martins case the employer started off as the owner of the property and subsequently conveyed it to another company. In the present case the employer never was the owner. But that has not featured as a critical consideration in the present appeal and I do not see that that factor affects the application of the exception. In the St. Martins case there was a contractual bar on the assignment of rights of action without the consent of the contractor. In the present case the extra qualification was added that the consent should not be unreasonably withheld. But again I do not see that difference as of significance. It does not follow that the presence of a provision enabling assignment without the consent of the contractor excludes the exception. As was held in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 WLR 68 where there is a right to have an assignment of any cause of action accruing to the employer against the contractor, the exception may still apply so as to enable the assignee to recover substantial damages. It may be that the exception could be excluded through some contractual arrangement between the employer and the third party who sustained the actual loss, but the law would probably be slow to find such an intention established where it would leave the black hole. At least an express provision for assignment of the employer’s rights will not suffice.
I have no difficulty in holding in the present case that the exception cannot apply. As part of the contractual arrangements entered into between Panatown and McAlpine there was a clear contemplation that separate contracts would be entered into by McAlpine, the contracts of the deed of duty of care and the collateral warranties. The duty of care deed and the collateral warranties were of course not in themselves building contracts. But they did form an integral part of the package of arrangements which the employer and the contractor agreed upon and in that respect should be viewed as reflecting the intentions of all the parties engaged in the arrangements that the third party should have a direct cause of action to the exclusion of any substantial claim by the employer, and accordingly that the exception should not apply. There was some dispute upon the difference in substance between the remedies available under the contract and those available under the duty of care deed. Even if it is accepted that in the circumstances of the present case where the eventual issue may relate particularly to matters of reasonable skill and care, the remedies do not absolutely coincide, the express provision of the direct remedy for the third party is fatal to the application of The Albazero exception. On a more general approach the difference between a strict contractual basis of claim and a basis of reasonable care makes the express remedy more clearly a substitution for the operation of the exception. Panatown cannot then in the light of these deeds be treated as having contracted with McAlpine for the benefit of the owner or later owners of the land and the exception is plainly excluded.
I turn accordingly to what was referred to in the argument as the broader ground. But the label requires more careful definition. The approach under The Albazero exception has been one of recognising an entitlement to sue by the innocent party to a contract which has been breached, where the innocent party is treated as suing on behalf of or for the benefit of some other person or persons, not parties to the contract, who have sustained loss as a result of the breach. In such a case the innocent party to the contract is bound to account to the person suffering the loss for the damages which the former has recovered for the benefit of the latter. But the so-called broader ground involves a significantly different approach. What it proposes is that the innocent party to the contract should recover damages for himself as a compensation for what is seen to be his own loss. In this context no question of accounting to anyone else arises. This approach however seems to me to have been developed into two formulations.
The first formulation, and the seeds of the second, are found in the speech of Lord Griffiths in St. Martins Property Corporation Ltd. v. Sir Robert McAlpine Ltd. [1994] 1 AC 85, 96. At the outset his Lordship expressed the opinion that Corporation, faced with a breach by McAlpine of their contractual duty to perform the contract with sound materials and with all reasonable skill and care, would be entitled to recover from McAlpine the cost of remedying the defect in the work as the normal measure of damages. He then dealt with two possible objections. First, it should not matter that the work was not being done on property owned by Corporation. Where a husband instructs repairs to the roof of the matrimonial home it cannot be said that he has not suffered damage because he did not own the property. He suffers the damage measured by the cost of a proper completion of the repair:
“In cases such as the present the person who places the contract has suffered financial loss because he has to spend money to give him the benefit of the bargain which the defendant had promised but failed to deliver.”
The second objection, that Corporation had in fact been reimbursed for the cost of the repairs was answered by the consideration that the person who actually pays for the repairs is of no concern to the party who broke the contract. But Lord Griffiths added at p. 97:
“The court will of course wish to be satisfied that the repairs have been or are likely to be carried out but if they are carried out the cost of doing them must fall upon the defendant who broke his contract.”
In the first formulation this approach can be seen as identifying a loss upon the innocent party who requires to instruct the remedial work. That loss is, or may be measured by, the cost of the repair. The essential for this formulation appears to be that the repair work is to be, or at least is likely to be, carried out. This consideration does not appear to be simply relevant to the reasonableness of allowing the damages to be measured by the cost of repair. It is an essential condition for the application of the approach, so as to establish a loss on the part of the plaintiff. Thus far the approach appears to be consistent with principle, and in particular with the principle of privity. It can cover the case where A contracts with B to pay a sum of money to C and B fails to do so. The loss to A is in the necessity to find other funds to pay to C and provided that he is going to pay C, or indeed has done so, he should be able to recover the sum by way of damages for breach of contract from B. If it was evident that A had no intention to pay C, having perhaps changed his mind, then he would not be able to recover the amount from B because he would have sustained no loss, and his damages would at best be nominal.
But there can also be found in Lord Griffiths’ speech the idea that the loss is not just constituted by the failure in performance but indeed consists in that failure. This is the “second formulation.” In relation to the suggestion that the husband who instructs repair work to the roof of his wife’s house and has to pay for another builder to make good the faulty repair work has sustained no damage Lord Griffiths observed at p. 97:
“Such a result would in my view be absurd and the answer is that the husband has suffered loss because he did not receive the bargain for which he had contracted with the first builder and the measure of damages is the cost of securing the performance of that bargain by completing the roof repairs properly by the second builder.”
That is to say that the fact that the innocent party did not receive the bargain for which he contracted is itself a loss. As Steyn L.J. put it in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 WLR 68, 80, “he suffers a loss of bargain or of expectation interest.” In this more radical formulation it does not matter whether the repairs are or are not carried out, and indeed in the Darlington case that qualification is seen as unnecessary. In that respect the disposal of the damages is treated as res inter alios acta. Nevertheless on this approach the intention to repair may cast light on the reasonableness of the measure of damages adopted. In order to follow through this aspect of the second formulation in Lord Griffiths’ speech it would be necessary to understand his references to the carrying out of the repairs to be relevant only to that consideration.
I find some difficulty in adopting the second formulation as a sound way forward. First, if the loss is the disappointment at there not being provided what was contracted for, it seems to me difficult to measure that loss by consideration of the cost of repair. A more apt assessment of the compensation for the loss of what was expected should rather be the difference in value between what was contracted for and what was supplied. Secondly, the loss constituted by the supposed disappointment may well not include all the loss which the breach of contract has caused. It may not be able to embrace consequential losses, or losses falling within the second head of Hadley v. Baxendale (1854) 9 Exch 341 . The inability of the wife to let one of the rooms in the house caused by the inadequacy of the repair, does not seem readily to be something for which the husband could claim as his loss. Thirdly, there is no obligation on the successful plaintiff to account to anyone who may have sustained actual loss as a result of the faulty performance. Some further mechanism would then be required for the court to achieve the proper disposal of the monies awarded to avoid a double jeopardy. Alternatively, in order to achieve an effective solution, it would seem to be necessary to add an obligation to account on the part of the person recovering the damages. But once that step is taken the approach begins to approximate to The Albacruz exception. Fourthly, the “loss” constituted by a breach of contract has usually been recognised as calling for an award of nominal damages, not substantial damages.
The loss of an expectation which is here referred to seems to me to be coming very close to a way of describing a breach of contract. A breach of contract may cause a loss, but is not in itself a loss in any meaningful sense. When one refers to a loss in the context of a breach of contract, one is in my view referring to the incidence of some personal or patrimonial damage. A loss of expectation might be a loss in the proper sense if damages were awarded for the distress or inconvenience caused by the disappointment. Professor Coote (“Contract Damages, Ruxley, and the Performance Interest” (1997) C.L.J. 537) draws a distinction between benefits in law, that is bargained-for contractual rights, and benefits in fact, that is the enjoyment of the fruits of performance. Certainly the former may constitute an asset with a commercial value. But while frustration may destroy the rights altogether so that the contract is no longer enforceable, a failure in the obligation to perform does not destroy the asset. On the contrary it remains as the necessary legal basis for a remedy. A failure in performance of a contractual obligation does not entail a loss of the bargained-for contractual rights. Those rights remain so as to enable performance of the contract to be enforced, as by an order for specific performance. If one party to a contract repudiates it and that repudiation is accepted, then, to quote Lord Porter in Heyman v. Darwins Ltd. [1942] A.C. 356, 399,
“By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded.”
The primary obligations under the contract may come to an end, but secondary obligations then arise, among them being the obligation to compensate the innocent party. The original rights may not then be enforced. But a consequential right arises in the innocent party to obtain a remedy from the party who repudiated the contract for his failure in performance.
Both of these two formulations seek to remedy the problem of the legal black hole. At the heart of the problem is the doctrine of privity of contract which excludes the ready development of a solution along the lines of a jus quaesitum tertio. It might well be thought that such a solution would be more direct and simple. In the context of the domestic and familial situations, such as the husband instructing the repairs to the roof of his wife’s house, or the holiday which results in disappointment to all the members of the family, the jus quaesitum tertio may provide a satisfactory means of redress, enabling compensation to be paid to the people who have suffered the loss. Such an approach is available in Germany see W. Lorrenz “Contract Beneficiaries in German Law” in The Gradual Convergence: Foreign Ideas, Foreign Influences, and English Law on the Eve of the 21st Century ed. Markesinis (1994), pp. 65, 78, 79. It may also be available in Scotland (Carmichael v. Carmichael’s Executrix 1920 SC (HL) 195). But we were not asked to adopt it in the present case and so radical a step cannot easily be achieved without legislative action. Since Parliament has recently made some inroad into the principle of privity but has stopped short of admitting a solution to a situation such as the present, it would plainly be inappropriate to enlarge the statutory provision by judicial innovation. The alternative has to be the adoption of what Lord Diplock in Swain v. The Law Society [1983] 1 A.C. 598, 611 described as a juristic subterfuge “to mitigate the effect of the lacuna resulting from the non-recognition of a jus quaesitum tertio.” The solution, achieved by the operation of law, may carry with it some element of artificiality and may not be supportable on any clear or single principle. If the entitlement to sue is not to be permitted to the party who has suffered the loss, the law has to treat the person who is entitles to sue as doing so on behalf of the third party. As Lord Wilberforce observed in Woodar Investment Development Ltd. v. Wimpey Construction U.K. Ltd. [1980] 1 WLR 277, 283, “there are many situations of daily life which do not fit neatly into conceptual analysis, but which require some flexibility in the law of contract.”
It seems to me that a more realistic and practical solution is to permit the contracting party to recover damages for the loss which he and a third party has suffered, being duly accountable to them in respect of their actual loss, than to construct a theoretical loss in law on the part of the contracting party, for which he may be under no duty to account to anyone since it is to be seen as his own loss. The solution is required where the law will not tolerate a loss caused by a breach of contract to go uncompensated through an absence of privity between the party suffering the loss and the party causing it. In such a case, to avoid the legal black hole, the law will deem the innocent party to be claiming on behalf of himself and any others who have suffered loss. It does not matter that he is not the owner of the property affected, nor that he has not himself suffered any economic loss. He sues for all the loss which has been sustained and is accountable to the others to the extent of their particular losses. While it may be that there is no necessary right in the third party to compel the innocent employer to sue the contractor, in the many cases of the domestic or familial situation that consideration should not be a realistic problem. In the commercial field, in relation to the interests of such persons as remoter future proprietors who are not related to the original employer, it may be that a solution by way of collateral warranty would still be required. If there is an anxiety lest the exception would permit an employer to receive excessive damages, that should be set at rest by the recognition of the basic requirement for reasonableness which underlies the quantification of an award of damages.
The problem which has arisen in the present case is one which is most likely to arise in the context of the domestic affairs of a family group or the commercial affairs of a group of companies. How the members of such a group choose to arrange their own affairs among themselves should not be a matter of necessary concern to a third party who has undertaken to one of their number to perform services in which they all have some interest. It should not be a ground of escaping liability that the party who instructed the work should not be the one who sustained the loss or all of the loss which in whole or part has fallen on another member or members of the group. But the resolution of the problem in any particular case has to be reached in light of its own circumstances. In the present case the decision that Panatown should be the employer under the building contract although another company in the group owned the land was made in order to minimise charges of VAT. No doubt thought was given as to the mechanics to be adopted for the building project in order to achieve the course most advantageous to the group. Where for its own purposes a group of companies decides which of its members is to be the contracting party in a project which is of concern and interest to the whole group I should be reluctant to refuse an entitlement to sue on the contract on the ground simply that the member who entered the contract was not the party who suffered the loss on a breach of the contract. But whether such an entitlement is to be admitted must depend upon the arrangements which the group and its members have decided to make both among themselves and with the other party to the contract. In the present case there was a plain and deliberate course adopted whereby the company with the potential risk of loss was given a distinct entitlement directly to sue the contractor and the professional advisers. In the light of such a clear and deliberate course I do not consider that an exception can be admitted to the general rule that substantial damages can only be claimed by a party who has suffered substantial loss.
I agree that the appeal should be allowed.
Lord Goff (dissenting)
I add that, if Lord Griffiths’ approach was to be rejected, it would follow that, for example, the employer under a building contract for work on another’s property would have no remedy in damages if the builder was to repudiate the contract or to fail altogether to perform the contractual work. In other words, the builder could repudiate with impunity. It is no answer, or an insufficient answer, to this point that money paid in advance by the employer may be recoverable on the ground of failure of consideration, any more than it is an answer to other cases that there may be an abatement of the price.
In the light of this preamble I wish to state that I find persuasive the reasoning and conclusion expressed by Lord Griffiths in his opinion in the St. Martin’s case [1994] 1 AC 85, that the employer under a building contract may in principle recover substantial damages from the building contractor, because he has not received the performance which he was entitled to receive from the contractor under the contract, notwithstanding that the property in the building site was vested in a third party. The example given by Lord Griffiths of a husband contracting for repairs to the matrimonial home which is owned by his wife is most telling. It is not difficult to imagine other examples, not only within the family, but also, for example, where work is done for charitable purposes – as where a wealthy man who lives in a village decides to carry out at his own expense major repairs to, or renovation or even reconstruction of, the village hall, and himself enters into a contract with a local builder to carry out the work to the existing building which belongs to another, for example to trustees, or to the parish council. Nobody in such circumstances would imagine that there could be any legal obstacle in the way of the charitable donor enforcing the contract against the builder by recovering damages from him if he failed to perform his obligations under the building contract, for example because his work failed to comply with the contract specification.
At this stage I find it necessary to return to the opinion of Lord Griffiths in the St. Martin’s case. In the passage from his opinion, [1994] 1 AC 85, 96-97, which I have already quoted, he gave the example of a husband placing a contract with a builder for the replacement of the roof of the matrimonial home which belonged to his wife. The work proved to be defective. Lord Griffiths expressed the opinion that, in such a case, it would be absurd to say that the husband has suffered no damage because he does not own the property. I wish now to draw attention to the fact that, in his statement of the facts of his example, Lord Griffiths included the fact that the husband had to call in and pay another builder to complete the work. It might perhaps be thought that Lord Griffiths regarded that fact as critical to the husband’s cause of action against the builder, on the basis that the husband only has such a cause of action in respect of defective work on another person’s property if he himself has actually sustained financial loss, in this example by having paid the second builder. In my opinion, however, such a conclusion is not justified on a fair reading of Lord Griffiths’ opinion. This is because he stated the answer to be that “the husband has suffered loss because he did not receive the bargain for which he had contracted with the first builder and the measure of damages is the cost of securing the performance of that bargain by completing the roof repairs properly by the second builder.” It is plain, therefore, that the payment to the second builder was not regarded by Lord Griffiths as essential to the husband’s cause of action.
The point can perhaps be made more clearly by taking a different example, of the wealthy philanthropist who contracts for work to be done to the village hall. The work is defective; and the trustees who own the hall suggest that he should recover damages from the builder and hand the damages over to them, and they will then instruct another builder, well known to them, who, they are confident, will do the work well. The philanthropist agrees, and starts an action against the first builder. Is it really to be suggested that his action will fail, because he does not own the hall, and because he has not incurred the expense of himself employing another builder to do the remedial work? Echoing the words of Lord Griffiths, I regard such a conclusion as absurd. The philanthropist’s cause of action does not depend on his having actually incurred financial expense; as Lord Griffiths said of the husband in his example, he “has suffered loss because he did not receive the bargain for which he had contracted with the first builder.”
There has been a substantial amount of academic discussion about the difference of opinion in the Appellate Committee in the St. Martin’s case and in particular about the merits of Lord Griffiths’ opinion in that case. The Appellate Committee in the present case was supplied with copies of a number of relevant articles, which I have studied with interest and respect. I have not detected any substantial criticism of Lord Griffiths’ broader ground, whereas there has been some criticism of the narrower ground adopted by the majority of the Appellate Committee in the St. Martin’s case [1985] 1 A.C. 85 – see in particular the articles by Professor Treitel in (1998) 114 L.Q.R. 527, and by Mr. Duncan Wallace Q.C. (the editor of Hudson on Building Contracts) in (1994) 110 L.Q.R. 42 and (1999) 115 L.Q.R. 394 (in which the writer supports Lord Griffiths’ broader ground). I have found nothing in the academic material with which we were supplied which should deter those who are attracted to the broader ground from giving effect to it in an appropriate case. In this connection, I wish to draw attention in particular to articles by Professor Brian Coote in (1997) 56 Camb. L.J. 557 and in (1998) 13 J.C.L. 91; to the articles by Mr. Duncan Wallace Q.C. to which I have already referred; and to a Paper presented by Janet O’Sullivan (the Director of Studies in Law at Selwyn College, Cambridge) at a conference held in Cambridge in 1999 on Comparative Unjustified Enrichment (the Papers for which will , I understand, shortly be published) in which she considered the whole question of damages awarded to protect contractual expectations with special reference to “restitutionary damages,” and in particular to the judgment of the Court of Appeal in Attorney-General v. Blake [1998] Ch 439. In so doing, she reviewed a number of cases in which damages were, or might usefully have been, awarded to protect contractual expectations, and in particular regarded Lord Griffiths’ opinion in St. Martin’s, together with the recent decision of your Lordships’ House in Ruxley Electronics and Construction Ltd. v. Forsyth [1996] AC 344, as providing examples of steps recently taken to recognise and attack a deficiency in the remedial regime for breach of contract, arising from the “perceived failure of the English law of contract to recognise that the plaintiff’s interest lies in the performance of the contract.” Her review provides the context within which Lord Griffiths’ opinion can usefully be set, and in this way provides further justification for Lord Griffiths’ broader ground.
Turning to the authorities, I think it right to start with the decision of your Lordships’ House in East Ham Corporation v. Bernard Sunley & Sons Ltd. [1966] A.C. 406, which is regarded as the leading authority for the proposition that, in cases in which the plaintiff is seeking damages for the defective performance of a building contract (which is a contract for labour and materials), the normal measure of his damages is the cost of carrying out remedial work. On the issue of damages in that case, there appears to have been no difference of opinion among the members of the Appellate Committee. Lord Upjohn accepted at p. 445 that the normal measure of damages is the cost of reinstatement, as both Lord Guest and Lord Pearson appear to have done at pp. 440 and 451 respectively. Lord Cohen was however careful to qualify this proposition by reference to a principle of reasonableness which he drew from Hudson on Building and Engineering Contracts, 8th ed. (1859). The statement of the law (which he drew from that book) was as follows at p. 434:
“There is no doubt that wherever it is reasonable for the employer to insist upon reinstatement the courts will treat the cost of reinstatement as the measure of damage.”
I turn next to the authoritative judgment of Oliver J. in Radford v. De Froberville [1977] 1 W.L.R. 1262, for which I wish to express my respectful admiration. The case was concerned with a contract for the sale of a plot of land adjoining a house belonging to the plaintiff (the vendor) but occupied by his tenants, under which the defendant (the purchaser) undertook to build a house on the plot and also to erect a wall to a certain specification on the plot so as to separate it from the plaintiff’s land. The plaintiff obtained judgment against the defendant for damages for breach of contract by reason of her failure to erect the dividing wall, but an issue arose as to the measure of the damages. The defendant having failed to build the dividing wall on the land purchased from the plaintiff, the plaintiff proposed to build a dividing wall on his own land, and claimed the cost of doing so from the defendant; whereas the defendant maintained that the appropriate measure of damages was the consequent diminution in the value of the plaintiff’s property, which was nil. Oliver J. rejected the defendant’s contention. He held that the plaintiff had a genuine and serious intention of building the wall on his own land, and that this was a reasonable course of action for him to take. With regard to an argument by the defendant that, since the plaintiff did not himself occupy the property, he could not be said to have himself suffered damage by reason of the defendant’s failure to build the wall, because he was not there to enjoy it, and that his only loss, therefore, was the diminution of the value of his reversion, Oliver J. gave the following answer at [1977] 1 W.L.R. 1262, 1285:
“Whilst I see the force of this, I do not think that it really meets the point that, whatever his status, the plaintiff has a contractual right to have the work done and does in fact want to do it . . . . As it seems to me, the fact that his motive may be to confer what he conceives to be a benefit on persons who have no contractual rights to demand it cannot alter the genuineness of his intentions.” Oliver J. here referred to Jackson v. Horizon Holidays Ltd. [1975] 1 WLR 1468.
The reference in this passage to the persons who would benefit by the building of the wall was a reference to the plaintiff’s tenants.
Oliver J.’s reliance on the simple fact that the plaintiff had a contractual right to have the wall built constitutes a plain assertion of the plaintiff’s right to recover damages on the basis of damage to his performance interest, and is surely inconsistent with the submission of McAlpine, in the present case, that the mere fact that the buildings were to be constructed on the land of UIPL, rather than on the land of Panatown, debars Panatown from recovering substantial damages for the defective performance of McAlpine in the construction of the buildings. Indeed the decision of Oliver J. that the plaintiff in the case before him was entitled to substantial damages is of itself inconsistent with McAlpine’s submission, since the damages were awarded in respect of a failure by the defendant to build on land which was not the property of the plaintiff.
In the course of his judgment Oliver J., relying on a passage from the judgment of Megarry V.-C. in Tito v. Waddell (No. 2) [1977] Ch. 106, 331-334, concluded, at p. 1283, that there were three questions which he had to answer:
“First, am I satisfied on the evidence that the plaintiff has a genuine and serious intention of doing the work? Secondly, is the carrying out of the work on his own land a reasonable thing for the plaintiff to do? Thirdly, does it make any difference that the plaintiff is not personally in occupation of the land but desires to do the work for the benefit of his tenants?”
The first two questions he answered in the affirmative; the third he answered in the negative. I think it right however to record that the issue of reasonableness which arose in the second question was not the same issue as that raised in Lord Cohen’s statement of principle in East Ham Corporation v. Bernard Sunley & Sons; [1996] A.C. 406 it arose because Oliver J. had to consider whether, although the defendant’s breach of contract related to a failure to build the wall on her land which she had purchased from the plaintiff, the plaintiff was entitled to claim the cost of building a similar wall on his own land. It followed that the second question was, as Oliver J. said (see [1977] 1 W.L.R. 1284E-F) “really one of mitigation,” and that it was in that context that he had to consider whether the proposed action of the plaintiff was a reasonable step for him to take.
In Ruxley Electronics and Construction Ltd. v. Forsyth [1996] AC 344, the defendants contracted to construct a swimming pool on the plaintiff’s land. The contract specification required that the deep end of the pool should be 7 feet 6 inches deep. The pool was constructed, but the deep end was only 6 feet deep. The plaintiff claimed damages in the sum required to reconstruct the pool to the specified depth, viz. £21,560. The trial judge rejected that claim, but awarded the plaintiff damages in the sum of £2,500 for loss of amenity. The Court of Appeal allowed the plaintiff’s appeal from that decision, and awarded him the full sum claimed by him. The House of Lords allowed the defendants’ appeal from the decision of the Court of Appeal, on the ground that the expenditure required to reconstruct the pool to the specified depth was out of all proportion to the benefit to be obtained, and restored the judgment of the trial judge. The plaintiff invoked the decision of Oliver J. in Radford v. De Froberville as showing that he was entitled to damages for failure to comply with the contract to provide a swimming pool to his specification, notwithstanding that the extra depth was of no objective value; but on the facts of the case your Lordships’ House held that the award of damages which the plaintiff sought was unreasonable and so could not be upheld. In support of this conclusion, the House was able to invoke not only English authority, notably the speech of Lord Cohen in East Ham Corporation v. Bernard Sunley & Sons, but also authoritative statements of principle from the High Court of Australia (viz. Bellgrove v. Eldridge (1954) 90 C.L.R. 613, 617-618) and the United States (viz. Jacob & Youngs v. Kent 129 N.E. 889, 891-2, per Cardozo J.). It is however plain from the opinions of the Appellate Committee that they regarded Oliver J.’s judgment in Radford v. De Froberville [1977] 1 W.L.R. 1262 as an authoritative and useful statement of legal principle: see, e.g., [1996] 1 A.C. at p. 360, per Lord Mustill. And, as Oliver J. said in Radford v. De Froberville [1977] 1 W.L.R. 1262, 1270:
“If [the plaintiff] contracts for the supply of that which he thinks serves his interests – be they commercial, aesthetic or merely eccentric – then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit.”
I respectfully agree with this proposition, the last few words of which can be regarded as concerned with the issue of reasonableness which arose in the Ruxley Electronics case [1996] AC 344. It cannot be said that, in the present case, the breach of contract alleged by Panatown is “technical”, or that Panatown is seeking an “uncovenanted” profit. Moreover Oliver J.’s proposition, and indeed his decision, are, as I have already indicated, inconsistent with the argument now advanced on behalf of McAlpine that the employer under a building contract is unable to recover substantial damages for breach of the contract if the work in question is to be performed on land or buildings which are not his property. Oliver J.’s proposition is, in my opinion, equally applicable where the work contracted for is to be performed on another person’s property for family reasons, or (as in the present case) for the benefit of a group of companies of which the plaintiff is a member, or for purely charitable reasons, or for any other reason for which the plaintiff thinks it appropriate to enter into such a contract –as for example in the case of a contract by the defendant to build a wall on her own land, as in Radford v. De Froberville [1977] 1 W.L.R. 1262 itself.
It follows, in my opinion, that the principal argument advanced on behalf of McAlpine is inconsistent with authority and established principle. This conclusion may involve a fuller recognition of the importance of the protection of a contracting party’s interest in the performance of his contract than has occurred in the past. But not only is it justified by authority, but the principle on which it is based is supported by a number of distinguished writers, notably Professor Brian Coote and Mr. Duncan Wallace Q.C.
However, as I have already recorded, it was the submission of McAlpine that your Lordships should regard any such development in the law as a matter for legislation, presumably after a reference to the Law Commission. This submission was made on the basis that the Lord Chancellor had introduced into Parliament a Bill – the Contract (Rights of Third Parties) Bill, based on a Report by the Law Commission, designed to bring about a radical reform of the privity rule, and that the prospect of this imminent legislation rendered illegitimate any further judicial activism in the field which was the subject of the present appeal. That Bill is now on the statute book: see the Contracts (Rights of Third Parties) Act 1999.
I am unable to accept this submission. As I have previously explained, this case is not concerned with privity of contract. There is no question of a third party here seeking to enforce a jus quaesitus tertio – i.e., of UIPL enforcing a right arising under the contract between McAlpine and Panatown. On the contrary, the reason why Panatown contracted as employer under the building contract with McAlpine was so that UIPL, although the owner of the site, should not do so. Even if the new Act had been in force at the material time, it would not have given UIPL any right to enforce the building contract, or any provision of it, against McAlpine.Section 1 of the Act, which is concerned with the right of a third party to enforce a contractual term, provides as follows:
(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a benefit on him.
(2)
Subsection (1) (b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.
It is plain that the building contract in the present case did not expressly provide that UIPL might in its own right enforce a term of the contract; and, in so far as the contract, or any term of it, purported to confer a benefit on UIPL, it is plain that the parties did not intend any such term to be enforceable by UIPL, the rights of the latter against McAlpine being limited to those which arose under a separate contract, the DCD.
In truth, no question of a jus quaesitum tertio arises in this case at all. Lord Griffiths’ broader ground is not concerned with privity of contract as such. It is concerned with the damages recoverable by one party to a contract (the employer) against another (the contractor) for breach of a contract for labour and materials, viz. a building contract. It does not seek to establish an exception to the old privity rule, though it may provide a principled basis for the recovery of damages (by a contracting party, not by a third party) in some cases, such as Jackson v. Horizon Holidays Limited [1975] 1 WLR 1468, in which the privity rule has been seen as a barrier to recovery (not by a contracting party but by a third party).
Furthermore, as Professor Hugh Beale stated some years ago (see (1995) 9 J.C.L. 103 at p. 108).
“Even if the basic doctrine of privity were to be reformed along the lines suggested by the Law Commission, I think it is vital that the promisee should have adequate remedies to take care of those cases in which the third party does not acquire rights.”
I would however go further. I do not regard Lord Griffiths’ broader ground as a departure from existing authority, but as a reaffirmation of existing legal principle. Indeed, I know of no authority which stands in its way. On the contrary, there have been statements in the cases which provide support for his view. Thus in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 WLR 68, 80, Steyn L.J. (as he then was) described Lord Griffiths’ broader ground as based on classic contractual theory, a statement with which I respectfully agree. Moreover, Lord Griffiths’ reasoning was foreshadowed in the opinions of members of the Appellate Committee in Woodar Investment Development Ltd. v. Wimpey Construction U.K. Ltd. [1980] 1. W.L.R. 277; see especially the opinion of Lord Keith of Kinkel (at pp. 297-8), and in addition the more tentative statements of Lord Salmon (at p. 291) and Lord Scarman (at pp. 300-1). Furthermore, as I have just indicated, full recognition of the importance of the performance interest will open the way to principled solution of other well-known problems in the law of contract, notably those relating to package holidays which are booked by one person for the benefit not only of himself but of others, normally members of his family (as to which see Jackson v. Horizon Holidays Ltd. [1975] 1 WLR 1468), and other cases of a similar kind referred to by Lord Wilberforce in his opinion in the Woodar Investment case at p. 283 – cases of an everyday kind which are calling out for a sensible solution on a principled basis. Even if it is not thought, as I think, that the solution which I prefer is in accordance with existing principle, nevertheless it is surely within the scope of the type of development of the common law which, especially in the law of obligations, is habitually undertaken by appellate judges as part of their ordinary judicial function. That such developments in the law may be better left to the judges, rather than be the subject of legislation, is now recognised by the Law Commission itself, because legislation within a developing part of the common law can lead to ossification and a rigid segregation of legal principle which disfigures the law and impedes future development of legal principle on a coherent basis. It comes as no surprise therefore that, in its Report on “Privity of Contract: Contracts for the Benefit of Third Parties, (1996) (Law Com. No. 242) para. 5.15, the Law Commission declined to make specific recommendations in relation to the promisee’s remedies in a contract for the benefit of a third party (here referring to The Albazero [1977] A.C. 774 and Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd. (the St. Martin’s case) [1994] 1 AC 85 as cases in which “the courts have gone a considerable way towards developing rules which in many appropriate cases do allow the promisee to recover damages on behalf of the third party”), and stated that the Commission “certainly . . . would not wish to forestall further judicial development of this area of the law of damages.” This certainly does not sound like a warning to judicial trespassers to keep out of forbidden territory; see also para. 11. 22, concerned with the problem of double liability – which I shall have to consider at a later stage.
The present case provides, in my opinion, a classic example of a case which falls properly within the judicial province. I, for my part, have therefore no doubt that it is desirable, indeed essential, that the problem in the present case should be the subject of judicial solution by providing proper recognition of the plaintiff’s interest in the performance of the contractual obligations which are owed to him. I cannot see why the proposed statutory reform of the old doctrine of privity of contract should inhibit the ordinary judicial function, and so prevent your Lordships’ House from doing justice between the parties in the present case. As I have said, the principal function of this submission of McAlpine appears to have been to restrict the argument of Panatown to the narrower ground in Dunlop v. Lambert 6 Cl. & F. 600 and by so doing to enable McAlpine to argue that, on that basis, the cause of action by Panatown under the building contract was excluded by the separate contractual right afforded to the building owner, UIPL, under the DCD. That is a matter which I will have to address when I come to consider the second issue in the case.
Technotrade Ltd v Larkstore Ltd
[2006] EWCA Civ 1079 [2006] 1 WLR 2926, [2006] WLR 2926
Mummery LJ
Assignment point: judgment of HHJ Wilcox
In view of developments during the course of the hearing this is now the only substantial issue remaining in the appeal. On the assignment point the judge concluded
“51. In my judgment, Larkstore under the assignment acquired Starglade’s right to sue Technotrade in contract, the cause of action having accrued at the time of the alleged breach of the contract of retainer. The measure of damages would not be nominal. The actual cost of repair and stabilisation of the site by Larkstore would be evidentially relevant to what would be recoverable, as would be the cost of reasonable repair to the neighbouring properties. Since the damage to the site occurred after the assignment, and damage is an essential ingredient in tort it follows in my judgment that under the assignment there was no cause of action in tort capable of being assigned by Starglade.”
[Note: The judge must have meant the transfer of the site. The damage occurred after that transfer, not after the assignment of the cause of action].
In reaching this conclusion the judge rejected Technotrade’s submission that the assignment was invalid. He rejected the submission that it was never in the contemplation of Starglade and Larkstore that the benefit of Technotrade’s report and Starglade’s rights of action in relation to it should be assigned to Larkstore. He found that the report was an incident of the vital planning consent being sold with the land and that a formal assignment was intended, but overlooked. As Peter Smith J observed in argument, there may have been an equitable assignment which was perfected by the statutory assignment in 2004. The judge held that Larkstore had a genuine commercial interest in the enforcement of any claim against Technotrade arising out of the breach of the contract of retainer and the recovery of at least an agreed proportion of the damages. This aspect of the judgment is not appealed by Technotrade.
Technotrade then submitted that Larkstore’s claims based on the assignment were misconceived. The argument was that an assignee cannot recover more than could the assignor, had there been no assignment; Starglade, the assignor, had not suffered any loss as a consequence of the report or the landslip, as it had ceased to own the Site at the time of the landslip and at the date of the assignment of the cause of action.
The judge reviewed the authorities and decided to apply the law was as stated by Staughton LJ in Linden Gardens at 57. The principle was that an assignee can recover no more damages than the assignor could have recovered if there had been no assignment, and if the building had not been transferred to the assignee …emphasis added).
Assignment point: general principles
The perceived problem of the effect of the assignment on the assignee’s right to recover substantial damages is temporal in origin. It arises from the particular order in which the following events occurred: the breach of contract by Technotrade, the transfer of ownership of the Site by Starglade to Larkstore, the damage caused by the landslip after the transfer, and the assignment of the cause of action by Starglade to Larkstore, which occurred years after the transfer of the Site.
There are 3 relevant points of time.
1) The time of the breach of contract by Technotrade. The contractual cause of action against Technotrade arose when Starglade was the owner of the Site. Starglade was only entitled to recover nominal damages at that time. No substantial damage could be established until the occurrence of the landslip in October 2001
2) The time of the landslip. Larkstore was the owner of the Site at the time when the landslip occurred and substantial damage was suffered. Starglade was still entitled to the chose in action, but it was not entitled to recover substantial damages, as it had ceased to own the Site. Larkstore owned the Site and suffered substantial damage, but was not entitled to recover damages form Technotrade for breach of contract, because it had no contract with Technotrade and, at that time, had no assignment from Starglade of the benefit of its contract, rights of action and remedies for breach of contract.
3) The time of the assignment. Starglade could not, it was submitted, assign to Larkstore more than it had. It did not have a claim for substantial damages against Technotrade in contract, as it had ceased to own the Site before the assignment and before the landslip.
The answer to the perceived problem of a limit on the damages which Larkstore, as assignee, is entitled to recover from Technotrade is to be found, in my judgment, in an analysis of the cause of action itself. In this case the cause of action was the right to sue Technotrade for breach of contract in respect of the preparation of the soil inspection report on the Site. The cause of action was complete in December 1998 when Technotrade produced the soil report for Starglade.
It is accepted that the report and the rights of action and remedies in respect of it were assignable and were not personal to Starglade. It is also accepted that, although the damages which Starglade could have recovered at the date when the cause of action was complete would have been no more than nominal damages, Starglade, if it had remained the owner of the Site, would have been entitled to claim and, if able to prove, recover substantial damages for the landslip which occurred in October 2001.
The remedy in damages for breach of contract is not limited to the loss that could have been proved at the date when the breach occurred and the cause of action first arose. Subject to factual and legal issues of causation, remoteness, quantum and limitation of actions, there is a remedy in damages against the contract breaker for loss which occurs after the cause of action has accrued. A cause of action may arise years before any substantial damage occurs, as, for example, in the case of negligent advice on title. There is no legal principle which protects the contract-breaker by excluding his liability for substantial damage that occurs after the initial breach of contract.
What difference, if any, can an assignment of the cause of action make to the remedies available to the assignee against the contract-breaker? A statutory assignment in writing under section 136 of the Law of Property Act 1925, of which express notice has been given, as was done in this case, is effectual in law to pass and transfer from the date of notice the legal right to the thing in action and “all legal and other remedies for the same.” The statutory assignment is expressly made “subject to equities having priority over the right of the assignee.”
Mr Friedman QC (who did not appear in the court below) submitted on behalf of Technotrade that the assignment makes a crucial difference. His broad submission was that the only losses that Larkstore is entitled to claim by virtue of the assignment of the cause of action are the losses that Starglade could itself have recovered from Technotrade at the time of the assignment. As the assignment of the cause of action took place after Starglade had parted with the Site to Larkstore and the substantial damage occurred before the assignment of the cause of action to Larkstore, Starglade and therefore Larkstore had no right to claim and recover substantial damages for loss resulting from the landslip.
In its defence to the Part 20 Particulars of Claim Technotrade pleaded that Starglade’s rights of action are of no assistance to Larkstore, as Starglade has suffered no losses (paragraph 31). It is pleaded in paragraph 30 –
” (i) The well established principle that an assignee of a chose in action (here Larkstore) cannot recover more than the assignor (here Starglade) has lost, is applicable on the particular facts of this claim, which it is averred does not fit within any of the exceptions to the said principle. Starglade has suffered no loss and Larkstore is not entitled to put itself in any better position than the principal to the contract which it has purported to assign.”
The scope of the principle pleaded is discussed generally in Chitty on Contracts (29th Edition-2004) Ch 19-
“19-073 Assignee cannot recover more than assignor. A further aspect of the idea that an assignee takes an assignment “subject to equities” is the principle that an assignee cannot recover more from the debtor than the assignor could have done had there been no assignment. For example, in Dawson v. Great Northern & City Railway Co the assignment of a statutory claim for compensation for damage to land did not entitle the assignee to recover extra loss suffered by reason of a trade carried on by him, but not the assignor, that the assignor would not have suffered.
19-074 The application of this principle has given rise to particular difficulty in relation to building contracts or tort claims for damage to buildings. Say, for example, a building is sold at full value along with an assignment to the purchaser of claims in contract or tort in relation to the building. The building turns out to need repairs as a result of a breach of the builder’s contract with the assignor (whether that breach is prior, or subsequent, to the sale to the assignee) or of a tort (damaging the building prior to the sale). The assignee pays for the repairs. It might be argued that the assignor in that situation has suffered no loss so that, applying the governing principle that the assignee cannot recover more than the assignor, the assignee has no substantial claim. If correct, ” …the claim to damages would disappear …into some legal black hole, so that the wrong-doer escaped scot-free.” Acceptance of the argument would also nullify the purpose of the governing principle which is to avoid prejudice to the debtor and not to allow the debtor to escape liability.
19-075 Perhaps not surprisingly, therefore, that argument was rejected by the House of Lords in a Scottish delict case. And the problem has been circumvented in England by the courts’ recognition that, where a third party is, or will become, owner of a defective or damaged property, there is an exception to the general rule that a contracting party can recover damages for its own loss and not for the loss of a third party. Where the exception applies, the contracting party (the assignor) is entitled to substantial damages for the loss suffered by the third party (the assignee): by the same token, an award of substantial damages to the assignee does not infringe the principle that the assignee cannot recover more than the assignor.”
Application of principles
Applying this concise account of the legal principles to the particular circumstances of this case, it is, in my judgment, fallacious to contend that Larkstore cannot recover substantial damages from Technotrade, even if it can prove that Technotrade was in breach of contract and otherwise liable for them.
The contention is based on the propositions that Starglade (the assignor) had only suffered nominal damages at the date of the assignment, because it no longer owned the Site, and that Larkstore (the assignee) could not acquire by assignment from Starglade any greater right than Starglade had against Technotrade.
As I see it, that is not the true legal position. What was assigned by Starglade to Larkstore was a cause of action for breach of contract against Technotrade and the legal remedies for it. It was not an assignment of “a loss”, as Mr Friedman described it in his attempt to persuade the court that the amount of the loss recoverable by Larkstore was limited by what loss had been suffered by Starglade, in this case nil. The assignment included the remedy in damages for the cause of action. The remedy in damages for breach of contract is not, in principle, limited to the loss suffered as at the date of the accrual of the cause of action or as at any particular point of time thereafter.
The principle invoked by Technotrade that the assignee cannot recover more than the assignor does not assist it on the facts of this case. The purpose of the principle is to protect the contract-breaker/debtor from being prejudiced by the assignment in having, for example, to pay damages to the assignee which he would not have had to pay to the assignor, had the assignment never taken place. The principle is not intended to enable the contract-breaker/debtor to rely on the fact of the assignment in order to escape all legal liability for breach of contract.
In this case the assignment of 23 February 2004 did not, in itself, prejudice Technotrade by exposing it to a claim for damages by Larkstore, which Starglade could not have brought against Technotrade. The assignment of the cause of action by Starglade to Larkstore was a delayed consequence of the earlier sale of the Site. It completed the transaction. If Starglade had not sold the Site to Larkstore, it would not have assigned the cause of action against Technotrade to Larkstore and it could have recovered substantial damages against Technotrade for the landslip. The increased exposure of Technotrade for damages for breach of contract was a consequence of the landslip after the cause of action arose. It was not a consequence of the assignment of the cause of action, which was made to enable Larkstore to step fully into the shoes of Starglade following on the earlier sale of the Site .
Indeed, if Mr Friedman’s arguments were accepted, far from being prejudiced by the assignment, Technotrade would improve its position as a result of it. Technotrade would escape all potential contractual liability for the damage caused by the landslip. It would have ceased to be liable to Starglade, which no longer owned the Site. It would not be liable to Larkstore, which did own the site, but the liability to Larkstore would be subject to the Starglade limit proposed by Mr Friedman, which would cancel any claim against Technotrade for substantial damages. By a legal conjuring trick worthy of Houdini the assignment would free Technotrade from the fetters of contractual liability. The position would be that the contract-breaker would be liable to no-one for the substantial loss suffered in consequence of the breach. As a matter of legal principle and good sense, this cannot possibly be the law, and fortunately the authorities cited in argument and discussed below do not compel the court to reach such a result.
Mr Friedman submitted that there was no “legal black hole” or conjuring trick here. He contended that the parties did not contemplate that any one other than Starglade would or might suffer loss in consequence of a breach of contract by Technotrade in respect of the report. Technotrade’s retainer was on the basis that it was Starglade who would be carrying out the development of the Site. Losses have been suffered by Larkstore because it chose not to seek any form of warranty from Technotrade, did not engage its own geo-technical advisers and relied on the Technotrade report without obtaining the consent of Technotrade for a purpose for which it had not been written.
In my judgment, these arguments amount to no more than an ingenious attempt to deny what has been correctly conceded, namely that the report and the causes of action in respect of it were assignable by Starglade. There was no express prohibition against assignment. No prohibition can be implied from any special circumstances. It was not argued, for example, that the contract between Starglade and Technotrade was of a personal nature and therefore unassignable.
The authorities
Mr Friedman’s submissions on the assignment point are not supported by the authorities cited by him to show that the judge had misunderstood or misapplied the correct legal principles. Although the cases were discussed at length in the skeleton arguments and at the hearing, I propose to deal with them quite briskly.
Dawson v. Great Northern and City Railways Company [1905] 1 KB 260 at 272-274 per Stirling LJ was cited for the proposition that the assignee was not entitled to recover any greater amount of compensation than the assignor could have recovered. The width of the general proposition has to be read in context. In that case compensation under the Lands Clauses Consolidation Act 1845 was not payable to the assignee for “damage to her trade stock” (as distinct from structural damage to premises requiring re-instatement works which did not increase the burden on the defendants), because that was compensation for an item that could not have been recovered by the assignor from the defendants. The assignor did not trade in the stock in question and could not have made a claim for compensation for that item.
GUS Property Management Limited v. Littlewoods Mail Order Stores Limited [1982] SLT 583 was also cited for Lord Keith’s statement at p 537-538 that
” …. the basic question at issue is whether in this action the Pursuers are really seeking to pursue against the Defenders a claim or claims which the [assignor] could have pursued at the date of the [assignment] ….. the only relevant loss which by virtue of the [assignment] the Pursuers could claim title to recover is loss suffered by the [assignor] for which the [assignor] could at the date of the [assignment] have sought reparation.”
The speech of Lord Keith was considered in Linden Gardens. We heard very detailed submissions on the speech of Lord Browne-Wilkinson in the House of Lords (with which the other members of the Appellate Committee concurred) and on the judgments in the Court of Appeal.
The judge was criticised by Mr Friedman for relying on the following passage in the judgment of Staughton LJ in 57 BLR 57 at p80-81-
“That brings me to the last point to be considered in connection with assignment of choses in action. Where the assignment is of a cause of action for damages, the assignee must of course have a sufficient proprietary right, or a genuine commercial interest, if the assignment is not to be invalid. It is no longer in issue in these appeals that the assignees had such a right in each case; we heard no argument to the contrary from the contractors. But it is said that in such a case he assignee can recover no more as damages than the assignor could have recovered.
That proposition seems to me well founded. It stems from the principle already discussed, that the debtor is not to be put in any worse position by reason of the assignment. And it is established by Dawson v. Great Northern & City Railway Co [1905] 1 KB 260; see also GUS Property Management Ltd v. Littlewoods Mail Order Stores Ltd [1982] SLT 533 by Lord Keith of Kinkel at page 538, cited later in this judgment [pp 89-90]. But in a case such as the present one must elucidate the proposition slightly: the assignee can recover no more damages than the assignor could have recovered if there had been no assignment, and if the building had not been transferred to the assignee.”
As I read the judgments of the other members of the court (Kerr LJ at pp 97- 98 and Nourse LJ at p66), it is reasonably clear that they agreed with what Staughton LJ said on this point in the passage cited and on pp 91-92.
Although the House of Lords overturned the decision of the Court of Appeal on the issue of the effect of the prohibition against assignment, I do not read the speech of Lord Browne-Wilkinson, which did not directly address the issue, as questioning the ruling of the Court of Appeal on the question whether an assignee could recover no more damages than the assignor could have recovered. It was unnecessary for the House to consider the assignee’s remedies for breach of contract in view of its decision that the prohibition against assignment rendered the assignments ineffective.
The judgment of Staughton LJ was rightly relied on by the judge. I am respectfully of the view that the ruling of Staughton LJ on this point is correct as a matter of legal principle and good sense, and ought to be followed by this court in this case. It completely disposes of the argument raised in the defence of Technotrade that Larkstore is not entitled to claim substantial damages from Technotrade, because its assignor, Starglade, had suffered no loss, having parted with the Site before the landslip occurred and before the assignment of its cause of action to Larkstore.
I must, however, make it clear that the only point raised in this case at this preliminary stage is whether Larkstore had, by virtue of the assignment, a right to sue Technotrade for substantial damages for breach of contract in respect of loss claimed to have been suffered by it in consequence of the landslip at the Site. There is no question before this court, nor was there below, as to the proper measure or quantum of damages, which Larkstore is entitled to recover against Technotrade. We have heard no argument on it and I express no views on that aspect of the case.
SPv Osus Ltd -v- HSBC International Trust Services (Ireland) Ltd & ors
[2015] IEHC 602
Costello J.
40. The following principles relevant to the current dispute emerge from these Irish authorities and the English authorities cited in the judgments:-
(1) It is unlawful to fund or assign litigation in return for a share of the proceeds unless the funder or assignee has a lawful interest or some other legitimate concern in the litigation.
(2) The assignment of a bare cause of action for purposes which the law does not recognise as legitimate savours of champerty.
(3) Trafficking in litigation is contrary to public policy.
(4) Wanton and officious intermeddling in the litigation of others is contrary to public policy.
(5) The scope of the law of maintenance and champerty must accommodate itself to modern social realities.
(6) The law in relation to maintenance and champerty must be considered in the light of the constitutional right of access to justice.
(7) The law in relation to maintenance and champerty must not place any unnecessary obstacles in the path of persons with a legitimate claim.
(8) The assignment of a cause of action that is incidental or ancillary to a property right or interest is not champertous.
(9) The interest which a party maintains or enjoys in a suit which he is maintaining must exist independently of the agreement which gives him a share in the proceeds of the suit.
(10) The assignment of a cause of action to a party who has a genuine commercial interest in the cause of action is not champertous.
(11) A shareholder or creditor of a company (or other entity) who already has an indirect link to the impecunious company (or other entity) may have an indirect and therefore legitimate interest in the litigation of the company (or other entity) and may lawfully fund the company’s litigation.
(12) Professional third party funders who make a commercial decision to ‘invest’ in litigation in the hope of making a profit commit the torts of either maintenance and/or champerty.
(13) In considering whether an agreement is champertous, the Court should look at the totality of the transaction.
(14) The Court is concerned with substance rather than the form of a transaction in considering whether if offends the law of maintenance and/or champerty.
The defendants’ objections
41. In this case the defendants argue that the Assignment is void as savouring of champerty on two grounds. They say that the assignment of the third party claims and, in particular, this third party claim, amounts to the assignment of a bare cause of action. In addition they say that it constitutes trafficking in litigation. On either ground the Court should declare that the Assignment, insofar as it relates to the assignment of third party claims, savours of champerty and is void and unenforceable.
42. The plaintiff argues that the assignment of the Allowed Customer Claim is valid. The assignment of the third party rights is ancillary or incidental to the assignment of the Allowed Customer Claim. Therefore the assignment of the third party litigation rights is not the assignment of a bare right to litigate, as the defendants argue. In addition, the plaintiff argues that it has a genuine commercial interest in the enforcement of the third party claim. The sale of the Allowed Customer Claim and the third party rights does not amount to trafficking in litigation and the relief sought by the defendants should be refused.
Preliminary points
43. The parties are agreed upon certain preliminary points. The Court must look at the totality of the transaction and it must look at the substance rather than the form of the transaction. The law is evolving and the courts must not apply older authorities in a slavish fashion to modern situations. What was previously considered to be contrary to public policy fifty years ago may now be considered unexceptional and acceptable.
44. In Trendtex Trading Corporation v. Credit Suisse [1982] A.C. 679, Lord Roskill held at p. 703 as follows:-
“[m]y Lords, I do not therefore think that Mr. Brodie is correct in criticising the judgment of Oliver L.J. on the ground that the learned Lord Justice failed to distinguish between the interest necessary to support an assignment of a cause of action and the interest which would justify the maintenance of an action by a third party. I think, with respect, that this submission involves over-analysis of the position. The court should look at the totality of the transaction. If the assignment is of a property right or interest and the cause of action is ancillary to that right or interest, or if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for its own benefit, I see no reason why the assignment should be struck down as an assignment of a bare cause of action or as savouring of maintenance.”
44. In Martell v. Consett Iron Company Limited [1955] 1 Ch. 263 at p. 415 Jenkins L.J. stated:-
“[b]ut it is an abuse of authorities to extract from judgments general statements of the law made in relation to the facts and circumstances of particular cases and treat them as concluding cases in which the facts and circumstances are entirely different and which raise questions to which their authors were not directing their minds at all.”
45. In Massai Aviation Services & Anor v. The Attorney General & Anor [2007] UKPC 12, Baroness Hale held:-
“19 But ‘trafficking’ is a pejorative term which takes the debate no further: it simple means trading in something (be it drugs or people) in which it is not permissible to trade. In order to decide whether the particular transaction is permissible, it is essential to look at the transaction as a whole and to ask whether there is anything in it which is contrary to public policy.”
46. It is thus clear that the Court must consider the totality of the transaction and not just its form. This means I must look at the circumstances of the Transfer Procedures Order and the restriction on the sale of interests in the Allowed Customer Claim, the terms of the Assignment and the Information Circulars, and the four steps in the transaction outlined in the Circular. I look to the fact that the losses arising from the fraud were indirectly but ultimately incurred by the holders of the Strategic Series shares and that the monies recovered will be paid to the holders of the shares in the plaintiff, which was a special purpose vehicle established to monetise the interests of the holders of the Strategic Series shares by the sale of shares in the plaintiff to third party investors.
47. Further, it is agreed that I should proceed for the purpose of this judgment on the basis that the third party claims were assigned by Optimal Strategic to SPV by the Assignment and that the Assignment is not champertous under the law of the State of New York, both of which propositions are currently contested before the courts in New York.
Assignment of a bare cause of action
48. It is common case that the assignment of a bare cause of action offends the rule against champerty and such an assignment is void. The assignment maybe saved if it is for a purpose which the law recognises as legitimate. As appears from the speech of Lord Roskill in Trendtex, quoted above, if the assignment is of a property right or interest and the cause of action is ancillary to that right or interest, or if the assignee had a genuine commercial interest in the taking the assignment and enforcing if for its own benefit, this is considered to be legitimate. The assignment of a debt and the right to sue to recover the debt would be a commonplace example of an assignment of a cause of action which the courts have long recognised as legitimate and not savouring of maintenance or champerty. In Thema, Clarke J. noted that charity might provide such a legitimate interest. In Greenclean, Hogan J. indicated that ATE insurance served an important need within the community by facilitating access to justice for persons who might otherwise be denied this and this was for a purpose which the law recognised as legitimate. In Martell, the plaintiffs had a common interest in protecting their rights as owners and occupiers of fisheries in the prevention of pollution of rivers. This was legitimate in the eyes of the law.
49. In this case, the plaintiff argues that the assignment of the right to sue the defendants is legitimate. It is not the assignment of a bare right to litigate as the assignment is:
(i) ancillary or incidental to the assignment of the Allowed Customer Claims or, in the alternative
(ii) that it has a genuine commercial interest in the litigation and therefore the assignment of the chose in action does not amount to the assignment of a bare right to litigate.
Ancillary or incidental: the law
50. While the law will strike down an assignment that is of only a bare cause of action, it will recognise the validity of an assignment of a cause action which is ancillary or incidental to a property right or interest. The two decisions of the Supreme Court, Fraser v. Buckle and O’Keeffe v. Scales, make it clear that the property right or interest must exist independently from the assignment of the cause of action. This is not to state that it must pre-exist the assignment of the cause of action, though frequently this will be the case. It has long been recognised that it is legitimate to assign debts together with the right to sue for the recovery of debts. The assignment of the cause of action – the right to sue for the debt – is incidental to the property right in the debt. They may, as a matter of fact, be created at the same time but the right to the debt is independent of the right to sue for the debt. In Fraser v. Buckle, Costello J. considered the speeches in Trendtex . In his judgment, he pointed out at p. 19 that “it is well established that the interest in which the maintainer enjoys in a suit which he is maintaining must exist independently of the agreement which gives him a share in the proceeds of the suit” if that latter agreement is not to offend the law against champerty. At p. 20, he stated that the agreements which the law of champerty condemns are agreements by which one party agrees to maintain litigation in which he has no genuine interest in consideration for a promise to receive a share of the proceeds of the litigation.
51. If the plaintiff is to succeed in this argument it must establish the existence of an independent right or interest and that the right to sue third party service providers is ancillary or incidental to that right.
A genuine commercial interest
52. As it appears from the speech of Lord Roskill in Trendtex , quoted at para. 44 above, the House of Lords also recognised that if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for his own benefit such an assignment did not savour of maintenance or champerty. The preceding passage in the judgment, at pp. 702-703, read as follows:-
“[m]y Lords, just as the law became more liberal in its approach to what was lawful maintenance, so it became more liberal in its approach to the circumstances in which it would recognise the validity of an assignment of a cause of action and not strike down such an assignment as one only of a bare cause of action. Where the assignee has by the assignment acquired a property right and the cause of action was incidental to that right, the assignment was held effective. Ellis v. Torrington [1920] 1 K.B. 399 is an example of such a case. Scrutton L.J. stated, at pp. 412-413, that the assignee was not guilty of maintenance or champerty by reason of the assignment he took because he was buying not in order to obtain a cause of action but in order to protect the property which he had bought. But, my Lords, as I read the cases it was not necessary for the assignee always to show a property right to support his assignment. He could take an assignment to support and enlarge that which he had already acquired as, for example, an underwriter by subrogation: see CompaniaColombiana de Seguros v. Pacific Steam Navigation Co. [1965] 1 Q.B. 101. My Lords, I am afraid that, with respect, I cannot agree with the learned Master of the Roles [1980] Q.B. 629, 657 when he said in the instant case that “the old saying that you cannot assign a ‘bare right to litigate” is gone’. I venture to think that that still remains a fundamental principle of our law. But it is today true to say that in English law an assignee who can show that he has a genuine commercial interest in the enforcement of the claim of another and to that extent takes an assignment of that claim to himself is entitled to enforce that assignment unless by the terms of that assignment he falls foul of our law of champerty, which, as has often been said, is a branch of our law of maintenance.”
53. Trendtex is the leading decision of the House of Lords in this area and was heavily relied upon by both the defendants and the plaintiff in their submissions. Trendtex, a trading company, instituted proceedings against the Central Bank of Nigeria (“CBN”). Trendtex had contracted to sell cement for shipment to Nigeria. The purchase price and demurrage would be paid under a letter of credit issued by CBN. It subsequently failed to honour the letter of credit. Credit Suisse had financed the transaction between Trendtex and CBN. Repudiation of the letter of credit by CBN had left Trendtexheavily indebted to Credit Suisse. Credit Suisse agreed to guarantee all costs incurred by Trendtex in proceedings against CBN where it claimed damages amounting to US$14 million. Subsequently, in a series of agreements, Trendtex assigned to Credit Suisse the whole of its residual interest in a claim for breach of contracts against CBN. The agreement recited that an offer had been received from a third party to buy Trendtex’s right of action against CBN for US$800,000.00. The agreement then provided (article 1) that Trendtex did not oppose the sale by Credit Suisse to a purchaser of its choice of all Trendtex’sclaims against CBN and recognised that it had no further interest in the case against CBN. Five days later the claim against CBN was assigned to a third party for US$1.1 million. A few weeks later the claim against CBN was settled for sum of US$8 million. Trendtex sought to set aside the transactions on the ground that the assignment to Credit Suisse was contrary to public policy and void as “savouring of champerty” insofar as it contemplated the possibility that a third party would make a profit out of the litigation even though it was not a party to the transaction.
54. Both Lords Wilberforce and Roskill, in their speeches, indicated that if the assignment in Trendtex had been no more than an assignment of Trendex’s claim against CBN to Credit Suisse, the assignment in question would not have offended the law against maintenance and champerty. They were both clear that Credit Suisse had a genuine and a substantial interest in the success of the CBN litigation (in the words of Lord Wilberforce) or a genuine commercial interest in the litigation (in the words of Lord Roskill). They each agreed that the transaction offended the law against champerty because of the possibility that the cause of action would be further assigned by Credit Suisse to an anonymous third party who lacked the requisite interest which the House recognised was enjoyed by Credit Suisse in the litigation against CBN.
55. Lord Wilberforce stated at p. 694:-
“[t]he vice, if any, of the agreement lies in the introduction of the third party. It appears from the face of the agreement not as an obligation, but as a contemplated possibility, that the cause of action against C.B.N. might be sold by Credit Suisse to a third party, for a sum of U.S. $800,000. This manifestly involved the possibility, and indeed the likelihood, of a profit being made, either by the third party or possibly also by Credit Suisse, out of the cause of action. In my opinion this manifestly ‘savours of champerty,’ since it involves trafficking in litigation – a type of transaction which, under English law, is contrary to public policy.”
56. Lord Roskill held that the assignment to the third party was champertous in the following terms at p. 703:-
“[b]ut, my Lords, to reach that conclusion and thus to reject a substantial part of Mr. Brodie’s argument for substantially the same reasons as did Oliver L.J. does not mean that at least article 1 of the agreement of January 4, 1978, is not objectionable as being champertous, for it is not an assignment designed to enable Credit Suisse to recoup their own losses by enforcing Trendtex’s claim against C.B.N. to the maximum amount recoverable. Though your Lordships do not have the agreement between Credit Suisse and the anonymous third party, it seems to me obvious, as already stated, that the purpose of article 1 of the agreement of January 4, 1978, was to enable the claim against C.B.N. to be sold on to the anonymous third party for that anonymous third party to obtain what profit he could from it, apart from paying to Credit Suisse the purchase price of U.S. $1,100,000. In other words, the ‘spoils,’ whatever they might be, to be got from C.B.N. were in effect being divided, the first U.S. $1,100,000 going to Credit Suisse and the balance, whatever it might ultimately prove to be, to the anonymous third party. Such an agreement, in my opinion, offends for it was a step towards the sale of a bare cause of action to a third party who had no genuine commercial interest in the claim in return for a division of the spoils, Credit Suisse taking the fixed amount which I have already mentioned.”
57. In Thema, Clarke J. noted that persons who might satisfy this test of having a genuine commercial interest would be existing shareholders or creditors of an impecunious company who had a claim against a third party. At par. 23 he noted that:-
“[i]f the proceedings are bona fide progressed, then such parties are simply funding an entity in which they have a legitimate interest in the hope that that entity will be able to pay them monies due (in the case of creditors) or dividends or capital distributions (in the case of shareholders).”
He drew a clear distinction between such parties and professional third party funders. If an assignee lacked the requisite genuine commercial interest in the litigation then the assignment is not saved from being champertous and the sale of the chose in action amounts to trafficking in litigation. Thus, the maintainer of the action must establish the existence of the genuine commercial interest apart from the assignment of the right to litigate.
Incidental or ancillary: application to the facts
58. By agreement of the parties, this case is to proceed on the assumption that the Assignment assigned not only the interests of Optimal Strategic in the Allowed Customer Claim and all other claims in the BLMIS bankruptcy but also its third party non bankruptcy causes of action. The defendants argue that simply because the third party claims were assigned in the same document in which the Allowed Customer Claim was assigned that the third party claims do not become incidental or ancillary to the Allowed Customer Claim for the purposes of the law of champerty. The fact that two rights – (1) the Allowed Customer Claim and the bankruptcy rights and (2) the non bankruptcy causes of action against parties other than the BLMIS estate – are assigned in the same Deed of Assignment does not as a matter of fact or law automatically and without anything more make the latter ancillary or incidental to the former. The Court must look to the substance of the transaction to see if this assignment of the non bankruptcy claims is legally incidental to the assignment of the bankruptcy claims. The defendants submit that the third party claims do not form part of the claims in the bankruptcy of BLMIS. They say it is not a claim against BLMIS but against third parties. As such it is a stand alone claim. It is not necessary for the securing of the Allowed Customer Claim or other rights in the bankruptcy of BLMIS. They submit that it is not necessary to assign the third party claims in order to protect the Assigned Customer Claim. They submit that the prosecution of a third party cause of action would have no impact on the quantum or recovery of that Allowed Customer Claim. They point to the fact that the Information Circulars provided to the investors in the Strategic Shares series made no reference whatsoever to the assignment of third party rights. The entire focus of the Circular is directed towards realising the interest of the holders of Strategic Shares series in the Allowed Customer Claim. They therefore say that it is neither incidental nor ancillary to the assignment of the Allowed Customer Claim. They say that the evidence advanced by the plaintiff to the contrary amounts to mere assertion and is insufficient to establish that the assignment of the third party litigation is incidental or ancillary to the assignment of the Allowed Customer Claim. If it fails to satisfy this test, then the assignment of the third party litigation rights amounts to the assignment of a bare cause of action which is prohibited by the law of champerty.
59. The plaintiff argues that the assignment of the cause of action against the defendants herein was ancillary and incidental to the assignment of the Allowed Customer Claim and the other claims in bankruptcy, that the transaction must be viewed as one integrated transaction and therefore the assignment of the cause of action against the third party service providers is not champertous.
60. Mr. John W. Greene, Jr., a director of the plaintiff swore an affidavit on 27th April, 2015, in the proceedings. At para. 35 he avers as follows:-
“I believe and am advised that [SPV] had a genuine commercial interest in entering into and enforcing the Assignment. I say that the Plaintiff has a direct and legitimate interest in the within proceedings. I say further that the Plaintiff had a genuine and legitimate commercial interest in entering into the Assignment. I say and believe that the Plaintiff was assigned the ‘Transferred Rights’ pursuant to the Assignment. I say and believe that the primary intention at the time of the Assignment was to allow Optimal Strategic shareholders to transfer their portion of the Allowed Customer Claim.”
61. In Mr. Greene’s second affidavit, sworn on 26th May, 2015, he avers at para. 11:-
“I believe and am advised that the Plaintiff’s right to bring claims arising out of Optimal Strategic’s investment in BLMIS is incidental to the Allowed Customer Claim.”
He referred then to the evidence of Professor Bruce Green sworn on behalf of the plaintiff.
62. Prof. Green swore an affidavit on 22nd May, 2015. He said that he had been instructed by the plaintiff to consider the Assignment and to furnish his Opinion as to the nature of the rights the subject matter of the Assignment and whether the Assignment is champertous under the laws of the State of New York. To that extent his evidence is not directed towards the issue for determination by this Court. Even if the assignment of the cause of action the subject of these proceedings is not champertous under the law of the State of New York, this does not mean that it is not champertous under Irish law.
63. In his replying affidavit, sworn on 23rd June, 2015, Prof. Green states at para. 4(a):-
“[t]he Assignment included the transfer of the allowed SIPA Claim to SPV as well as causes of action, including the types of claims being pursued before this court. The Assignment was one integrated transaction that is commonplace in the distressed investing industry.”
In his Opinion, Prof. Green states:-
“The inclusion of the litigation claims [non bankruptcy claims against third parties] as part of the Transferred Rights was only incidental to the primary purpose of allowing investors to realize over a $1 billion of market value and is customary for secondary trades. Secondary purchasers typically want all rights the seller has that arise under, as a result of, or in connection with a claim, and there is nothing improper about that what so ever.”(Emphasis added)
He then gives a footnote:-
“For example, a secondary purchaser would not want to run the risk the original holder would bring, post-assignment, any litigation claims that could impair the secondary purchaser’s ability to recover on the claim.”(Emphasis added)
64. Mr. Matthew Heerde, legal counsel of the plaintiff and a member of the New York State Bar, swore an affidavit on 27th April, 2015. At para. 14 he averred:-
“[t]he transfer of the causes of action against third party service providers was ancillary to the transfer of the Allowed Customer Claim. Under the laws of the state of New York, the causes of action were freely transferrable. New York General Obligations Law § 13-101 states: ‘any claim or demand can be transferred,’ with limited exceptions inapplicable here.”
At para. 16 he stated:-
“Here, SPV has acquired the right of payment of $1,570,108,675 against the BLMIS estate (along with the right to receive payments made by the BLMIS estate to general unsecured creditors). Supplemental to that transfer, SPV has also acquired the right to pursue causes of action, relating to the Allowed Customer Claim against the BLMIS estate. There is no indication that SPV intended to ‘stir up litigation ‘in an effort to secure costs,’ but rather all evidence indicates it intends to pursue legitimate property interests and related causes of action.”(Emphasis added)
65. Professor Steven Shavell, Professor of Law and Economics at Harvard University swore an affidavit on 23rd May, 2015, furnishing his Opinion as to the nature of the rights the subject matter of the Assignment and whether the Assignment is champertous under the laws of the State of New York. At p. 7 he stated:-
“…the Assignment allowed the rights to litigation to be monotized. Buyers of shares in SPV on the secondary market presumably ascribed a value to the litigation rights that they purchased along with the Allowed BLMIS claim. It is standard in secondary markets for distressed assets that all rights and claims associated or related to an asset are included in the rights being transferred. Without the inclusion of the litigation of rights, buyers of SPV shares might not have been willing to purchase, or to pay the prices they did for the shares. Among other things, if, the right to litigate did not travel with the Allowed BLMIS claim, buyers may have been wary that the pursuit of such rights by another party could impair the value of the Allowed BLMIS claims.”(Emphasis added)
66. The plaintiff submits that this evidence establishes that the sale of the non bankruptcy claims was incidental to and indeed an integral part of the assignment of the Allowed Customer Claim and the other claims in the BLMIS estate. It submits that accordingly this satisfies the requirement that the assignment of the causes of action against the third parties be incidental to the assignment of the Allowed Customer Claim and therefore prevents the assignment from falling foul of the law of champerty. It says that Irish public policy should reflect the new reality emerging in relation to secondary markets in bankruptcy claims and accept that the transaction is not contrary to public policy.
67. Neither Prof. Green nor Mr. Heerde explain how the assignment of non bankruptcy claims is incidental to the assignment of all the claims against the BLMIS estate. Mr. Heerde’s evidence amounts to a mere statement that the transfer of the causes of action against third party service providers was ancillary to the transfer of the Allowed Customer Claim. As a matter of fact this is true. It does not advance the legal argument. Professor Green states that secondary purchasers typically want all rights the seller has that arise under, as a result of or in connection with a claim, being, in this case, a claim in the BLMIS estate. This falls very far short of establishing that the assignment of non bankruptcy claims is ancillary or incidental to the assignment of claims in the bankrupt estate. On the contrary, he emphasised that the inclusion of the litigation claims against third parties as part of the transfer right was only incidental to the primary purpose, which was the sale of the Allowed Customer Claim and associated rights in the bankruptcy. He says that secondary purchasers would not want to run the risk that the original holder would bring any litigation claims that could impair the secondary purchaser’s ability to recover on the claim. His emphasis and focus is upon recovering the claim in the bankruptcy estate. The plaintiff has not adduced any evidence that the failure to assign the non bankruptcy litigation rights would impair the ability to recover upon the claim in the bankruptcy, as was suggested was a possibility by Professor Green. Professor Shavell’s Opinion acknowledges the possibility of the third party litigation rights not travelling with the bankruptcy claim, which would suggest that they are not automatically and without something more incidental to the bankruptcy claims.
68. In argument, Mr. McGrath S.C., for the plaintiff, urged that the bringing of proceedings could delay payment by the Trustee on foot of the Allowed Customer Claim (and other possible claims) while the Trustee awaited the outcome of the litigation. The Trustee would wish to ensure that if damages were recovered from the third parties in respect of losses arising from the fraud of Mr. Madoff that there should not be a double payout in respect of the same loss suffered by the investors in Optimal Strategic. This argument is not supported by the evidence adduced by the plaintiff. None of the four affidavits go so far. The height of the evidence is to suggest that the price achievable in the secondary market for the shares in SPV might be reduced if the non bankruptcy claims were not included in the rights to be transferred.
69. The plaintiff argued that Optimal Strategic was, in reality, assigning the remnants of the investment with BLMIS in circumstances where all that was left of that investment was the prospective rights of recovery either from the BLMIS estate or from third party litigation. It argued that, as the third party claim it arose out of the investment by Optimal Strategic in BLMIS and the Allowed Customer Claim also arose out of the same investment therefore the two claims were related. The defendants, in reply, said that this was not the correct test. If this were correct, it followed that there were no circumstances in which an assignment of the third party claims could be champertous as they all arose out of the investment in BLMIS. There would be no requirement of an independent interest in the cause of action. On this basis it was submitted that the analysis of what the law meant by incidental or ancillary must be incorrect. They submitted that the claims against the service providers are different in kind to the claims made against the BLMIS estate.
70. In argument, Mr. McGrath S.C., for the plaintiff, pointed out that the Information Circulars made no reference whatsoever to the assignment of the right to third party litigation. He emphasised that such litigation was not contemplated by the directors of OML and SPV when they devised the scheme.
71. These arguments raise certain difficulties. It seems to me that the failure to make any reference whatsoever to the assignment of the right to third party litigation in the Information Circulars could equally be taken to support the view that assignment of these rights was not incidental to the assignment of the claims against the bankruptcy estate. Certainly, it would appear that the holders of the Strategic Series shares were not being informed that these rights were to be assigned. Furthermore, Optimal Strategic is disputing the fact that these third party rights were assigned as part of the Assignment. While I am accepting for the purposes of this case that the Assignment included assignments of the third party litigation rights, the fact that such point is being contested in the courts in New York is at least suggestive of the fact that assignment of such rights is not invariably part of the assignment of claims in bankruptcy estates and therefore that it is not inevitable that the assignment of non bankruptcy litigation rights is ancillary or incidental to the assignment of the claims against the bankruptcy estate.
72. It was argued that the assignment of the causes of action against third parties was necessary to protect the Allowed Customer Claim. It was pointed out that the bringing of third party proceedings could, or possibly even would, prejudice further payment out by the Trustee in Bankruptcy in respect of the Allowed Customer Claim. The Trustee would await the outcome of the third party litigation before determining when and how much more he should pay out in respect of the Allowed Customer Claim in light of the possible recovery from these proceedings. This argument is based upon the fact of third party proceedings rather than the identity of the plaintiff. If the purpose of the assignment of the right to pursue the third party claims was in order to protect the Allowed Customer Claim (and other lesser claims in the BLMIS estate) then by its actions in instituting these proceedings the plaintiff has triggered the very event which, according to its counsel, was sought to be guarded against by taking the assignment in the first place. This would suggest that the risk (if any) in bringing the proceedings is not so great as was suggested in argument and is not such as would justify the Court, in the absence of further evidence, in concluding that assignment of the third party causes of action are necessary to protect the Allowed Customer Claim. On the contrary, it would appear that in the eyes of the plaintiff the risk is out weighed by the potential commercial benefits in bringing the proceedings. Certainly, it does not reinforce the idea that assignment of the third party rights is necessary to protect the proprietary interest in the Allowed Customer Claim.
73. I am not satisfied that the plaintiff has established that the assignment of the cause of action against the defendants is incidental to the assignment of the claim against the estate of BLMIS. In my judgment, for a cause of action to be incidental to the assignment of a property right or interest (such as the Allowed Customer Claim), it must relate to the protection or realisation of that other interest which is independent of the assignment of the cause of action. So in Irish Bank Resolution Corporation Ltd. v. Morrissey [2014] IEHC 527, the assignment of litigation to enforce a debt was incidental to the assignment of the actual debt. In Waldron v. Herring, the assignment of a cause of action for damage caused to a building was incidental to the rights of a mortgagee in possession realising its security.
74. Further, in my judgement if the cause of action is to be described as ancillary to the Allowed Customer Claim it must be a claim in the bankruptcy of BLMIS. It cannot encompass non bankruptcy third party claims.
75. I therefore reject the argument that the assignment of the third party litigation rights is either incidental or ancillary to the assignment of the Allowed Customer Claim and associated bankruptcy rights. This is not a basis for holding that the assignment of the third party litigation rights is not void for champerty.
Genuine commercial interest: application to the facts
76. The plaintiff argued in the alternative that it had a genuine commercial interest in the enforcement of the claim of Optimal Strategic against the defendants and that it is entitled to enforce that assignment. The defendants point out that the commercial interest cannot arise from the agreement that is impugned. This is a correct statement of Irish law and arises from Fraser v. Buckle and O’Keeffe v. Scales. In Thema, Clarke J. elaborated upon the indirect interest in litigation which would justify a party taking an assignment of a cause of action or funding the litigation of another. In all the cases cited to me where shareholders or creditors of companies have been held to be entitled to either fund the litigation or to take an assignment of the cause of action and to pursue the litigation to enforce the claim on their own behalves, the shareholders or creditors had pre-existing interests, albeit indirect, in the claim of the assignor. The courts were concerned with the identity of the person or persons pursuing the litigation, whether directly or indirectly. Thus in Trendtex , all were agreed that Credit Suisse had sufficient genuine commercial interest in the outcome of the litigation between Trendtex and CBN to take an assignment of the claim of Trendtex against CBN but the unknown party to whom Credit Suisse assigned the claim did not.
77. The crucial distinction which the courts seek to draw is between pursuing such an indirect genuine commercial interest on the one hand and the trafficking in or purchasing of litigation on the other hand.
78. In this case the plaintiff had not yet been incorporated when the wrongful events, the subject matter of this litigation, are alleged to have occurred. The plaintiff is a special purpose vehicle which was set up for the purpose of enabling investors in Strategic Series shares to monetise their interest. The Information Circular of 29th April, 2011, stated at p. 13 as follows:-
“[t]he business object of SPV will be to hold the [Allowed Customer Claim] of USD 1,540,141,277.60 and attend to any business affairs incidental to and necessary to the proper administration thereof for the benefit of the shareholders of SPV until such time as any and all recoveries made by the Trustee have being distributed to SPV in respect of the [Allowed Customer Claim] and the trustee shall have been discharged from the office of Trustee for the liquidation of BLMIS. SPV’s sole purpose is to hold the [Allowed Customer Claim] for the benefit of its shareholders and to act as a conduit through which Strategic Series investors may dispose of their pro rata interest in the [Allowed Customer Claim].”
79. It is true to say that originally the shares in SPV were held by Optimal Strategic and that when the Assignment was effected there was thus no change in the holders of the indirect interest in both the Allowed Customer Claim and all the Transferred Rights as defined in the Assignment, including the third party claims. However, crucially, the avowed purpose of the entire scheme was that the shares held by the holders of the Strategic Series shares could be exchanged for shares in SPV on a pro rata basis and these SPV shares could then be sold to secondary purchasers. It was thus intended that at the end of the process most, if not all of the parties who suffered the loss arising from the Madoff fraud, would have sold their interest to third parties who had not been involved in the investment and thus who did not suffer the loss. Furthermore, the purchasers of the shares may be (indeed almost inevitably will be) parties who had no prior interest in the failed investment. They are purchasing shares in SPV which, in the scheme as established, necessarily involves indirectly buying the right to sue third parties. The shares are intended to be auctioned for sale in the secondary market for claims in the BLMIS estate. The purchasers will ascribe a certain value to the third party litigation rights according to Prof. Shavell. This, as a matter of fact and law, is trading in litigation. It will amount to trafficking in litigation if there is no genuine commercial interest legitimising transactions which otherwise the courts have traditionally condemned.
80. The courts are concerned with the identity of the person or person prosecuting or benefitting from the litigation. In considering the issue of a genuine commercial interest in relation to shareholders of the company, the critical matter is whether or not it is the original shareholders who, through the company, actually suffered the loss and who thus have the genuine commercial interest in pursing the litigation themselves, who are prosecuting the litigation either by taking an assignment of the chose in action through a new company in which they are also shareholders or through any other suitable vehicle or whether it is persons who had no connection with the original loss. The critical issue is whether the original wronged parties remain (directly or indirectly) the parties pursing the litigation. This is to be contrasted with such wronged parties realising their interest in the cause of action by selling it to a third party who then pursues it for the benefit of that third party. This is clear from the case of Laurent v. Sale & Co., quoted above, where Megaw J. held at p.834:-
“[i]n my view, the position is entirely different where the plaintiff in the action is one who does not have any original title in respect of the matter which he claims.”
81. Furthermore, if, as the authorities state, a prior existing commercial interest in the matter that gives rise to cause of action is a powerful consideration in support of the assignment being legitimate and not contrary to public policy as being champertous, the reverse must also be true: the absence of such prior existing commercial interest weighs heavily against the legitimacy of the transaction.
82. I do not accept that any of the decisions in the cases to which I have been referred or any part of the judgments of those cases oblige me to hold that the plaintiff in this action had a genuine commercial interest or a legitimate and genuine interest in taking an assignment of the non bankruptcy litigation rights. Just as the plaintiff’s evidence and arguments to the effect that the assignment was ancillary or incidental to the assignment of the Allowed Customer Claim were unconvincing to my mind, so also is the alternative argument that it had a genuine commercial interest in taking the assignment of the third party litigation rights.
Trafficking in litigation
83. As was pointed out by Baroness Hale in Massai Aviation Services, trafficking simply means trading in something in which it is not permissible to trade. In Stocznia Gdanska SA v. Latreefers Inc & other appeals [2000] All E.R. (D) 148 at para. 61 it was held that:-
“[a]buse of the court’s process can take many forms and may include a combination of two or more strands of abuse which might not individually result in a stay. Trafficking in litigation is, by the very use of the word ‘trafficking’, something which is objectionable and may amount to or contribute to an abuse of the process. We think that it is undesirable to try to define in different words what would constitute trafficking in litigation. It seems to us to connote unjustified buying and selling of rights to litigation where the purchaser has no proper reason to be concerned with the litigation. ‘Wanton and officious intermeddling with the disputes of others in which they [the funders] have no interest and where that assistance is without justification or excuse’ maybe a form of trafficking in litigation. Lord Mustill’s words, quoted by Simon Brown LJ in the context of an application to stay, are powerfully descriptive of the kind of plain and obvious champerty of which Chadwick LJ considered Faryab v. Smyth itself not to be an example.”
In Thema, Clarke J. clearly indicated that a party with no pre existing indirect interest in the relevant litigation who simply buys into the litigation is trafficking in litigation and commits the tort of a champerty.
84. In Trendtex , Lord Wilberforce made clear the critical distinction between the valid and the invalid assignment. If the assignment in that case had simply been to Credit Suisse there would have been no objection to the transaction. However, the vice in the agreement lay in the introduction of the third party:-
“[i]t appears from the face of the agreement not as an obligation, but as a contemplated possibility, that the cause of action against C.B.N. might be sold by Credit Suisse to a third party, for a sum of U.S. $800,000. This manifestly involved the possibility, and indeed the likelihood, of a profit being made, either by the third party or possibly also by Credit Suisse, out of the cause of action. In my opinion this manifestly ‘savours of champerty’, since it involves trafficking in litigation – a type of transaction which, under English law, is contrary to public policy.”
85. Lord Roskill pointed out that article 1 of the agreement showed that it was not designed to enable Credit Suisse to recoup their own losses by enforcing Trendtex’s against CBN. The purpose of article 1 of the agreement was to enable the claim against CBN to be sold on to an anonymous third party and for that anonymous third party to obtain what profit he could from the litigation. He held, at p. 704, that the agreement offended:-
“for it was a step towards the sale of a bare cause of action to a third party who had no genuine commercial interest in the claim in return for a division of the spoils”.
86. The plaintiff argued that in this case there was only one assignment and that there was no onward assignment and that therefore the Assignment was lawful applying the Trendtex test. The plaintiff also argued that the purpose of the transaction was to assign the Allowed Customer Claim and the purpose for which SPV was set up was to tradein the Allowed Customer Claim. It was submitted that the current litigation was not contemplated at the time of this transaction and was not so much as mentioned in the Information Circulars. It was urged upon the court that there was therefore no intention to trade in litigation and there could be no trafficking in litigation.
87. However, this submission ignores the fact that the Court has to look at the whole transaction. The test as established in Trendtex is whether or not there is a contemplated possibility of a further third party involvement in the litigation for a profit. In this case not only was it a contemplated possibility, it was the whole purpose of the transaction. As Mr. Greene, Jr., stated at para. 33 of his first affidavit sworn on 27th April, 2015:-
“…the Assignment effectively gave shareholders in Optimal Strategic the ability to sell their pro rata interest in the Allowed Customer Claim and the Transferred Rights.”
The Information Circular of 29th April, 2011, stated at p.14:-
“[e]ffecting such exchange [of strategic series share for shares SPV] would allow holders of Strategic Series shares to trade the SPV Shares…”.
It is clear that the transaction was set up to sell the Allowed Customer Claim and third party claims. This clearly involves the onward sale of litigation. This fact is clearly acknowledged by Professor Shavell on behalf of the plaintiff when he states that the Assignment allowed the rights to litigate (i.e. third party claims) to be monetised. He stated at p. 7 of his Opinion:-
“[b]uyers of shares in SPV on the secondary market presumably ascribed a value to the litigation rights that they purchased along with the allowed BLMIS claim.”
88. In my judgment the transaction as a matter of fact involves the sale of litigation. It is not the same as the purchaser of the business of a company incidentally purchasing an existing suit or cause of action as part and parcel of the business it is acquiring. The purchasers of SPV shares are purchasing with a view to either receiving distributions arising from the pro rata distribution of payments of the Allowed Customer Claim and other bankruptcy remedies and third party litigation proceeds, or so they, in turn, may sell the shares in SPV to other parties, presumably for a greater sum than they paid for them in the first place. They are not engaged in any business other than the realisation of claims to the greatest extent possible. This to my mind is professional trading in litigation. It is what is condemned as trafficking in litigation and is prohibited by Irish public policy.
89. A further test of the transaction is; does it amount to intermeddling or stirring up of litigation? It is clear that this suit would not have been brought if the cause of action had not been assigned to SPV and the control of SPV passed to parties who were not originally investors in the Strategic Series shares. The claim is now being brought on behalf of the persons who did not suffer the injury in respect of which damages are sought against the defendants (though it is likely that a small percentage of the shareholders in SPV are the original investors in the Strategic Series shares). This is not a situation where an impecunious plaintiff is being facilitated in the bringing of a claim that otherwise could not be brought such as arose in the case of Greenclean. The Trustee of the BLMIS estate has paid US$750 million on foot of the Allowed Customer Claim to date. The plaintiff says that this enables it to fund this litigation and that it does not require the investment of the purchasers of its shares to enable it to bring the case. This of course also means that had Optimal Strategic not entered into this elaborate transaction and if it had retained both the Allowed Customer Claim and all other rights that it would have received these monies and would have been in a position to fund this litigation if it saw fit.
90. The plaintiff pointed out that the Santander related companies (the ultimate parent of Optimal Strategic) held the majority of the Strategic Series shares. Holders of Strategic Series shares had instituted proceedings in Florida and Switzerland against, inter alia, the defendants. No proceedings were commenced against the defendants when Santander was in ultimate control of Optimal Strategic. If they, the majority of those who suffered as a result of the fraud, elected not to institute proceedings against the defendants and the proceedings, as a matter of fact, were only instituted once they had sold their controlling shareholding in SPV, it seems very clear to me that these proceedings have been brought, not in order to secure damages for the injured party, but rather are the very type of wanton or officious intermeddling in the litigation of another which has been condemned by the courts for centuries.
Conclusion
91. In my opinion the assignment of the right to litigate third party claims by means of the Assignment in the context of the entire transaction for the sale of the shares in SPV on the secondary market amounts to the assignment of a bare cause of action for no legitimate reason recognised by Irish law. The assignment is not incidental or ancillary to the assignment of the Allowed Customer Claim and the other associated rights in the bankruptcy of BLMIS for the purposes of Irish public policy, whatever about the legitimacy of such an assignment under the laws of the State of New York. The purchasers of the shares in SPV on the secondary market have no genuine commercial interest in the taking or enforcement of these proceedings. The assignment of the chose in action to SPV with a view to the sale of the shares in SPV on the secondary market amounts to trafficking in litigation and has resulted in unlawful stirring up of litigation.
92. In light of these conclusions the defendants are entitled to a declaration that the Assignment of Claim dated 6th May, 2011, between Optimal Strategic U.S. Equity Limited and SPV Optimal SUS Limited insofar as it purported to assign to SPV Optimal SUS Limited the right to bring these proceedings against the first and second named defendants is contrary to public policy, void and unenforceable as a matter of law.
93. It was agreed between the parties that the question as to whether or not the Assignment insofar as it purported to assign to the plaintiff the right to institute and maintain these proceedings was champertous or savoured of champerty and was void was to be tried as a preliminary issue. On 9th March, 2015, the Court gave the first and second named defendants leave to issue the present application. There does not appear to have been an order directing the trial of a preliminary issue as such. For the reasons set out in this judgment, I am satisfied to make the declaration sought in para. 1 of the Notice of Motion, as amended, quoted above at para. 24. That being so, the question that remains is whether or not the proceedings ought to be dismissed or struck out, as is sought in para. 2 of the Notice of Motion.
94. In the submissions on behalf of the plaintiff, counsel argued that the jurisdiction to strike out in proceedings at a preliminary stage is to be exercised sparingly. Of course this jurisprudence is well established. In deciding whether or not to grant the relief sought it is necessary to consider the Statement of Claim and to assess what part of the plaintiff’s claim, if any, survives after the declaration I have made. In this regard the judgment of the Supreme Court in O’Keeffe v. Scales is important. Lynch J. stated at p. 295 that if the case of the plaintiff was to be struck out, the defendant:-
“…would have to make out a clear case if she were to succeed, analogous to the onus on a party bringing a motion to dismiss an action on the basis that the statement of claim discloses no cause of action or that the proceedings are frivolous and/or vexatious.”
In the preceding paragraph, Lynch J. stated that a person who is unlawfully maintaining or champertously prosecuting or defending proceedings:-
“…cannot enforce an agreement with that other person for any form of benefit, whether it be a share of the proceeds of the litigation or a promise of remuneration, such as money or a transfer of property if the claim is successfully defended.”
95. This was reiterated by Clarke J. in Thema. Of course in this case there is no agreement between SPV and the defendants which is sought to be enforced. But if the plaintiff is to succeed in these proceedings, it necessarily would require the Court to enforce that assignment. Without the assignment it has no interest at all in the relevant events and causes of action. I am satisfied that the plaintiff, which was incorporated after all of the events the subject matter of these proceedings had occurred, has no cause of action in contract, misrepresentation or tort or any fiduciary claim against the defendants other than one which is based upon the assignment of the chose in action enjoyed by Optimal Strategic against the defendants. On that basis I see no purpose in simply staying the proceedings, as has occurred in some of the cases cited in argument. Accordingly, I dismiss the proceedings as being frivolous and vexatious and bound to fail in the light of the declaration given above.