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The return of the black hole

LAW

Assignment of contractual rights is a useful tool to establish liability where no other route exists, writes Lindy Patterson

CONTRACTORS frequently enter into building contracts with developers who have no intention of retaining their interest in the development. The developer will sell it on as soon as possible, sometimes during the course of the building process, sometimes after. Contractors are normally well aware of that possibility.

It is not uncommon, in such a situation, for a defect in the works to arise after the developer has sold on his interest.

The purchaser of the development suffers the loss and pays for the costs of remedying the defects.

Assuming he has no warranty or other contractual relationship with the building contractor, the purchaser (leaving aside any potential claims for negligence which are outside the scope of this article), has no way of recovering his losses.

The developer, although able to sue the contractor (with whom he has a contract) has arguably suffered no loss as the defect came to light after he sold on the development for full value. There is a general principle of law that you cannot recover a loss you yourself have not suffered.

It might seem, in such circumstances, that the claim against the contractor disappears into some legal 'black hole' and the contractor gets off scot free. But that's not what happens.

Following a series of cases dealing with this point as far back as the 1970s, such 'black holes' have disappeared into the ether.

The cases defined an exception to the general principle that you cannot recover for loss which you have not suffered.

This means that where the above circumstances arise then, in general terms, provided the purchaser has no other direct remedy against the building contractor, the developer will be entitled to recover damages (regardless of the fact that he himself has not suffered the loss) for the actual loss sustained by the purchaser.

The developer must then normally account to the purchaser for the damages recovered.

So what all of this means for the contractor is that there is no escape - it will be held accountable for its breach of contract.

A recent case - Technotrade v Larkstore - in the Court of Appeal tried, though in slightly different circumstances, to reopen the black hole argument.

In December 1998, a developer called Starglade appointed Technotrade to produce a site investigation report for a residential development. Starglade then sold the development site to Larkstore, which started to build on the site.

In 2001, during the construction works, a landslip occurred causing substantial damages to houses uphill from the site and extensive stabilisation works had to be undertaken by Larkstore.

In March 2003, the owners of the houses that had suffered damage as a result of the landslip sued Larkstore and its contractor (which is now insolvent). The following February, Starglade assigned the Technotrade report and its rights relative to the report to Larkstore. The Deed of Assignment stated:

'For the avoidance of doubt, the assignment effectively hereby includes the right to sue in respect of breaches of Technotrade of its duties and obligations under its Appointment with Starglade and to bring all such claims against Technotrade as are available at law.'

In October 2004, Larkstore, relying on the assignment, then issued a claim against Technotrade. A number of preliminary questions were put to the court in respect of these proceedings and some of these were appealed by Technotrade.

The main point on appeal was whether Larkstore, by virtue of the assignment, was able to recover the loss it had allegedly suffered.

Technotrade relied on the principle that a person who is assigned rights (Larkstore, in this case) under a contract cannot recover more from the breaker of the contract than the original party to the contract.

Hence Technotrade argued that, since Starglade had suffered no loss (the landslip having occurred after it had sold the site for full value), Larkstore had no entitlement to damages from Technotrade.

The appeal court rejected Technotrade's argument, pointing out that 'if Starglade had not sold the site to Larkstore?it could have recovered substantial damages against Technotrade for the landslip'.

If Technotrade had succeeded, it would have avoided liability. Accordingly, a legal black hole would have opened up.

The court added: '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.'

Assignment of contractual rights (whether under building contracts or consultant's appointments) may be a useful tool to plug black holes of liability where no other route exists.

It would have been an incredible result if Larkstore, having itself attempted to plug the legal black hole by assignment, had been left with no comeback against Technotrade.

Assignment saves the parties involved the trouble of involving the original contract party, who no longer has an interest, in any dispute which arises under the contract in question.

It may be used where collateral warranties are unavailable or inappropriate and where the Contract (Rights of Third Parties) Act 1999, which confers rights under a contract on third parties to that contract, is excluded.

But this solution is not always available. Many contracts include express prohibitions on assignment or assignment only with consent.

Key points

There is a general legal principle that a party cannot recover losses which they have not incurred. This gave rise to 'black holes' of liability in property development and sale.

An exception to this principle has been established to allow the contracting party to recover damages for loss suffered by a third party where no other route is open to the third party.

Rights to recover under a contract can be acquired by a third party by assignment of the original contract.

The recoverable losses are those the original party under the cont ract would have been able to recover if the assignment had not taken place.

Law Report is a weekly column covering legal issues of all kinds - including contractual, employment and industrial relations. To help us provide a steady flow of quality, readable legal articles, we have created a panel of expert advisers. They are: ¦ Daniel Atkinson, executive director of Atkinson Law; ¦ James Bell, partner with London law firm Christian Khan; ¦ Guy Cottam, a conciliator, arbitrator and former chairman of the arbitration advisory panel of the Institution of Civil Engineers; ¦ Catriona Dodsworth, a partner with law firm Pinsent Masons; ¦ Rudi Klein, visiting professor of construction law at the University of Wolverhampton and chief executive of the Specialist Engineering Contractors' Group; ¦ Lindy Patterson, partner and head of construction group with Dundas & Wilson; and ¦ Jeremy Winter, a partner with law firm Baker & McKenzie.