Factual and Procedural Background
This appeal concerns a ruling on a preliminary issue in Part 20 proceedings arising from a dispute about liability for substantial physical damage and financial loss resulting from building operations on a residential development site.
The central factual matrix involves a geo-technical site investigation report produced by Company A for the original owner of the Site. The Site was sold in phases to Company B, the purchaser, who used the report without a direct contract with Company A. Subsequently, a landslip occurred during building works carried out by a contractor engaged by Company B, causing damage to neighbouring properties owned by the Claimants.
The cause of action for breach of contract relating to the soil inspection report was not assigned to Company B until nearly five years after the Site had changed hands and after the landslip occurred. The assignment was made by the original owner to Company B by deed, with notice given to Company A.
The Claimants commenced proceedings against Company B and the contractor, the latter being insolvent. Company B then commenced Part 20 proceedings against Company A relying on the assignment of the cause of action for breach of contract to claim damages. Company B also made tort claims against Company A, some connected to the assignment and others not.
The court ordered determination of three preliminary issues: (1) whether Company B, as assignee, could recover loss by virtue of the assignment; (2) whether Company A owed a duty of care to the Claimants; and (3) whether Company A owed a duty of care to Company B in respect of physical damage and economic loss.
The judge ruled in favour of Company B on issue 1, holding that the assignment was valid and that Company B could recover substantial damages despite the original owner having suffered no substantial loss. The judge confirmed a duty of care owed by Company A to the Claimants (issue 2) and held that Company A owed a duty of care to Company B only in respect of physical damage, not economic loss (issue 3).
Permission to appeal was granted only on the first preliminary issue concerning the assignment of the cause of action.
Legal Issues Presented
- Whether the assignee of a cause of action for breach of contract is entitled to recover damages for loss occurring after the transfer of the property but before the assignment of the cause of action, in a larger sum than the assignor would have recovered.
- Whether the defendant owed a duty of care to the Claimants whose properties suffered physical damage.
- Whether the defendant owed a duty of care to the assignee in respect of physical damage and/or economic loss.
Arguments of the Parties
Appellant's Arguments (Company A)
- The assignment was invalid or ineffective to transfer rights to claim substantial damages.
- The assignee cannot recover more damages than the assignor could have recovered; since the assignor suffered no substantial loss, the assignee's claim is limited.
- The parties did not contemplate that anyone other than the assignor would suffer loss or have rights to claim damages.
- The assignment should not expose the defendant to greater liability than it would have owed to the assignor.
Respondent's Arguments (Company B)
- The assignment was valid and intended to transfer the cause of action and all associated remedies.
- The principle that an assignee cannot recover more than the assignor does not preclude recovery of substantial damages when the loss occurs after the assignment or property transfer.
- The assignment completed the transaction of the Site and enabled Company B to step into the shoes of the assignor for breach of contract claims.
- Allowing the defendant to escape liability due to timing of assignment and loss occurrence would create a "legal black hole," which the law avoids.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Dawson v. Great Northern & City Railway Co [1905] 1 KB 260 |
Assignee cannot recover more than assignor; protects debtor from increased liability. |
The court accepted the principle but clarified it must be applied so as not to create a legal black hole; assignee’s claim limited to assignor’s rights but loss timing matters. |
| GUS Property Management Ltd v. Littlewoods Mail Order Stores Ltd [1982] SLT 583 |
Assignee can recover loss suffered by assignor even if assignor sold property at book value; sale price irrelevant to loss suffered. |
Supported the rejection of arguments that assignor’s nominal damages limit assignee’s claim; principle used to avoid unjust enrichment and legal black hole. |
| Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd [1994] 1 AC 85 |
Assignment of cause of action for damages: assignee cannot recover more than assignor but exceptions exist to avoid legal black holes. |
The court relied heavily on the Court of Appeal’s reasoning that assignee can recover substantial damages if assignor would have been entitled to them absent assignment and transfer. |
| St Martins Property Corporation Ltd v. Sir Robert McAlpine Ltd [1994] 1 AC 85 (House of Lords) |
Exception to general rule allowing recovery for loss suffered by third party where contract contemplates transfer of property and loss. |
Used to illustrate that courts will find remedies to prevent wrongdoers escaping liability due to assignment timing and property transfer. |
| Darlington Borough Council v. Wiltshier Northern Ltd [1995] 1 WLR 68 (CA) |
Extension of Dunlop v. Lambert exception; courts willing to find exceptions to general assignment principles to prevent injustice. |
Supports court’s approach to avoid legal black holes and uphold assignee’s right to recover substantial damages. |
| Alfred McAlpine Construction Ltd v. Panatown Ltd [2001] 1 AC 518 |
Limits extension of exceptions where assignee has separate direct claim; confirms careful application of exceptions. |
Referenced as illustrating boundaries of exceptions; court found present case fits within permissible exceptions. |
| Dunlop v. Lambert (1839) 6 Cl & F 600 |
Contracts made for the benefit of third parties who may acquire interest later; exceptions to rule that only contracting parties can recover. |
Applied as part of rationale for exceptions allowing recovery by assignees when property transferred and loss suffered by third party. |
Court's Reasoning and Analysis
The court analysed the temporal sequence of events: the contract breach, the transfer of the Site, the occurrence of damage, and the subsequent assignment of the cause of action. The breach of contract occurred when the assignor owned the Site, but substantial damage arose only after transfer to the assignee, and the assignment of the cause of action was delayed until after the damage.
The court acknowledged the fundamental principle that an assignee cannot recover more than the assignor but emphasised that the principle protects the defendant from increased liability, not from liability altogether. The court rejected the argument that the assignee's claim is limited by the assignor's nominal loss at the time of assignment.
The court considered leading authorities, particularly Linden Gardens and GUS Property Management, which reject the notion of a "legal black hole" where no party can recover damages due to the timing of assignment and property transfer. The court accepted that the remedy in damages for breach of contract includes losses occurring after the cause of action accrues, and that a statutory assignment with notice passes all legal remedies.
The court held that the assignment completed the transaction by enabling the assignee to step into the assignor's shoes to enforce contractual rights against the defendant for breach. It noted that the defendant would be unjustly advantaged if allowed to escape liability due to the assignment timing, which would be contrary to legal principles and commercial common sense.
The court also addressed the duty of care issues, confirming the defendant owed a duty to the Claimants and to the assignee in respect of physical damage but not for economic loss, consistent with established proximity and fairness principles. Applications for permission to appeal on duty of care were refused.
Holding and Implications
The appeal on the assignment point is dismissed.
The court held that the assignee is entitled to recover substantial damages for breach of contract despite the assignor having suffered only nominal damages at the time of assignment, and despite the damage occurring after transfer of the property but before assignment. The assignment was valid and effective to transfer the cause of action and associated remedies.
The decision prevents the creation of a "legal black hole" whereby the defendant could escape liability due to the timing of loss and assignment. No new precedent was established beyond the application and affirmation of existing principles and authorities in the context of construction law and property development.
Applications for permission to appeal on the duty of care issues were refused, leaving the preliminary rulings on those points intact.