Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd

Factual and Procedural Background

The judgment deals with two sets of proceedings that raise similar contractual questions.

• Action 1 (“Linden Gardens”): Company H held the leasehold of several floors in a building in The City. In 1979 it engaged Company F under a standard form building contract to remove asbestos. Clause 17(1) of that form stated that “The Employer shall not without the written consent of the Contractor assign this Contract.” Practical completion was certified in March 1980, but further asbestos was later discovered. In April 1985 Company H assigned its leasehold to Company A and, in January 1987, purported to assign to Company A all rights of action arising out of the 1979 contract without obtaining Company F’s consent. Company A sued Company F (and an ancillary sub-contractor, Company B) for the cost of remedial works. The trial judge found the assignment ineffective; the Court of Appeal reversed that decision; Company F appealed to the House of Lords.
• Action 2 (“St Martin’s”): Company C began a commercial development in 1968 and, in 1974, employed Company E under the same standard form contract (containing Clause 17). In 1976 Company C assigned its property interests and purported to assign “the full benefit of all contracts” to its group company, Company D, again without obtaining Company E’s consent. All alleged breaches (leaks in a podium deck) occurred after this assignment. Company D and Company C both sued Company E. The trial judge held the assignment invalid and limited Company C to nominal damages; the Court of Appeal upheld invalidity but awarded Company C substantial damages. Company E appealed and Company D cross-appealed.

After full argument the House of Lords delivered the present judgment on 22 July 1993.

Legal Issues Presented

1. Whether Clause 17(1) of the standard form building contract invalidates any assignment of “the benefit of the contract” without the contractor’s written consent.
2. If so, whether the clause nonetheless permits assignment of accrued causes of action even though it bars assignment of future contractual performance.
3. Whether a contractual prohibition on assignment is void as being contrary to public policy.
4. Whether, despite breach of Clause 17(1), a purported assignment is effective in law to vest rights of action in the assignee.
5. Where an assignment is ineffective, whether the original employer (having disposed of its proprietary interest before breach) can recover substantial damages, or is limited to nominal damages.

Arguments of the Parties

Appellants’ Arguments (Companies F and E)

• Clause 17(1) prohibits all assignments of the contract’s benefit; any assignment made without consent is ineffective.
• The prohibition is not contrary to public policy and has long been recognised by authority.
• If the assignment is void, the assignee has no standing and the original employer, having suffered no proprietary loss at the breach date, is entitled only to nominal damages.

Respondents’ Arguments (Companies A, C and D)

• On its true construction Clause 17(1) only prevents substitutional performance, not the transfer of accrued causes of action.
• Alternatively, a clause making rights inalienable is void for public-policy reasons.
• Even if the clause is valid, the assignment should be treated as effective between employer and assignee, leaving the contractor with a damages remedy only against the assignor.
• If the assignment fails, the original employer should still recover the full cost of remedial works because the contractor’s breach deprived it of the bargain for which it paid.

Table of Precedents Cited

Court's Reasoning and Analysis

The leading speech of Judge Browne-Wilkinson (with all other Law Lords concurring in the result) proceeded as follows:

1. Construction of Clause 17. The phrase “assign this contract” was construed in its ordinary (though technically inaccurate) sense of prohibiting any assignment of contractual benefits. A separate prohibition on “sub-letting” within the same clause showed that “assignment” could not be read down to mean merely substitutional performance. Clause 17 therefore barred assignments both of future performance and of accrued causes of action.
2. Validity of Non-assignment Clause. Long-standing authority, including In re Turcan, Helstan and South-African and Scottish cases, recognises that such clauses are enforceable. No public-policy ground justified treating them as void.
3. Effect of Breaching the Clause. An assignment made in breach of Clause 17 does not transfer contractual rights to the assignee; at most it may create obligations between assignor and assignee. Accordingly, Company A and Company D had no direct cause of action.
4. Measure of Damages Where Assignment Fails. Although Company C had disposed of its proprietary interest before any breach, the House held—applying the rationale in Dunlop v. Lambert and the exceptions noted by Judge Diplock in The Albazero—that an original employer may sue for substantial damages on behalf of subsequent owners when (i) the contract expressly bars assignment, and (ii) it was within the parties’ contemplation that later owners would suffer loss. Otherwise the claim would fall “into a legal black hole.”
5. Remoteness. Damages based solely on the assignor’s separate liability to its group company were too remote (Hadley v. Baxendale). The recoverable measure remained the cost of reinstatement attributable to the contractor’s breach.

Holding and Implications

Final Orders:

• The appeal by Company F in the “Linden Gardens” action was ALLOWED. The Court of Appeal’s decision was set aside and the trial judge’s order (holding the assignment ineffective) was restored.
• In the “St Martin’s” action the appeal by Company E was DISMISSED, as was Company D’s cross-appeal. Clause 17 rendered the assignment ineffective, but Company C was nonetheless entitled to substantial damages for the cost of remedying defects.

Implications:

• Non-assignment clauses in standard form building contracts are valid and will be enforced.
• A purported assignment made in breach of such a clause transfers no contractual rights to the assignee.
• Where the clause bars assignment and the property has been transferred, the original employer can still recover the full cost of remedying defects on behalf of subsequent owners, preventing a remediless “legal black hole.”
• The decision preserves commercial certainty for contractors while ensuring that ultimate owners are indirectly protected through the original contracting party. No new general rule of public policy was created.