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| Issue No: | 33 |
|---|---|
| Published: | Summer 2006 |
| Article No: | 7 |
| Author: | Jonathan Hawkswell |
| Title: | Assignment of Contracts - Beware of Pitfalls |
Jonathan Hawkswell discusses how the recent English case of Technotrade Ltd v Larkstore Ltd demonstrates the risks arising out of assignment of contracts that may have been avoided.
A company advising on site investigations found itself being claimed against by a company it had no contract with and no prior relationship with. How could that be? The original site investigation contract had been assigned to the Claimant.
Background
A development company called Starglade Limited (‘Starglade’) purchased a site in Kent and employed Technotrade Limited (‘Technotrade’) to produce a site investigation report. Technotrade duly produced the report in December 1998, which found that the site was satisfactory for the proposed development. The issued report contained no prohibition against assignment. In June 1999, Starglade sold the site to Larkstore Limited (‘Larkstore’).
Larkstore bought the site with planning permission for 8 detached units. The planning consent contained a condition that a report from a specialist soil consultant be obtained to identify whether there was a need to stabilise the land and any adjoining properties. Starglade used the Technotrade report to satisfy the planning condition and sold the site to Larkstore with the benefit of full planning consent.
Larkstore then sought planning permission for phase 2 of their project and found that a similar condition had been placed upon them and so used the report produced by Technotrade as this confirmed that the ground was satisfactory to build a number of two storey houses on. Larkstore failed to obtain Technotrade's permission to use the report but the report satisfied the planning condition regardless.
That October, Larkstore employed Bess Ltd (‘Bess’) to construct the houses. However, a landslip occurred whilst they were undertaking the groundworks. Neighbouring properties sustained significant damage and a vast amount of work had to be undertaken to stabilise the properties before the project itself could continue.
Larkstore turned to Bess for the cost of the damage but Bess became insolvent and so Larkstore turned its attention to Technotrade. In the meantime, but more than two years after the land slide, Larkstore obtained a deed of assignment from Starglade which assigned the Technotrade report to Larkstore and 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 and to bring all such claims against Technotrade as are available at law
which gave Larkstore the right to sue Technotrade for breach of contract.
Larkstore also came to an agreement with Starglade that in consideration of you making the assignment of even date, we undertake to pay you one half of the net monies received from Technotrade Limited
.
Larkstore, therefore, made an agreement to pay Starglade half of the proceeds received from Technotrade.
The neighbours who suffered damage due to the landslide commenced proceedings against Larkstore and Bess for the damage caused to their properties. The case went to the Technology and Construction Court in England to determine liability for the substantial damage caused and the resulting financial loss. The case was heard by Judge Wilcox who made an order for the determination of specific preliminary issues including the status of the assignment which was the main issue in these proceedings.
The General Position
The position in law has always been that a person who is assigned rights under a contract cannot recover more from the contract breaker than the assignor could have done had there been no assignment but it appeared in this case that to apply this logic would create a “legal black hole” whereby the contract breakers position would be that no one could legally recover substantial damages from him so the right to damages disappears in the “legal black hole”.
The question asked was Is the assignee of the cause of action entitled to recover from the contract breaker damages for loss, which occurred after the transfer of the development by the assignor to the assignee, but before the assignment of the cause of action, in a larger sum than the assignor would have recovered?
General Principles
The assignment is affected by the order of events which were as follows:
- The breach occurred when the defective report was produced and at that time Starglade were the owners of the site. At that time, Starglade would only have been able to claim nominal damages as Starglade had not suffered a loss.
- At the time of the landslip, Larkstore was the owner of the site and suffered substantial loss due to the landslip. Larkstore could not however, recover damages from Technotrade for breach of contract as there was no contract at that time between Larkstore and Technotrade.
- The assignment then took place. Technotrade argued that Starglade were not able to assign more rights than it had to Larkstore. Starglade did not have a claim for damages as it had sold the site before the assignment and before the landslip occurred.
- It was accepted that the report was assignable and that although the damages that Starglade could have recovered at the date of the cause of action was no more than nominal damages, if Starglade had remained the owner of the site, they would have been able to claim substantial damages for the landslip in 2001.
Decision
Judge Wilcox found in favour of Larkstore and held that they could sue Technotrade in contract. He also held that damages could be claimed stating that The actual cost of repair and stabilisation of the site by Larkstore would be evidentially relevant to what would be recoverable, as would the cost of reasonable repair to the neighbouring properties.
Court of Appeal
Concurring with Judge Wilcox, the Court of Appeal held that if they had concurred with Technotrade, they would have escaped all potential contractual liability for the damage caused as its liability to Larkstore would be capped at Starglade's limit which was nominal damages.
The Court of Appeal stated:
“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 loss… that the amount of the loss recoverable by Larkstore was limited by what loss had been suffered by Starglade, in this case nil.”
And 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. As a matter of legal principle and good sense, this cannot possibly be the law.”
The appeal was dismissed.
Although the Court found against Technotrade, there are steps which it could have considered to avoid the risk:
- Having a clause prohibiting assignment
- Excluding the Third Party Rights Act in England and Wales
- Limiting risk in the future by the wording of contracts