Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68

Facts

• Darlington Borough Council sought the construction of a leisure facility but, for tax reasons, used a separate company, Darlington Recreation Ltd, to contract with the builder, Wiltshier Northern Ltd.
• Defective construction by Wiltshier caused loss to the council, which operated the facility but had no direct contract with the builder.
• The council sought compensation from Wiltshier despite the absence of a contractual link.

Issues

1. Whether the council, as an intended beneficiary without direct contractual privity, could claim compensation from the builder for defects.
2. Whether the Albazero rule could apply without a formal trust relationship between the contracting party and the third-party beneficiary.
3. What factors determine the application of the Albazero rule in construction contracts.

Decision

• The House of Lords held that the council could claim compensation from Wiltshier, even though it was not a party to the contract.
• The court identified the council as the intended beneficiary of the agreement, with the builder reasonably able to foresee the council’s reliance and potential harm.
• Lord Goff confirmed that the Albazero rule could extend beyond cases involving strict trustee relationships.
• The court emphasized the contract’s purpose and the predictability of third-party harm over formalities of trust.

Legal Principles

• The Albazero principle allows a contracting party to claim for losses sustained by a third party if the contract was intended for the third party’s benefit and the loss was foreseeable.
• The need for a strict trustee relationship was relaxed; the key requirement is that the third party is an intended beneficiary and reliance was predictable.
• Later cases, such as Alfred McAlpine Construction Ltd v Panatown Ltd, clarified that the party claiming must retain the right to obtain real, not merely nominal, compensation for the third party’s loss.

Conclusion

Darlington BC v Wiltshier Northern Ltd extended the Albazero rule in construction law, allowing third-party beneficiaries to recover for defects where reliance and harm are foreseeable, shaping the drafting and structure of building contracts to address rights and liabilities for all relevant entities.