St Martins Property Corporation Ltd v Sir Robert McAlpine & Sons Ltd [1994] 1 AC 85

Facts

  • St Martins Property Corporation Ltd entered into a contract with Sir Robert McAlpine & Sons Ltd for construction work.
  • Before the project was completed, St Martins transferred ownership of the property to a third party.
  • Defects later emerged in the work completed by McAlpine, causing loss to the new property owner.
  • The third-party owner had no direct contractual relationship with McAlpine and was therefore unable to claim damages from McAlpine directly.
  • St Martins, despite having transferred ownership, pursued damages against McAlpine for the new owner’s loss.

Issues

  1. Whether a contracting party can recover damages for losses suffered by a third party when the contract was intended to benefit that third party.
  2. What conditions must be met for the exception to the privity of contract rule to apply.
  3. Whether the third party’s inability to claim directly against the breaching party is central to the availability of this exception.

Decision

  • The House of Lords held that a strict exception to the privity rule permitted St Martins to recover damages on behalf of the third party.
  • The court found that the exception applies only where the contract was intended to benefit the third party, and the third party suffered a specific loss due to the breach.
  • It was a key requirement that the third party did not have a direct contractual remedy against the party in breach.
  • The decision was distinguished in later cases, particularly where the third party held a direct contract providing an alternative means of claim.

Legal Principles

  • Privity of contract generally prohibits parties outside a contract from enforcing its terms or recovering damages for its breach.
  • An exception exists where (i) the contract was intended to benefit a third party, (ii) that third party has suffered an identifiable loss, and (iii) the third party has no direct contractual right to claim against the breaching party.
  • The exception operates to prevent unfairness in cases where without it, an injured third party would be left without remedy due to the technicalities of privity.
  • The strictness of this exception was affirmed and clarified in later cases, such as Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518.

Conclusion

The House of Lords established a narrow exception to the privity of contract doctrine, allowing a contracting party to recover damages for third-party loss where the contract’s intent and the absence of direct rights to claim by the third party justify intervention. This development provides a safeguard for subsequent property owners and highlights the importance of clear contractual drafting in multi-party construction and property contexts.

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