Chapter 6 Guidance on questions in the book

Question

Apricot plc contracted with Broadbrush Ltd, a building company, for the construction of an office block on land owned by Apricot, for a contract price of £2million. At the time the contract was made, Apricot was planning to transfer the land to a subsidiary company for tax reasons, and so a recital was included in the contract, explaining that the contract was being made for the benefit of any subsequent owner of the land within Apricot’s corporate group. Two months after the contract was made, Apricot set up a new subsidiary company, Cherry Ltd, the land was transferred to it and notice of the transfer was given to Broadbrush. As a gesture of goodwill, Broadbrush then executed a deed in favour of Cherry, promising to take reasonable care to perform its obligations under the building contract. The work was completed and paid for, but it quickly became clear that the building did not comply with the detailed health and safety specifications in the contract in a number of important respects and, as a result, Cherry was unable to find tenants willing to takes leases of office space in the building. Advise Apricot and Cherry.

Answer guidance

Remember you are asked to advise the promisee Apricot (A) and the third party Cherry (C). This raises the familiar fact pattern of a contract made between A and B which, when breached by B, causes loss to C rather than A. Notice immediately that, in the real world, A would almost invariably assign the benefit of the building contract to C at the time of transferring the property, unless (as in St Martins) the contract prohibits assignment, although assignment does not solve the underlying question of what level of loss can be recovered.

Today, it is preferable to start your analysis with the Contracts (Rights of Third Parties) Act 1999, to see whether C has a direct statutory right to enforce the contract against B. You will need to consider whether the recital included in the contract, explaining that the contract was being made for the benefit of any subsequent owner of the land within Apricot’s corporate group, is sufficient to identify C as required by section 1(3). Also, consider whether the deed in favour of C has any impact on C’s statutory rights - it certainly would have ousted any such statutory right had it been given at the time the contract was made, but notice that it was executed two months later.

If for some reason the statute does not assist C, you will need to consider the common law exceptions to privity, in particular the line of cases St Martins, Darlington and Panatown. The main issues to think about are: Whose claim is it, and whose loss is it? And does the duty of care deed oust any possibility of either A or C recovering damages for C?s losses? If so, why?