Legal: The law of assignment

The case: Larkstore Ltd -v- Technotrade Ltd, CA 27 July 2006.

The issue: Can a party who is assigned rights under a contract recover more from the contract-breaker that the assignor could have done had there been no assignment?

The implication: A site investigation report prepared for a previous owner of the land could be assigned to a new owner who could then persue the author of the report for breach of contract even though the damage occurred between the sale of the land and the date of the assignment.

The law of assignment

In December 1998, Technotrade produced a site investigation report for a property development company called Starglade. Larkstore came into possession of the Technotrade report when, at a later date, it purchased the development site from Starglade.

Larkstore sought planning permission to redevelop the site and, in March 2001, this was granted by Shepway District Council. It was a condition of the planning approval that the applicant should obtain a report from a specialist soil consultant to identify the need for any works to stabilise the land and the adjoining properties.

The Technotrade report had concluded that the site was satisfactory for the development of a number of two-storey houses and was used by Larkstore to satisfy this planning condition. However, Larkstore did not seek permission from Technotrade to use the report.

In October 2001, Larkstore entered into contract with Bess Ltd for the construction of the houses. However, while undertaking the groundworks, a landslip occurred. Significant damage was caused to the neighbouring properties, which were 'upslope' from the site, resulting in the need for extensive stabilisation works before the project could continue.

Larkstore initially pursued the contractor, Bess, for the cost of the damage but, when it became insolvent, Larkstore turned its attention towards Technotrade.

In the event, two years after the landslip, Larkstore secured a deed of assignment with Starglade. This deed assigned the Technotrade report to Larkstore and gave Larkstore the right to sue Technotrade for breach of contract.

On the same day, Larkstore wrote to Starglade and confirmed a further agreement reached in respect of the assignment. The agreement provided that, in consideration for the assignment, Larkstore would pay Starglade half of the proceeds received from Technotrade.

Proceedings begin

In 2003, the 'upslope' neighbours commenced proceedings against Larkstore and Bess for the damage to their properties. The case was brought before His Honour Judge David Wilcox in the Technology and Construction Court, where an order was made for the determination of specific preliminary issues, including the status and effect of the assignment.

One of the legal problems involved in the case was the relationship between Larkstore and Technotrade. It has long been the position in law 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. This principle has never been easy to apply in practice and an analysis of the timing of the events highlights the kind of problem the courts faced.

Points in time

The first point in time was the time of the breach. The breach occurred when the defective report was produced and, at the time, Starglade was the owner of the site. However, at that time, Starglade would have been entitled to recover nominal damages because it had suffered no loss.

The second relevant point in time was the time of the landslip. At this point, Larkstore was the owner of the site and as a result of the landslip, substantial damage was suffered. The problem was that Larkstore was not entitled to recover any damages from Technotrade for breach of contract, because at that time there was no contract between Larkstore and Technotrade because the assignment had not yet taken place.

The third relevant point in time was the time of the assignment. Technotrade submitted that Starglade could not assign Larkstore more than it had. It did not have a claim for substantial damages against Technotrade in contract, as it had ceased to own the site before the assignment and before the landslip.

Judge Wilcox found that Larkstore had acquired the right to sue Technotrade in contract. More importantly, for Larkstore, he found that the measure of damages would not be nominal. He noted 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". Technotrade appealed.

Claim for damages

The Court of Appeal concurred with Judge Wilcox and found that the assignment did not, in itself, prejudice Technotrade by exposing it to a claim for damages by Larkstore that Starglade could not have brought against Technotrade. It found that the assignment was a delayed consequence of the earlier sale and if Starglade had not sold the site to Larkstore, and developed the site itself, it could have recovered substantial damages for the landslip.

The Appeal Judges also noted that if Technotrade's position was correct, and the assignee could never recover more than the assignor, then Technotrade would have improved its position as a result. Technotrade would have escaped all potential contractual liability for the damage caused. It would cease to be liable to Starglade, which no longer owned the site, and its liability to Larkstore would be capped at Starglade's limit, which would amount to only nominal damages.

Lord Justice Mummery noted that: "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 duly dismissed.

[Contract Journal, 16 August 2006, p 33]