No exception to the privity rule where party incurring the loss has its own legal remedy
The dispute concerned works carried out on cottages at the Blarney Golf Resort, which were owned by Messrs. Frank and Derek McCarthy who were shareholders in Kelcar Developments. Bowen undertook the works under a contract with Kelcar. Kelcar transferred ownership of the cottages to a number of other parties under a number of development agreements, and Bowen executed collateral warranties which gave the transferees of the buildings similar rights to sue for defects as were contained in that agreement. The development agreements also contained warranties by Kelcar as to the quality of the private investors, who owned the clubhouse and the hotel at the resort. This conferred on them the right to pursue the contractor for defects.
In the case of the cottage owners, however, the warranties were not executed. Bowen maintained that it was willing to do so, but was never called upon to provide the warranties. This was not contested by Kelcar.
A dispute under the contract as referred to arbitration and the arbitrator sought directions from the court on a number of questions of law arising under section 35 of the Irish Arbitration Act 1954. The issue was whether an employer under a building contract could counterclaim or set-off the costs of remedying defects where the losses had been incurred by someone who had not been party to the contract. Although Kelcar was the employer under the contract, it had no interest in the cottages or the resort, isnce the coattages were owned by associated persons or companies and the resort was owned by a subsuduary company, BGR Ltd. When the matters came to the arbitrator's attention, he gave Kelcar leave to amend its points of defence and counterclaim. However, he rejected Kelcar's application to join BGR as a party to the arbitration.
Bowen challenged Kelcar's entitlement to make such claims for alleged serious defects in the buildings, particularly in the construction of the roofs. BGR maintained that it would have to close the resort during the remedial work, and would lose business as a result. Although Bowen denied that the buildings were defective, for the purposes of the present action, it was assumed that the defects existed and that they would give rise to at least some of the losses claimed. Bowen relied upon the doctrine of privity of contract i.e. That only a party to a contract can sue for a breach of it, and a claimant can only recover losses which it has sustained or will sustain.
Kelcar argues that the present case came under an exception to the privity rule in that clause 21(A) and 21(B) of the contract applied to losses sustained by thired parties, and authorised the employer to make a claim in respect of them. Section 21(B) related to insurance against damage to property or persons, and 21(A) imposed a liability on the contractor to indemnify the employer against any loss or damage to personal property arising "out of or in the course of or by reason of the execution of the works".
The court rejected this interpretation of the contract. Those provisions were intended to apply to quite a different situation from the present one, dealing principally where there was damage during the works due to the negligence of the contractor or one of its subcontractors.
Turning to the "exception" argument, Kelcar was proposing that, on the agreed assumption that there were defects in the works, Bowen would be allowed to escape liability for its wrongdoing. Having reviewed the English authorities, the court concluded that they did not support a deviation from the general privity rule in order to enable a party to an arbitration to claim losses sustained. In building contract cases, the exception to the privity rule applied where there was a "legal black hole" i.e where a party which sustains a loss would otherwise be without any remedy at law and the party suing could not prove substantial losses, so that the party in breach would escape liability. If the party suffering the loss has a right of action, the exception does not apply. The present case did not fall within the exception to the privity rule.
Author: Ann glacki
Date: March 2010
Commentary by Lorne Alway
The key issue in this case was whether the Privity of Contract rules, such that only the Parties to a Contract can enforce it, could be avoided. The Court found that there was an exception to the rule in English Law but that only applied, and was only available, where the relevant Party had no other remedy at law for a loss suffered and where the Party in default would otherwise "get away with it". Those circumstances did not apply in this case.
For more information please contact Lorne Alway by telephone 01295 275975 or by email on lorne.alway@alway-associates.co.uk
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