Legal black holes: revelations from the Outer House

Marquess of Aberdeen and Tremair v Turcan Connell [2008] CSOH 183 provided an opportunity for analysis of the problem known as a “legal black hole.”  This phenomenon arises where loss caused through a breach of contract falls not on the contracting counter-party, but rather on a third party.  The English courts developed a potential solution to the problem in cases such as St Martin’s Property Corporation v Sir Robert McAlpine and Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 and Darlington Borough Council v Wiltshier Northern Limited [1995] 1 WLR 408.  Focussing on the problem itself, and explaining it  using a construction context, owner of a building (O) engages builder (B) to carry out works on a building.  Those works are performed negligently, although that fact is not immediately apparent.  The building is then sold, possibly several times.  Rights under the building contract are not assignable without consent of the builder.  When the loss becomes apparent, it falls on a subsequent owner (SO) who finds the building worth less than he anticipated.  However, SO cannot sue the builder, having no rights under the building contract.  Nor does he have an action in delict against B.  O, who has a contract with B and could, in theory, sue him, has suffered no loss.  The lack of congruence between loss and right to sue has led the courts to describe these situations as legal black holes. 

The solution developed by the English courts allows O to recover damages on SO’s behalf.  It is, however, far from perfect, doubts remaining about the way in which SO can force O to disgorge damages, and what might happen if O became insolvent after recovering damages but before giving them to SO.

Marquess of Aberdeen is a case of solicitor’s negligence.  Failure properly to advise a client on the operation of a trust led to substantial, as yet unquantified, financial losses.  However, the loss fell on persons due to benefit from the trust, not the person engaging the legal advisor to set up/administer the trust.  Thus the person with a right to sue in contract (the client) suffered no loss, and the person who suffered the loss (the disappointed beneficiaries) had no right to sue the negligent solicitor. 

Whether the English solution would be applied in Scotland was not previously clear despite discussion in cases such as McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323 and Clark Contracts Limited v The Burrell Company Construction Management) Limited (No 2) 2002 SLT (Sh Ct) 73.  Jus quaesitum tertio, the Scottish third party right, fails to solve these cases.  It is doubtful whether O and B have the intention to benefit SO which would successfully constitute SO as a tertius.  

This decision in Marquess of Aberdeen was made at procedure roll stage.  Thus, Lady Smith was deciding whether the pursuers had a relevant case. The case would only have been dismissed if, assuming that the pursuer approved his averments, his claim would necessarily fail.  Her conclusion was that the case was relevant.  She is, however, not fond of the name given to this phenomenon [para 45]:

         “I am not wholly convinced that it is helpful to compare the situation of a person who finds himself out of pocket on account of the breach of contract to which he was not a party with the extraordinary gravitational pull of the dense collections of mass in outer space that are colloquially known as black holes, but, one way or another, that is how they have come to be known.”

We are fond of the space terminology, and look forward to finding out if, at last, the hole has been plugged.