The House of Lords decision in McAlpine Construction Ltd v Panatown Ltd [2000] 4 All ER 97 neatly encapsulates a legal dilemma over breaches of contract where there is no apparent claimant.

It has been referred to as a legal black hole which arises when the person who suffers loss is not a party to the contract and so may have difficulties in pursuing a claim, subject to the Contracts (Rights of Third Parties) Act 1999.

Equally, the person who did enter into the contract may have suffered no loss.

It means that potentially the contract breaker gets off scot-free.The factsIn McAlpine itself, the contractor McAlpine built an office block and multi-storey car park on a site owned by Unex Investment Properties Ltd (UIPL).

The employer in the construction contract was another company, Panatown, which was in the same group as UIPL.

This is the classic triangular relationship that regularly occurs which causes problems.

The employer has all contractual rights, but if the building is defective, arguably it has suffered no loss.

It is the owner of the land UIPL that has suffered the loss.There were alleged to be serious defects with the building - so much so that it might have to be demolished, raising the possibility of a £40 million claim.

Panatown started proceedings against McAlpine.There also existed a duty of care deed which McAlpine entered into with UIPL giving it direct rights of recovery.

However, UIPL did not start an action.Three primary issuesThere were three primary issues addressed in Panatown.

First, there was a debate on whether there is a general rule of English law that prevents a company in Panatown's position (where no loss has been suffered) recovering damages.

Second, is there an exception to the general rule that would cover the situation of a compa ny placing a contract but not owning the land? Third, was it right to analyse the situation as being one in which Panatown had not suffered a loss? It was argued that as Panatown had placed a contract and had not received the benefit of that contract, that this could amount to a loss.

If accepted then the question arises as to the amount of loss and how it should be measured in financial terms.The House of Lords accepted that there was a general rule that a party to a contract could not sue without showing loss.

However, there have been a number of exceptions in the past.

The first relevant to Panatown is known as the narrow ground exception.The narrow ground exceptionThis exception concerns the transferred loss principle.

It originates from shipping cases and was originally known as the rule in Dunlop v Lambert (1839) 6 Cl & Fin 600, although properly this is an exception to the general rule.

It was developed in The Alberzero [1977] AC 774 by Lord Diplock and more recently applied to building contracts in St Martins v McAlpine [1994] 1 AC 85.

The importance of the narrow ground is that it is an exception which allows a non-owning employer in the building contract scenario to recover the loss actually suffered by the owner of the site, typically these might be related companies in the same group.In the St Martins case the employer was St Martins.

It entered into a contract with McAlpine for a building to be erected on land it owned.

Subsequently St Martins transferred its interest in the land to a sister company.

It tried to assign the benefit of the building contract to the sister company but that assignment required consent under the terms of the contract and the contractor's consent was not obtained.

This meant that the assignment was not effective.

The benefit of the building contract remained with St Martins.The building was allegedly defective and the sister company had to incur substantial costs in rectifying the work.

As there was no valid assignment of rights nor a collateral warranty, it was unable to sue McAlpine.St Martins did sue McAlpine; although the claimant had not suffered loss, the House of Lords held that it could recover damages on behalf of the sister company - so this exception was used for the first time in a construction case.The precise boundaries of the exception are difficult to analyse but it is probably used in situations where justice requires it.

However, in Panatown there was an important distinction because there was a second contract, the duty of care deed, made between the building contractor and the owner of the land.In St Martins it had been said that if there were a secondary contract, that would prevent the exception applying.

As a result the House of Lords was able to distinguish the St Martins case and reach a different decision in Panatown.The broad ground exceptionThe St Martins case also gave rise to another possible exception known as the broad ground.

This arose in the judgment of Lord Griffiths, who decided that St Martins should succeed because it had made a contract and not received the benefit for which it had contracted.

This argument is known as the broad ground exception.

The other Law Lords indicated that this was a plausible argument and that, following academic debate, they were prepared to consider it should another case reach the House of Lords.Following St Martins, academic debate did take place.

In addition, a further case, Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68 was decided by the Court of Appeal.

Thus Panatown was the first opport unity for the House of Lords to give further consideration to the broad ground exception.

This depends substantially upon the concept of performance interest.

This was interpreted as the interest of the innocent party in obtaining compensation for what should have been provided under the contract.It is this type of interest that is relevant to a case like Panatown.

If damages relate to the interest in having the contract performed then it should not be relevant that there has been a loss suffered by any other party, such as UIPL.

The argument is that the innocent party to the contract should obtain damages which would represent the cost of getting the contract performed properly.JudgmentIn essence the House of Lords' findings in Panatown were that there was a general rule that a promisee cannot sue without showing loss and that the narrow ground exception could apply but was defeated in this case because of the duty of care deed.In respect of the third argument that Panatown had in fact suffered its own loss, the broad ground exception, the Lords were divided.

However, it is now accepted that this broad ground exception does exist.

The two dissenting judgments in Panatown, by Lord Gough and Lord Millett, held that the broad ground was the correct analysis and would have decided for Panatown on that basis.

However, the remaining three judges rejected this argument.

Lord Jauncey and Lord Browne-Wilkinson did so as a result of the duty of care deed.

Lord Clyde raised questions about the principle of the broad ground.Practical impact of McAlpine v PanatownContractual arrangements such as in the Panatown case are increasingly common and so the precise interpretation of the Lords' judgment on the broad ground exception is clearly vital.However, this is likely to require a further test case and so for the meantime practitioners will probably try to avoid a situation where the contractor clients, having given multiple warranties, are exposed to the risk of multiple recovery from the various beneficiaries.

This may be achieved by careful drafting.For example, in Panatown the duty of care deed was sufficient to displace the operation of the narrow ground and for some of the Lords was also sufficient to displace the broad ground.