UK Supreme Court clarifies limits of transferred loss claims

In Forthwell Limited v Pontegadea UK Limited, the court unanimously dismissed an appeal brought by the tenant of Glasgow’s well-known Rogano restaurant, ruling that it could not recover losses allegedly suffered by its wholly owned subsidiary.

The judgment resolves uncertainty surrounding the doctrine of transferred loss and confirms that Scottish and English law are aligned on several important principles in this area.

Brian Grierson, commercial litigation expert at Pinsent Masons, said: “This decision provides some much needed clarity. The judgment is an appeal from the Court of Session, and so the UK Supreme Court was sitting as a Scottish Court, but it this decision is likely to be persuasive authority across the other UK jurisdictions.”

The dispute arose from damage caused to the Rogano premises by flooding, fire and ongoing water ingress in late 2020 and early 2021. The tenant, Forthwell Limited, brought proceedings against its landlord, Pontegadea, alleging breaches of repairing obligations. However, the losses were not losses suffered by Forthwell itself, but trading losses allegedly sustained by its wholly owned subsidiary, Lynnet Leisure (Rogano) Ltd, which operated the restaurant under a licence to occupy the premises.

The Supreme Court was asked to consider the circumstances in which a party to a contract can recover damages due to losses sustained by a third party. In doing so, it examined the recognised exceptions to the general principle that a contracting party may recover only its own losses.

The court reaffirmed the existence of the so-called “narrow ground”, also known as the Albazero exception, under which a contracting party may recover losses suffered by a third party in certain property-related contracts where the parties contemplated that the third party might suffer loss, provided the contractual arrangements do not give that third party a direct remedy.

It also discussed the separate “broader ground” identified in earlier authorities, where a contracting party may suffer its own loss because it has not received the contractual performance for which it bargained, even if it lacks a proprietary interest in the relevant property. However, the court stopped short of providing definitive guidance on the scope of that principle.

Grierson said: “The judgment closes off, in Scotland, a developing but flawed route to transferred loss recovery based on an incorrect interpretation of the Panatown case.”

"The Supreme Court has made clear that it is wrong to treat the law as deeming an innocent contracting party to be claiming on behalf of itself and others who have suffered loss simply to avoid a legal 'black hole'”, he said.

The court rejected the proposition that Scots law should recognise a broad, policy-based right enabling contracting parties to recover losses suffered by third parties whenever those losses might otherwise fall into such a ‘black hole’.

Grierson said: “The decision provides clarity that the position in Scotland and England is aligned on the non-applicability of the Panatown solution and on the existence of the narrow Albazero exception. Further consideration of the broader ground has been left open in both jurisdictions. Watch this space for the next case to develop the law on that point.”

He added: “A practical takeaway is the importance of ensuring that corporate group structures are paired with appropriate contractual protections. Parties should consider whether third party rights legislation can be used to provide direct remedies and whether contracts can be drafted in a way that maximises the prospect of the narrow ground exception applying by making clear at the outset that a third party may suffer loss.”

Grierson said: “Businesses should pay particular attention where a parent company enters into contracts, including leases, construction contracts and service agreements, but a subsidiary occupies premises, owns assets or bears the commercial risk. The law will not readily allow the parent to recover the subsidiary’s losses if things go wrong.”

“It should be considered at the outset whether the operating entity requires its own direct contractual remedy and, if so, provision should be made expressly”, he said.