Transferred Loss in Scots Contract Law Requires a Defined Exception, Not General Fairness
Case: Forthwell Ltd v Pontegadea UK Ltd
Citation: [2026] UKSC 33
Court: United Kingdom Supreme Court
Date: 17 September 2026
Judgment: Lord Doherty, with whom Lord Reed, Lord Stephens, Lady Simler and Lord Hodge agreed
1. Introduction
This unanimous decision defines the limits of “transferred loss” under Scots contract law. The Supreme Court held that a contracting party cannot recover a third party’s loss merely because allowing recovery would prevent an apparent “legal black hole”. Recovery must fall within a recognised and properly confined exception to the ordinary rule that damages compensate the claimant’s own loss.
The appellant, Forthwell Limited, was the tenant of restaurant premises in Glasgow. Its wholly owned subsidiary, Lynnet Leisure (Rogano) Ltd, occupied the premises under a licence and operated the Rogano Restaurant and Bar. Following flooding, fire and continuing water ingress, the restaurant could not reopen. Forthwell alleged that the landlord, Pontegadea UK Limited, had breached repairing obligations under the lease.
Alongside claims concerning repairs and its own expenditure, Forthwell sought damages for profits lost by Lynnet. Lynnet was not a party to the lease and had no contractual claim against the landlord. The central issue was whether Forthwell could recover those losses on Lynnet’s behalf.
2. Procedural Background
The commercial judge allowed the transferred-loss claims to proceed to proof before answer. He considered that Scots law recognised a broad policy-based rule permitting a contracting party to recover loss suffered by another person, subject to accounting to that person.
A majority of the First Division of the Inner House rejected that approach and dismissed the claims. The Supreme Court upheld the First Division and dismissed Forthwell’s appeal.
Although the parties settled immediately before the hearing and sought to withdraw the appeal, the Supreme Court refused permission. The settlement did not depend upon withdrawal, the appeal raised an issue of general public importance, and another commercial action had been stayed pending the outcome. The Court therefore heard the appeal to provide authoritative guidance.
3. Summary of the Judgment
- The ordinary compensatory rule remains that a contracting party may recover only loss that it has itself suffered.
- Transferred loss is an anomalous and limited exception, not an alternative measure of contractual damages.
- Scots law does not recognise the general policy-based rule proposed by Lord Clyde in Alfred McAlpine Construction Ltd v Panatown Ltd and adopted obiter in McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd.
- The narrow exception derived from Albacruz v Albazero forms part of Scots law. It depends upon the parties’ contemplated contractual purpose and is unavailable where the third party has its own direct remedy.
- The Court left open whether the broader “performance interest” ground forms part of Scots law or the law of England and Wales.
- Forthwell had expressly accepted that its claim did not satisfy either the narrow or broader ground. Its proposed additional exception was too wide and indefinite.
- Separate corporate personality could not be disregarded merely because Forthwell and Lynnet belonged to the same corporate group.
4. The Nature of Forthwell’s Claim
The Court distinguished between three possible types of claim:
- Forthwell’s own loss: expenditure, professional costs, repair costs or loss flowing from infringement of its own contractual rights.
- A performance-interest claim: damages reflecting the contracting party’s interest in receiving the promised performance.
- A transferred-loss claim: recovery by the contracting party of financial loss actually suffered by a third party.
The lost-profit claims fell squarely within the third category. Forthwell pleaded that the profits had been lost by Lynnet and that it sued on Lynnet’s behalf. They were not pleaded as losses suffered by Forthwell itself.
This classification was decisive. Forthwell could not avoid the ordinary compensatory rule by describing its subsidiary’s losses as part of its own contractual interest.
5. Precedents Cited
5.1 Dunlop v Lambert (1839) 6 Cl & Fin 600
This Scottish appeal was identified as the historical origin of the narrow transferred-loss exception. Despite later criticism of the reasoning and of the understanding of the Scottish proceedings, the exception derived from it is too firmly established to be questioned. The Supreme Court confirmed that it forms part of Scots law.
5.2 Albacruz v Albazero (“The Albazero”) [1977] AC 774
The Albazero established the paradigm narrow exception. A contracting party may sometimes recover loss to property suffered by a third party where:
- the contract concerns property;
- the parties contemplated that the proprietary interest would be transferred, or that the relevant loss might be suffered by a third party; and
- the contractual arrangements do not provide the third party with its own direct remedy.
The Supreme Court emphasised that this exception rests on the common intention or contemplation of the contracting parties. It is not a free-standing rule imposed whenever the court considers compensation desirable.
St Martins extended consideration of transferred loss beyond carriage of goods and into construction contracts. It also introduced the broader performance-interest analysis associated with Lord Griffiths: a person who contracts for work to be done may suffer loss when the promised work is not performed, even if another person owns the affected property.
Forthwell did not rely on this broader ground. The Supreme Court considered that there was “much to be said” for it but declined to decide whether it forms part of Scots or English law.
5.4 Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 (“Panatown”)
In Panatown, an employer under a building contract sought damages for defects affecting property owned by another company in the same group. The property-owning company had received a direct contractual remedy through a duty of care deed. The House of Lords held that the transferred-loss claim failed.
Lord Clyde suggested that the contracting party should generally be permitted to recover losses suffered by itself and third parties, subject to an obligation to account to the actual losers. He regarded this as a practical means of avoiding a legal black hole.
The Supreme Court held that this suggestion was not endorsed by any other member of the Appellate Committee and was inconsistent with the reasoning of the majority. It therefore did not represent the law of England and Wales and supplied no sound foundation for a distinct Scots rule.
5.5 McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323
Lord Drummond Young adopted Lord Clyde’s proposed solution as a matter of Scots legal policy. He suggested that whenever breach causes measurable loss to another person, the contracting party may sue on that person’s behalf and account for the damages recovered.
The Supreme Court identified two errors in that reasoning:
- Lord Drummond Young incorrectly described Lord Clyde’s approach as representing the majority in Panatown.
- The policy-based approach was inconsistent with the intention-based analysis subsequently confirmed in Swynson Ltd v Lowick Rose LLP (formerly Hurst Morrison Thomson LLP).
The relevant discussion in McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd was also obiter because the claimant in that case had suffered its own loss before the property was transferred.
5.6 Marquess of Aberdeen and Temair v Messrs Turcan Connell [2008] CSOH 183; 2009 SCLR 336
This Outer House decision followed the approach associated with Lord Clyde and Lord Drummond Young. However, the correctness of that approach was not challenged. The dispute concerned whether other available remedies excluded transferred loss. It therefore did not provide strong authority for the proposed general rule.
5.7 Axon Well Intervention Products Holdings AS v Craig [2015] CSOH 4
This case similarly proceeded without a challenge to the correctness of the earlier policy-based approach. The Supreme Court treated it as providing no independent justification for a general Scots exception.
5.8 Swynson Ltd v Lowick Rose LLP (formerly Hurst Morrison Thomson LLP) [2017] UKSC 32; [2018] AC 313
Swynson was central to the decision. It reaffirmed that separate corporate personality must be respected and described transferred loss as a limited exception driven by legal necessity.
The exception requires the transaction’s known object to benefit the third party or a class including that party, and the anticipated breach to cause that third party’s loss. It is unavailable where the third party has a direct remedy for the same loss.
The Supreme Court relied particularly on Lord Neuberger’s warning that transferred loss is anomalous and should apply only in defined and limited circumstances.
5.9 BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596; [2020] QB 551
The Court of Appeal treated the broader ground as good law, although the Supreme Court observed that Swynson had not finally decided that question. Nevertheless, the case correctly recognised that both narrow and broader formulations require an intended third-party benefit at the time of contracting.
6. Legal Reasoning
6.1 The compensatory principle
Contract damages ordinarily compensate the claimant for loss caused by breach of a duty owed to that claimant. A company does not suffer a loss merely because its shareholder, subsidiary or associated company suffers one. Each company is a separate legal person.
Any departure from that principle must therefore be justified by a clearly defined exception. A general desire to ensure that every breach produces an award of damages is insufficient.
6.2 Contractual intention, not retrospective fairness
The narrow exception depends on what the parties contemplated when contracting. This protects the defendant from liabilities which were not within the contractual allocation of risk and for which it may not have insured.
Forthwell’s proposed rule would instead permit recovery whenever a claimant had a “material interest” in another person’s loss. The Court considered that test uncertain and unworkable. It did not adequately define the necessary relationship, the relevant degree of interest or the outer boundaries of liability.
6.3 The proposed rule was too wide
The rule could have applied even where the defendant did not know of the third party’s involvement. Here, Forthwell did not aver that the landlord knew of Lynnet’s licence. Moreover, the lease prohibited subletting and parting with or sharing possession, and the licence appeared prima facie to breach those provisions.
Imposing liability for Lynnet’s trading losses in those circumstances would expose the landlord to a risk not shown to have formed part of the contractual bargain.
6.4 The proposed rule was too indefinite
Lord Clyde did not establish clear limits, while Lord Drummond Young contemplated almost universal application. Neither approach adequately reconciled transferred loss with the basic rule that damages belong to the person who suffered the loss.
Rules on remoteness, mitigation and reasonableness could control the amount recoverable, but they could not answer the prior question of why the claimant had standing to recover another person’s loss.
6.5 Other mechanisms reduce the need for a new exception
The Court noted that third parties may sometimes obtain direct rights under the Contracts (Third Party Rights) (Scotland) Act 2017. Other cases may fall within The Albazero exception or, potentially, the unresolved broader ground. Legal black holes are therefore relatively uncommon and did not justify creating an extensive new exception.
6.6 No injustice in respecting the corporate structure
Forthwell and Lynnet had chosen to conduct their affairs through separate companies and through a licence containing extensive exclusions of Forthwell’s liability to Lynnet. They could not assume that the ordinary consequences of separate corporate personality would be disregarded when loss occurred.
7. Complex Concepts Simplified
- Transferred loss
- A claim in which one person sues for financial loss actually suffered by someone else.
- Legal black hole
- A situation where one person has the contractual right to sue but appears to have suffered no loss, while another has suffered the loss but has no contractual right to sue.
- The narrow ground
- The established Albazero exception, based on the parties’ contemplation that contractual performance would benefit, or loss might be suffered by, a third party.
- The broader ground
- The proposition that a contracting party may recover substantial damages because it has not received the promised performance, even though the defective performance affects another person’s property. Its status remains unresolved.
- Performance or expectation interest
- The contracting party’s interest in receiving exactly what was promised, rather than merely avoiding direct financial loss.
- Privity of contract
- The general rule that contractual rights and obligations belong only to the parties to the contract.
- Res inter alios acta
- A matter occurring between other persons which ordinarily does not affect the legal rights of the parties to the dispute.
- Proof before answer
- A Scottish procedure in which evidence is heard before final determination of legal and factual issues.
- Obiter dictum
- A judicial observation not necessary to decide the case and therefore not binding as part of the decision’s ratio.
8. Impact of the Decision
8.1 Corporate groups
Companies within the same group cannot treat losses as interchangeable. A parent, subsidiary or sister company must generally establish its own loss or its own right of action. Commercial unity does not override separate legal personality.
8.2 Contract drafting and risk allocation
Where performance is intended to benefit another company or person, parties should address that position expressly through third-party rights, collateral warranties, assignation, direct contracts, indemnities or suitable insurance arrangements.
8.3 Scots and English law
The decision rejects the suggestion that Scots law contains a uniquely broad, policy-based transferred-loss rule. It does not, however, declare that Scots and English law must be identical in every respect. In particular, the status of the broader performance-interest ground remains open in both systems.
8.4 Future litigation
Future claimants relying on transferred loss will need to plead precisely:
- which recognised exception applies;
- what the contracting parties contemplated at the relevant time;
- why the third party lacks a direct remedy;
- whose loss is being claimed; and
- why the claim is consistent with the contract’s allocation of risk.
A merely close family, commercial or corporate relationship will not supply the missing legal basis.
9. Conclusion
Forthwell Ltd v Pontegadea UK Ltd establishes that Scots law does not permit a contracting party to recover another person’s loss simply to avoid an uncompensated breach. Transferred loss remains a narrow and exceptional doctrine grounded in defined legal principles, principally the parties’ contemplated contractual purpose.
The Supreme Court confirmed that The Albazero exception forms part of Scots law, rejected the wider policy-based approach derived from Lord Clyde’s opinion in Panatown, and left the broader performance-interest ground for a case in which it is directly raised and fully argued. The judgment reinforces contractual intention, certainty of risk allocation and separate corporate personality as the controlling considerations.