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FORTHWELL LTD AGAINST PONTAGADEA UK LTD
Factual and Procedural Background
The case involves a commercial dispute between the Pursuer, tenant of premises at 11 Exchange Place, Glasgow, and the Defender, the landlord of those premises under a lease dated March 1996. The Pursuer's wholly owned subsidiary, Company A, has operated a restaurant and bar from the premises since August 2013. The dispute arises from three separate flooding incidents between December 2020 and January 2021 causing substantial damage to the premises. Under the lease, the Defender is obliged to carry out remedial work. The Pursuer contends that the flooding damage constitutes an "insured risk" under the lease, and due to the Defender’s alleged failure to maintain the common parts, Company A was unable to trade, suffering loss of profits.
The Pursuer seeks several remedies: (i) an order requiring the Defender to carry out reinstatement works; (ii) alternatively, damages of approximately £789,000; (iii) damages of £178,696.94 for losses already sustained by Company A; and (iv) damages of £934,056.13 for Company A's estimated future losses. The Defender accepts the Pursuer’s right to seek specific implement but disputes the entitlement to damages on the basis that insurance coverage excludes financial claims between the parties, and also disputes the Pursuer’s right to recover damages on behalf of Company A. The court heard a debate on these issues and allowed a proof before answer on the disputed matters.
Legal Issues Presented
- Whether the Pursuer can claim damages in the alternative to specific implement given the insurance provisions in the lease and the insurance coverage (the insurance issue).
- Whether the Pursuer is entitled to recover damages on behalf of its wholly owned subsidiary, Company A, for losses sustained by that subsidiary due to the Defender's breach (the transferred loss issue).
Arguments of the Parties
Defender's Arguments
- The insurance arranged by the Defender for the benefit of both parties precludes claims for damages between them for insured risks, based on established Scots law principles and case authorities.
- The insurance policy and lease provisions together create a joint insurance scheme or at least insurance benefiting both parties, which excludes financial claims for insured losses.
- The Pursuer cannot recover damages on behalf of Company A as Scots law requires the contracting party to recover only its own losses unless the third party's loss was contemplated at contracting, aligning Scots law with English law on this point.
- The Pursuer’s pleadings are defective because the contractual relationship between the Pursuer and Company A disclaims liability, and because the lease prohibits assignation or sub-letting, undermining the claim for Company A’s losses.
Pursuer's Arguments
- The Pursuer accepts it can enforce the obligation to reinstate by specific implement but argues it should also be entitled to damages as an alternative remedy if reinstatement is not carried out.
- The insurance is not joint insurance; the Defender insures in its own name and the Pursuer merely pays the premium and has an endorsement to protect against subrogation claims, which does not exclude damages claims.
- The endorsement protects the Pursuer from subrogation but does not preclude the Pursuer from suing for damages for breach of the reinstatement obligation.
- Regarding transferred loss, Scots law differs from English law and permits the contracting party to recover damages for losses sustained by a third party in certain circumstances, justified as a matter of policy rather than requiring the parties’ contemplation at contracting.
- The Pursuer is entitled to recover damages on behalf of Company A and account to it, despite the lease restrictions and contractual disclaimers between the Pursuer and Company A.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| The Ocean Victory [2017] 1 WLR 1793 | Contractual interpretation of insurance benefiting both parties precludes claims between them for insured losses. | Affirmed the principle that where insurance inures to both parties, claims for insured loss between them are excluded; court applied this as a matter of lease construction. |
| Mark Rowlands Ltd v Berni Inns Ltd [1986] QB 211 | Insurance arranged by landlord inures to tenant’s benefit, precluding claims for insured losses. | Used as authority to support that insurance endorsement protects tenant from being sued but does not confer broader benefits. |
| Barras v Hamilton 1994 SC 544 | Lease construction precludes landlord’s claim for losses covered by insurance paid by tenant. | Applied as leading Scottish authority on insurance and contractual interpretation in landlord-tenant context. |
| McLaren, Murdoch and Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323 | Transferred loss doctrine in Scots law; contracting party may recover damages for loss sustained by third party as a matter of policy, not contractual intention. | Relied on to reject English law approach and uphold Scots law position on transferred loss. |
| The Albazero [1977] AC 774 | English law exception allowing contracting party to recover loss suffered by third party in carriage contracts. | Discussed as background to transferred loss issue and contrasted with Scots law approach. |
| Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 | Juridical basis of transferred loss exception; whether it arises by law or intention of parties. | Considered in analysis of English law and contrasted with Scots law principles. |
| Swynson Ltd v Lowick Rose LLP [2018] AC 313 | English law requiring contemplation of third party benefit at contracting for transferred loss claims. | Discussed and distinguished; court declined to adopt English approach for Scots law. |
| BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2020] QB 551 | English law on transferred loss requiring common intention to benefit third party. | Referenced in transferred loss discussion and rejected as applicable Scots law. |
| Marquess of Aberdeen and Temair v Messrs Turcan Connell 2009 SCLR 336 | Support for Scots law approach to transferred loss as matter of policy. | Endorsed Lord Drummond Young’s reasoning on transferred loss. |
| Clark Contracts Ltd v The Burrell Co (Construction Management) Ltd (No 2) 2003 SLT (Sh Ct) 73 | Transferred loss irrelevant where third party has direct right of action. | Noted as consistent with Scots law principles on transferred loss. |
| Axon Well Intervention Products Holdings AS v Craig [2015] CSOH 4 | Supported the approach to transferred loss in Scots law as expressed by Lord Drummond Young. | Applied in support of Scots law position on transferred loss. |
Court's Reasoning and Analysis
The court first addressed the insurance issue by applying established principles of contractual interpretation. It held that the critical question is the intention of the parties as expressed in the lease and insurance policy. Clause 13.1 of the lease requires the Defender to insure the property in its own name but with an endorsement protecting the Pursuer from insurer subrogation claims. The court found that this endorsement only confers on the Pursuer a protection from being sued for insured risks, not a broader benefit that would preclude the Pursuer from seeking damages for breach of the reinstatement obligation under clause 13.2.
The court distinguished the present case from authorities where joint insurance or co-insurance precluded claims between parties for insured losses. Here, the insurance policy was in the Defender's name only, and the Pursuer paid the premiums. Even if the insurance were joint or for mutual benefit, the claim for damages relates to a post-loss obligation to reinstate, which is separate from the insured loss itself. Thus, the Pursuer is entitled to pursue damages in the alternative to specific implement.
Regarding the transferred loss issue, the court reviewed the divergent approaches of English and Scots law. English law requires that the contracting parties must have contemplated at the time of contracting that a third party would benefit from the contract and suffer loss recoverable by the contracting party. Scots law, as explained by Lord Drummond Young and supported by Lady Smith and others, adopts a policy-based approach. It allows the contracting party to recover damages for loss sustained by a third party to avoid injustice where the third party cannot sue directly. The contracting party must then account to the third party for any damages recovered.
The court rejected the Defender's submission that Scots law should align with English law, finding the policy approach more principled and consistent with existing Scottish authority. It also dismissed subsidiary arguments against the Pursuer’s entitlement to recover on behalf of Company A. The court concluded that the Pursuer’s pleadings on transferred loss were relevant and suitable for proof.
Holding and Implications
The court repelled the Defender's pleas-in-law challenging the Pursuer's entitlement to damages both on the insurance and transferred loss issues, and granted the Pursuer a proof before answer on these matters. The Defender was found liable for the expenses of the debate. Further procedural directions were to be arranged by order.
The decision confirms that under Scots law, where a lease provides insurance arranged by the landlord in its own name with an endorsement protecting the tenant, this does not preclude the tenant from seeking damages for breach of a reinstatement obligation. It also affirms the Scots law approach to transferred loss, allowing a contracting party to recover damages for loss sustained by a third party as a matter of policy without requiring proof of the parties’ contemplation at contracting. No new legal principle was established beyond the application of existing authorities and legal policy considerations. The ruling directly affects the parties by permitting the Pursuer to pursue damages claims in proof and clarifies the scope of remedies available under the lease.
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