Anonymized Case Summary
Factual and Procedural Background
The Appellant was the tenant and the Respondent was the landlord of restaurant premises at [Number] Main Street in The City. The Appellant licensed its wholly owned subsidiary to occupy and operate The Restaurant, although the Appellant did not aver that the Respondent knew of the licence. [1][2]
The licence excluded any obligation by the Appellant to repair the premises or compensate the Subsidiary for loss arising from deficiencies in them. [3]
Flooding, water ingress and a fire damaged the premises, leaving them without safe electrical installations or heating. The lease required the Respondent to rebuild parts damaged by an insured risk, while the Appellant also alleged an implied obligation to repair common parts. Repairs remained outstanding and The Restaurant could not reopen. [4][5]
The Appellant sought enforcement of the repairing obligations or damages for the cost of repairs, together with professional costs and other losses. It additionally claimed the Subsidiary's past and anticipated lost profits, expressly suing on the Subsidiary's behalf. [6][7][8][9][10]
The commercial judge allowed the transferred-loss claims to proceed to proof before answer. On appeal, a majority of the First Division dismissed those claims because the Appellant had not sustained the losses and the claims did not satisfy any recognised transferred-loss exception. [11][12][13][14][15]
Although the parties settled immediately before the Supreme Court hearing, the Court refused permission to withdraw the appeal because the settlement was unconditional, the appeal raised a point of general public importance, and another similar action awaited authoritative guidance. [16][17]
Legal Issues Presented
- Whether Scots law permits a contracting party to recover loss sustained by a third party whenever that loss results from breach, even though the third party's involvement or benefit was not contemplated when the contract was made. [18][19]
- Whether the policy-based solution proposed in Panatown and adopted in McLaren Murdoch & Hamilton forms part of Scots law. [19][20]
- Whether the established narrow transferred-loss exception forms part of Scots law, and whether the broader performance-interest ground should also be recognised. [21][22][23]
Arguments of the Parties
Appellant's Arguments
- The Court should recognise a Scots law rule allowing a contracting party to recover a third party's loss as a matter of legal policy, rather than by implication from the parties' intentions. [19]
- The proposed rule was said to prevent uncompensated “legal black holes” and to accord with fundamental Scots contract-law principles. [19]
- The rule would be confined to cases in which the contracting party had a “material interest” in the third party's loss, supplemented by ordinary principles of remoteness and reasonableness. [19]
- The Appellant asserted that its corporate relationship with the Subsidiary supplied the necessary material interest and that the Respondent must have contemplated that the restaurant operator would lose profits following breach of the repairing obligations. [19]
Respondent's Arguments
- The Respondent maintained that the Appellant could not recover the Subsidiary's lost profits because those were not losses sustained by the Appellant, making that part of the action legally irrelevant. [7][10]
- The Respondent did not admit breach of the lease; liability for the separate repair-related remedies remained for determination at proof before answer. [7]
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Albacruz v Albazero (“The Albazero”) [1977] AC 774 |
The narrow exception permits recovery of contemplated third-party property loss where the third party lacks a direct remedy. [24] |
The Court held that this intention-based exception is established in both Scots law and the law of England and Wales, but the Appellant accepted that its claim did not satisfy it. [24][22] |
| Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corpn Ltd v Sir Robert McAlpine Ltd [1994] 1 AC 85 |
The case extended discussion of transferred loss beyond carriage-of-goods cases and introduced the proposed broader performance-interest ground. [24][25][26] |
The Appellant did not rely on either the narrow exception as developed in this case or the broader ground. [24][25] |
| Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 |
A third party's direct contractual remedy prevents a transferred-loss claim; one judgment separately proposed a broad policy-based solution. [27][28][29][30] |
The Court held that the policy-based solution was not endorsed by the other judges, was inconsistent with the majority reasoning, and does not represent the law of England and Wales. [31][32] |
| McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323 |
An obiter discussion proposed that Scots law should permit recovery of another person's loss as a general rule of legal policy, subject to accounting and the absence of a direct third-party remedy. [33][34][35][36] |
The Court rejected that approach because it mistakenly treated one judgment in Panatown as representing the majority and incorrectly treated transferred loss as a rule of law rather than an intention-based implication. [37][38][20] |
| Marquess of Aberdeen and Temair v Messrs Turcan Connell [2008] CSOH 183; 2009 SCLR 336 |
The decision followed the proposed Scottish policy-based approach to transferred loss. [39][12] |
The Court observed that the correctness of that approach had not been challenged; the dispute concerned whether other remedies excluded the claim. [40][41] |
| Swynson Ltd v Lowick Rose LLP (formerly Hurst Morrison Thomson LLP) [2017] UKSC 32; [2018] AC 313 |
Transferred loss is a limited, necessity-driven exception requiring an intended third-party benefit and a potential legal black hole. [42][43][44] |
The Court relied on this authority to reject an unrestricted policy-based rule and to stress that transferred loss should operate only in defined and limited circumstances. [32][38][20][45] |
| BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596; [2020] QB 551 |
For either recognised transferred-loss ground, the contracting parties must have intended a third-party benefit when contracting. [46] |
The Court held that this authority did not support the policy-based solution advanced by the Appellant. [32] |
| Axon Well Intervention Products Holdings AS v Craig [2015] CSOH 4 |
The decision followed the proposed Scottish policy-based approach to transferred loss. [12] |
The Court noted that the correctness of the underlying approach was not challenged; the issue was whether another remedy excluded recovery. [40][41] |
| Dunlop v Lambert (1839) 6 Cl & Fin 600 |
The Scottish decision was identified as the origin of the narrow transferred-loss exception. [22] |
The Court relied on its longstanding authority to confirm that the narrow exception forms part of Scots law. [22] |
Court's Reasoning and Analysis
The Appellant sought the Subsidiary's consequential losses, not compensation for any performance interest or loss suffered by the Appellant itself. Its claim therefore depended entirely on the proposed policy-based exception. [10][19]
The Court found that the proposal rested on a misreading of Panatown: the relevant solution was advanced by only one judge, was not adopted by the others, and was inconsistent with the majority's reasoning. [31][37]
Later authority established that transferred loss is an exceptional doctrine based on the contemplated purpose of the transaction and legal necessity, rather than a universal rule preventing every third-party loss from going uncompensated. [42][43][44][38]
The proposed exception was excessively wide because it could impose liability for third-party involvement not contemplated at contracting, potentially disrupting the contract-breaker's insurance and commercial arrangements. [47]
It was also too indefinite because neither family or corporate connections nor the Appellant's proposed “material interest” test supplied clear and workable boundaries. [48]
Existing third-party-rights legislation and the narrow transferred-loss exception already address some legal black holes, while the possible availability of the broader ground remains open. The Court therefore found no cogent justification for creating the Appellant's new exception. [49][50]
The result was not unjust: the Appellant and Subsidiary chose their separate corporate structure, and the licence appeared prima facie to contravene the lease's restrictions on sharing possession. [51]
Holding and Implications
APPEAL DISMISSED. The First Division correctly dismissed the Appellant's claims for the Subsidiary's lost profits. [52]
The policy-based transferred-loss solution advanced by the Appellant does not form part of Scots law. The narrow exception is confirmed as part of Scots law, but the Court left unresolved whether the broader performance-interest ground forms part of either Scots law or the law of England and Wales. [20][22][23]
The Appellant's separate claims concerning repairs, repair costs, common parts and professional expenses remain subject to proof before answer. [6][7]