Background to the dispute
Forthwell was the tenant and Pontegadea the landlord of the premises. Forthwell had granted Lynnet (a wholly owned subsidiary) a licence to occupy the premises, from which it operated, as described by the Court, 'one of the oldest and most celebrated restaurants' in Glasgow, the Rogano. In December 2020 and January 2021, the Rogano was damaged by flooding, water ingress, and - after the first flood - fire.
The lease obliged the landlord to rebuild any part of the premises destroyed or damaged by an insured risk, such as flooding. The dispute concerned the nature and scope of the repairs required, and who was liable for them.
Forthwell sought specific implement of Pontegadea's obligations to repair the premises, or failing that, damages to allow the repairs to be carried out. Forthwell also sought damages for Pontegadea's failure to maintain the common parts. It brought claims for consequential losses on behalf of Lynnet (namely trading losses), which Pontegadea challenged as irrelevant.
Legal issue
Lynnet did not have its own contractual route to claim against Pontegadea. Nor had Lynnet’s trading losses been passed on to Forthwell because the licence provided that Forthwell would not be responsible for such losses. The central issue that the Supreme Court therefore had to consider was whether Forthwell could recover the losses suffered by Lynnet under the principle of transferred loss.
The Supreme Court noted that Forthwell was not relying on The Albazero exception (otherwise known as the ‘narrow’ ground), which allows a contracting party to recover a third party's loss from breach of contract relating to property, where the parties to a contract contemplated that loss may be suffered by the third party and the third party did not have any direct remedy against the party in breach.
Equally, Forthwell did not rely on the ‘broader’ ground exception. This ground had been supported in some dissenting judgments in previous appeal cases. The essence of this ground is that where a person with no proprietary interest in a property contracts for work or services to be performed in relation to it, that person has a “performance” or “expectation” interest in the contract being performed. In the event of breach, that party suffers loss because they have not got what they contracted for, and because in order to put the property into the state it ought to be in, they would have to incur further expense. This exception did not apply here.
Instead, Forthwell relied on Lord Clyde's proposed solution in Panatown, which was affirmed by Lord Drummond Young in McLaren Murdoch & Hamilton.
In Panatown, Lord Clyde, as a solution to losses disappearing down a 'legal black hole', thought that a 'more realistic and practical solution' would be to allow a contracting party to recover damages for loss suffered by a third party and be accountable to the third party for those damages. However, Lord Clyde was in the minority in his thinking. In McLaren Murdoch & Hamilton, Lord Drummond Young treated Lord Clyde's opinion in Panatown as reflecting the law in Scotland.
Court of Session decisions
At first instance, Lord Braid disagreed with Pontegadea that Forthwell was not entitled to recover Lynnet's losses, noting that transferred loss in Scots law is different from the law in England and Wales. Lord Braid allowed the transferred loss claims by Forthwell to proceed to a proof before answer.
Pontegadea appealed Lord Braid's decision and the appeal was upheld by the Inner House. The Lord President held that Forthwell's claim failed because it did not suffer the loss it was claiming for, and the claim did not meet either the ‘narrow’ or ‘broader’ ground exceptions. The Court noted that transferred loss in Scots law should be examined further.
Supreme Court's decision
The Supreme Court dismissed the appeal and upheld the Inner House's decision, thereby finding in favour of Pontegadea.
The Supreme Court reaffirmed the principle that transferred loss is a limited exception to the general rule that a claimant can only recover loss which it has suffered.
The Supreme Court held that Lord Clyde's solution in Panatown did not represent the law of England and Wales, had not been endorsed in subsequent judgments, and Lord Drummond Young's reliance on it in McLaren Murdoch & Hamilton would create an exception to the general rule that was too wide and too indefinite.
The Supreme Court also confirmed that the ‘narrow’ ground or The Albazero exception is as much the law of Scotland as it is of England and Wales, with its roots traced to the 1839 case of Dunlop v Lambert. The Court held it was 'too long-established' to be questioned or amended.
As for the ‘broader’ ground, the Supreme Court did not consider that this was a suitable case in which to decide whether this formed part of the law of England and Wales or Scots law, particularly as the point did not need to be decided in this case.
The Supreme Court was not persuaded that the outcome was unjust, commenting: “Forthwell and Lynnet chose to organise their affairs in the way in which they did. They had no reason to believe that the ordinary legal consequences associated with their separate corporate personalities would not apply”.
Why does this decision matter?
- This decision is an important reminder to establish the appropriate contractual arrangements at the outset so as to make sure that the party or parties who are likely to suffer loss have a contractual route to recover it. This is particularly important where projects involving corporate group companies may have been set up in a particular way for various reasons such that the party entering into the contract might not be the party that suffers the loss (or all of the losses).
- The Supreme Court’s clarification that The Albazero exception is applicable in Scots law brings consistency between the law of Scotland and that of England and Wales.
- Whilst the decision illustrates that there is a high bar to being able to recover losses suffered by a third party, given that the Supreme Court left the question of the ‘broader’ ground of transferred loss open to review in a future appropriate case there is the potential for this area of law to develop in years to come.
