Reclaiming Motion in the cause Forthwell LTD against Pontagadea (Court of Session) [2024] CSIH 38 (31 October 2024)

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2024] CSIH 38

CA31/23

Lord President

Lord Malcolm

Lord Pentland

OPINION OF LORD CARLOWAY, THE LORD PRESIDENT

in the reclaiming motion

in the cause

FORTHWELL LIMITED

Pursuers and Respondents

against

PONTEGADEA UK LTD

Defenders and Reclaimers

____________

Pursuers and Respondents: Borland KC, D Ford (sol adv); Brodies LLP

Defenders and Reclaimers: Dean of Faculty (Dunlop KC), G Reid; Burness Paull LLP

31 October 2024

Introduction

[1]

This reclaiming motion (appeal) raises two questions. The first is: where the parties to a

contract have put in place insurance for their mutual benefit, can one party sue the other for

losses which are covered by that insurance? The second is: in what circumstances can a party to

a contract recover damages for a breach of that contract in respect of losses that were sustained,

not by the contracting party, but by one of its subsidiaries?

Background

[2]

The Rogano is one of the oldest and most celebrated restaurants in Glasgow. It traded

continuously in Exchange Place from 1935 until it closed in 2020 at the height of the Covid 19

restrictions. On 9 and 14 December 2020 and 10 January 2021, it was damaged by flooding. An

electrical fire broke out after the first flood. This rendered the electrics unsafe. The premises

were left without heating. There was ongoing water ingress. Repairs have not been carried out.

It has not been possible to reopen the restaurant in its present state.

[3]

The current lease of the Rogano was originally entered into by The Exchange Proprietors

Ltd and Ind Coope (Oxford & West) Ltd in 1996. On 20 August 2013, the tenant's interest was

assigned to the pursuers by Lynnet Leisure (Properties) Ltd. The defenders are the landlords.

[4]

The defenders, as landlords, are required (clause 13.1) to maintain insurance for the

premises in their name:

"(but ... with the endorsement thereon of the respective interest of the Tenant and any

permitted sub-tenant in such terms as to preclude the exercise by the insurance

company of its subrogation rights against the Tenant and any such permitted sub-

tenant)".

The lease requires the defenders to rebuild any part of the premises which has been destroyed

or damaged by any "insured risk" (clause 13.2). This includes flooding (clause 1.1). The parties

are agreed that the obligation to rebuild includes the lesser obligation to repair where the

premises have been damaged rather than destroyed. The defenders hold an insurance policy

for the premises. The risks insured by that policy include flooding.

[5]

The pursuers contend that, since the damage was caused by an insured risk, the

defenders are required to repair the property. They have asked the defenders to carry out the

repairs. The defenders have not done so. The pursuers first conclude for specific implement,

ordaining the defenders to carry out the repairs. They have a second conclusion wherein, if no

decree for implement is granted, they seek damages. These are calculated by reference to the

estimated cost of repairs. They do not claim damages in the event that the defenders fail to

obtemper any decree for implement.

[6]

The pursuers claim additional damages arising from the defenders' failure to maintain

the restaurant in good repair, and for past and future loss of profit as a result of the restaurant's

closure. However, since the date of entry, in August 2013, the Rogano has been operated by a

third party, albeit a subsidiary of the pursuers, namely Lynnet Leisure (Rogano) Ltd, under a

"Licence to Occupy" from the pursuers. This provides:

"4.2.13 [The Licensee] acknowledges that the Licensor shall at no time become liable to

the Licensee for (i) any loss, injury or damage which the Licensee may sustain from a

deficiency in any part of the Licence Subjects except in the event of act, omission, default

or negligence on the part of the Licensor or those for whom the Licensor is responsible

in law or (ii) ... or for damage to any property or for any losses ...

...

Licensor not liable for repairs

The Licensee acknowledges and accepts that the Licensee cannot oblige the Licensor to

carry out any repairs or other works to the Licence Subjects, and that the Licensor shall

at no time become liable to the Licensee for any loss, injury or damage which the

Licensee may sustain from any deficiency in any part of the Licence Subjects".

[7]

The pursuers do not plead that they have suffered any loss beyond the cost of

rebuilding. They aver that their subsidiary has suffered loss and will continue to do so

(COND 6.6). The pursuers state that they are "bound to account" to their subsidiary for any

damages which are recovered in respect of that loss. However, the conclusion does not seek

payment to the subsidiary and the subsidiary has not been called as a party to the action, even

for any interest which they might have.

[8]

The defenders maintain that they have not breached any of their obligations under the

lease. They do not dispute that, in principle, the pursuers can seek specific implement.

However, they seek dismissal of the claim for additional damages. They contend that, where a

landlord and tenant have agreed to effect insurance for their mutual benefit, that insurance is

the only means of recourse which the parties have in respect of insured losses. In any event,

they were not obliged to pay compensation to the pursuers for losses suffered by a third party

(the pursuers' subsidiary).

[9]

The commercial judge rejected these arguments. He repelled the defenders' pleas to the

relevancy of the damages claim generally and to the effect that the pursuers were not entitled to

recover their subsidiary's losses. He allowed a proof before answer.

The commercial judge's decision

Mutual Insurance issue

[10]

Whether a party to a contract could sue another party for losses, in respect of which

there was insurance that inured to the benefit of them both, was a matter of contractual

interpretation (The Ocean Victory [2017] 1 WLR 1793, at paras 114, 139 and 99). It involved the

proper construction of the lease (Mark Rowlands v Berni Inns [1986] QB 211 and Barras v Hamilton

1994 SC 544). The issue did not turn on any speciality of insurance law, or on any circuity of

action based on rights of subrogation, but on what the parties had intended. Where parties

were jointly insured, they would almost invariably be found to have intended to exclude a

claim by either of them against the other. That did not preclude other terms of the contract

from being enforced.

[11]

Clause 13.1 expressly provided that the defenders were to endorse the pursuers' interest

on the policy so as to preclude the exercise of subrogation rights against the pursuers and any

permitted sub-tenant. That made it plain that the parties had intended that the pursuers were

not to be sued in respect of an insured loss. The clause could not be construed as conferring any

greater benefit than that on the pursuers, far less could it be construed as conferring any

entitlement on the defenders not to be sued by the pursuers.

[12]

The parties did not intend that the insurance should be a joint policy. Only the

defenders were named as the insured. Even if the policy had been joint, or inured for the

benefit of both parties, the defenders' argument would still have failed. It would be illogical for

the pursuers to be entitled to sue for specific implement, but not for the alternative remedy of

damages for loss caused by a breach of the same obligation. The circumstances in which the

pursuers might seek to invite the court to award damages, instead of granting specific

implement, were not entirely clear; nor was how the pursuers' losses would be quantified, if the

defenders did not carry out the work, given that the pursuers did not own the premises.

Transferred Loss

[13]

The general rule was that when A contracted with B, but C suffered loss as a result of B's

failure to perform its obligations: (i) C would be unable to sue B, because C was not a party to

the contract; and (ii) A would be unable to sue B since the loss had been suffered by another.

The application of this rule could lead to an unjust outcome. The loss could fall into a legal

black hole, which, in a well-regulated legal universe, should not exist (McLaren, Murdoch and

Hamilton v The Abercromby Motor Group 2003 SCLR 323, at para [33]). A number of legal

subterfuges had been employed to justify a departure from the rule to allow A to recover C's

losses.

[14]

In English law, there was a narrow exception. It had originally applied to contracts of

carriage by sea (The Albazero [1977] AC 774, at 845). Later it had extended to building contracts

whereby a party could sue for transferred loss where that loss was within the contemplation of

the contracting parties at the time of the contract (Alfred McAlpine Construction v Panatown

[2001] 1 AC 518, at 568, 575; cf. 530). The objective of the transaction must have been to benefit a

third party. It must have been anticipated that the effect of a breach would cause loss to that

third party (Swynson v Lowick Rose [2018] AC 313; Nederlandse Industrie van Eiprodukten v

Rembrandt Enterprises [2020] QB 551, at paras 72 73). There were both narrow and broad

grounds for applying the exception. The narrow ground applied where the property, which

was the subject of the contract, had been transferred to C. The broad ground was that, although

A had not suffered pecuniary damage, he had contracted with B for a benefit to be conferred on

[15]

The general thrust of the Scottish cases was that a party could sue for loss sustained by a

third party where the loss would otherwise fall into the legal black hole. This was justified as a

matter of policy, rather than by resort to what the parties must have intended (McLaren,

Murdoch and Hamilton, at para [42], following Panatown; Marquess of Aberdeen and Temair v

Turcan Connell 2009 SCLR 336, at para [45]; Axon Well Intervention Products Holdings v Craig

[2015] CSOH 4, at para [29]). The broad ground for applying the exception had no place in

Scots law. The exception was most likely to arise where property, which was the subject of the

contract, had been transferred to a third party, or where the contracting party intended to

benefit a third party such as a family member or a company in the same corporate group.

Where the third party had a remedy and a direct right of action, there was no need for the

exception.

[16]

The pursuers had pled a relevant case. If they recovered damages for the losses claimed,

they would have to account for those to their subsidiary. It did not matter that a contract

between the pursuers and the subsidiary expressly provided that the pursuers had no liability

to the subsidiary for any loss which they might sustain. The obligation to account would arise

from the recovery of damages itself, not from any pre-existing obligation to account.

Submissions

Defenders

Mutual Insurance

[17]

Where parties to a venture had agreed that insurance would inure to the benefit of both

of them, they could not claim against each other in respect of an insured loss (The Ocean Victory

at paras 114, 139, and 99; Barras v Hamilton 1994 SC 544 at 551 553). That principle was not

restricted to joint insurance. It was a question of construction of the contract. The parties had

agreed that the insurance would inure for the benefit of both of them. In holding that they had

not, the commercial judge had erred. He had not considered the entire scheme of the lease.

Under that scheme, the defenders were obliged to take out insurance covering the pursuers'

interest, and to endorse that interest (clause 13). The pursuers were obliged to pay for the

insurance (clause 4.2). A stipulation to insure property, with no requirement to endorse the

tenant's interest, was still an agreement to take out insurance for the parties' mutual benefit

(Berni Inns). An oral agreement to insure property could be an agreement to take out insurance

to inure for the benefit of both parties (Barras v Hamilton). The present case was a fortiori of

those situations.

[18]

The judge erred in concluding that, by agreeing to exclude subrogation rights in respect

of the pursuers, the parties were agreeing that the defenders could not sue the pursuers under

the lease, but the pursuers could sue the defenders. That would be a very odd reading of a

bilateral contract. It did not accord with The Ocean Victory. The agreed scheme was one in

which parties were to look to the insurance fund rather than to each other (The Ocean Victory, at

para 143). There was no other purpose for endorsing the pursuer's interest. The parties had

only excluded subrogation against the tenant, and not the landlord, because there was no need

to exclude subrogation against the defenders, as the insured party. Since the insurers stood in

the shoes of the insured, if they sued the landlords they would be suing themselves. That

would be a nonsense (Palliser v Fate [2019] Lloyds LR 341, at para 22). This was consistent with

similar arrangements between a landlord and tenant which precluded claims between them

(Berni Inns, at 225 and 232 233).

Transferred Loss

[19]

The action proceeded only on the basis of contract. The general rule was that, in a

breach of contract case, a person could only recover losses which he himself has sustained (The

Albazero at 846). The defenders relied on the principle of privity in contract, whereas the

pursuers founded upon the solution to the black hole problem. The origin of the transferred

loss exception was a Scottish decision (Dunlop v Lambert (1839) Macl & Rob 663 as explained in

The Albazero at 846 et seq). Losses suffered by a third party could only be recovered on one of

two grounds.

[20]

First, they could be recovered on the narrow ground (the Albazero exception), where the

loss was in respect of property, and the parties intended to transfer title to that property to a

third party (Swynson, at para 14). Examples included Panatown and McLaren Murdoch &

Hamilton. This ground did not apply to the present case. There was no mutual or known

intention to transfer any property to the subsidiary. Secondly, there was a broader ground,

which was only available where a pursuer showed that, at the time of contracting, there was a

common intention or known objective in the lease to benefit the third party (Swynson, at

paras 14 and 17; Nederlandse Industrie, at paras 72 73).

[21]

The commercial judge erred in holding that Scots law differed to the law in England in

that the broader ground had no application in Scots law. He had relied upon McLaren Murdoch

& Hamilton, which in turn had relied upon Lord Clyde in Panatown. Lord Clyde could not, in an

English appeal, set Scots law on a different course. In Panatown, neither Lord Clyde, nor Lord

Jauncey, said that Scots law differed from that in England. Scottish authority subsequent to

McLaren Murdoch & Hamilton had followed English law. It had referred to the need to show an

imputed intention of the contracting parties (Axon Well Intervention Products Holdings, at

para [42]). The pursuers did not suggest that their claim fell within the broader ground. Even if

it did, the pursuers' claim failed because of the broader ground requirement to show intention

to confer a benefit on a third party.

[22]

On the commercial judge's approach, the exception would become the rule. Such a rule

would drive a coach and four through freedom of contract. A party could recover losses

sustained by anyone, subject only to questions of remoteness. The authorities emphasised that

the exception was limited and closely defined. Parties were at liberty to choose with whom

they contracted. The need for collateral warranties in construction contracts had arisen as a

result of the restriction on the rights of third parties to make delictual claims for economic loss

(Murphy v Brentwood District Council [1991] 1 AC 398). If the judge were correct, the

development of the law in Donoghue v Stevenson [1932] AC 562 , 1932 SC (HL) 31 had been entirely unnecessary.

Winterbottom v Wright 152 ER 402 demonstrated why the law of contract did not have the

result suggested by the judge.

[23]

There was a difference between losses which fell into a legal black hole, and losses

which were irrecoverable under a contract. There was nothing unjust in this. Parties who enter

into contracts could be expected to look out for their own interests. A party who entered into

an unauthorised licence of premises did so at his own risk. There could be no legitimate

complaint when the party suffered loss as a result of a breach of contract by someone with

whom he had not chosen to contract. Any other result was unwarranted by authority,

unprincipled and of potentially limitless application.

Pursuers

Mutual Insurance

[24]

The defenders' central proposition, that neither party could sue the other in respect of

insured losses where they had agreed that insurance was to inure to the benefit of both parties,

had no application. The commercial judge was right to hold that it was a matter of the

interpretation of the lease (The Ocean Victory, at para 139; Barras v Hamilton, at 546, 554 to 555

and 556). The question was: what benefit was conferred upon the pursuers, as tenants, by

clause 13.1? The sole benefit was to preclude pursuit of the pursuers by the insurers. The

pursuers' right was enforceable against the defenders, as the other party to the lease.

The

parties had applied their minds at the time of the lease to the extent to which clause 13.1 would

confer a benefit on the pursuers. There was nothing preventing the pursuers from suing the

defenders for damages for a breach of the repairing obligation in clause 13.2.

[25]

The wording of clause 13 provided no support for there being a bar on the pursuers'

claim. The defenders' argument proceeded on the basis that it was agreed that some form of

joint insurance would be taken out. That was not what was agreed. The policy was to be taken

out in the name of the defenders. Only they were named in the policy. The insurance did not

inure for the benefit of the pursuers. Consequently, the pursuers had no rights against the

insurer. They could not claim indemnification from the insurers. That being so, the pursuers

were entitled to sue the defenders under clause 13.2. They were entitled to compel the

defenders to reinstate the property. If they failed to do so, the pursuers could carry out the

works. Specific implement was a discretionary remedy which the court might not grant.

Transferred Loss

[26]

The concept of transferred loss was pithily described in White v Jones [1995] 2 AC 207 (at

266-267). It could be applied to cases by analogy. Its application did not involve an intention to

benefit the third party. The pursuers' subsidiary was not a party to the lease. It could not sue

the defenders directly in respect of its losses. The pursuers therefore sued on its behalf. The

pursuers acknowledged that they had an obligation to account to the subsidiary for any

damages recovered. Such a claim was permissible in Scots law (McLaren Murdoch and Hamilton,

at paras [33] to [43]; Marquess of Aberdeen and Temair, at paras [45] and [46]; and Axon Well

Intervention Products Holdings, at para [29]).

The defenders argued that Swynson should be

applied. If that were correct, these Scots cases were wrong.

[27]

Scots law had long recognised an exception to the general rule that damages could not

be recovered for losses caused to a third party.

A subrogated claim, by an insured on behalf of

an insurer who had paid out, was one exception. Another was that, in an undisclosed agency

situation, even where the principal's existence was eventually disclosed, the agent was entitled

to enforce the principal's claim (AF Craig & Co v AF & JC Blackater 1923 SC 472).

Another arose

in terms of Panatown (at 535) where a loss caused by a breach of contract would go

uncompensated through an absence of privity. The solution was that the innocent contracting

party would be deemed to be claiming on behalf of itself and any associated third party which

had suffered loss. The innocent party would require to account to the third party for any

damages recovered.

[28]

This approach had been followed in Scots law (McLaren Murdoch & Hamilton, at paras 38

43). The solution was imposed by law (Panatown, at 530; McLaren Murdoch & Hamilton, at

para [42]; and Marquess of Aberdeen and Temair, at para [45]). It was a legitimate and justifiable

response to the black hole problem. The exception had been delineated in the modern Scottish

cases. It had not proved problematic in practice. There was no dissonance between the Scottish

cases and Swynson. Swynson did not purport to decide definitively the position regarding

transferred loss (at paras 17 and 106). Ultimately, it was a matter of legal policy. The court

should do justice by permitting recovery of those losses by the party holding the remedy

against the contract-breaker. It could do so on the basis of the principled approach identified in

Panatown, and as developed and applied in the three modern Scottish cases. The concept was

tightly circumscribed and applied only in familial or company group situations. Two elements

were present: the closeness of the pursuers to the third party and the policy not to allow losses

to fall into a black hole. Remoteness and reasonableness of damages would still apply. Nothing

turned on the terms of the licence.

Decision

Mutual Insurance

[29]

Where it is agreed that insurance is to inure for the benefit of both parties to a contract,

they cannot claim against each other for a loss covered by that insurance (The Ocean Victory

[2017] 1 WLR 1973, Lord Sumption at para 99; Lord Mance at para 114; Lord Toulson at

para 139). The question is one of interpretation of the contract (Barras v Hamilton 1994 SC 544,

LJC (Ross) at 546 and 551); in this case a lease. The court requires to ascertain the parties'

intention from the words used in the context of the lease as a whole.

[30]

The defenders were obliged (cl 13.1) to insure the building. The interest of the tenant

was to be endorsed on the policy, but the purpose of that endorsement was specified. It was to

"preclude" the insurer from suing the pursuers, having subrogated to the defenders' rights

against them. This would apply where, as in Mark Rowlands v Berni Inns [1985] 1 QB 211 and

Barras v Hamilton, the damage had been caused by the tenant's negligence. The insurance was

expressly to be in the sole name of the defenders. They alone could make a claim upon the

fund. In that situation there is nothing in the lease to suggest that the pursuers were to be

prevented from pursuing the defenders in respect of their obligation to rebuild, where damage

had been caused by an insured risk (cl 13.2). The defenders' contention on mutual insurance

therefore fails. The court should agree with the commercial judge's opinion on this point and

adhere to his interlocutor of 13 June 2024 in that regard.

[31]

The pursuers seek payment of a sum, which reflects the cost of the repairs, in the event

that decree for specific implement is not granted. This is an unusual conclusion, since the

pursuers are under no obligation to effect the repairs during the currency of the lease. They

could not carry out the works without either the defenders' consent or a further order of the

court. Their second conclusion does not accord with the relative plea-in-law (number 2), which

seeks payment of damages "failing implement". Those damages are said to be the cost of

repairs; but the damage is not to the pursuers' property but to the defenders'. Payment to the

pursuers would not necessarily result in any repairs being carried out. The pursuers would

receive a benefit, but the damage to the defenders' property would remain. Just how the

pursuers intend to proceed is unclear (cf Law Reform (Miscellaneous Provisions) (Scotland) Act

1940, s 1(2); and see infra)).

Transferred loss

General

[32]

At the heart of this issue is a simple question: what damages, if any, can the pursuers

recover from the defenders as a result of the defenders' breach of the rebuilding obligation

under the lease? The answer to that is equally straightforward. It is such damages as will, in

monetary terms, place them, as the innocent party, as near as possible in the same position as if

the obligation had not been breached (Gloag: Contract (2

ed) 680 citing Duke of Portland v

Wood's Trs 1926 SC 640, Lord Murray at 645). In this case, the pursuers do not seek damages as

a primary remedy. Rather, they seek specific implement of the obligation.

[33]

It is not disputed that, in principle, the pursers are entitled to that remedy. Although in

oral submissions the pursuers raised the prospect of the court declining to grant the order

sought, there are no grounds pled which would prevent the court from doing so. These

grounds are well established: unenforceability; impossibility; impossibility of enforcement; and

exceptional hardship. None are present here. The court should therefore proceed on the basis

that implement will be granted.

[34]

Two possibilities then arise. The first is that the defenders will carry out the requisite

repairs. In that event what will remain to be determined are any consequential losses to the

pursuers arising from the period of disrepair. The second is that the defenders do not carry out

the repairs. A decree for specific implement is simply an opportunity to the defenders to carry

out the works. If that is not done, the pursuers can apply to the court for authority to carry out

the works at the defenders' expense (Gloag: 661). Once again, the residual question will be:

what other losses flowed to the pursuers from the breach of the obligation meantime? In so far

as relations between the contractual parties are concerned, there is no black hole in relation to

the repairing obligation. The pursuers will be able to authorise the repairs, under warrant of

the court, and the court will grant decree against the defenders for payment of the costs of these

repairs.

[35]

The lease is of bar and restaurant premises (clause 5.2.2). There is a prohibition on sub-

letting without consent (5.3.2; 5.3.4.1). Had the pursuers sub-let the premises, with the

appropriate consent, there would, no doubt, have been a rent payable with a reciprocal

condition that the premises remained fit for occupation. If the sub-lease rental were lost for a

period, that would be the measure of the pursuers' additional damage. There was no sub-lease,

but a licence to occupy. There was no rent or an equivalent licence fee (other than £1). There

was no obligation on the pursuers to keep the premises in good repair. Had there been one, the

subsidiary would have been able to claim damages from the pursuers, and the pursuers would

in turn have been able to claim the equivalent from the defenders, at least if the defenders were

aware of the arrangement. Not only was none of this contracted for, it was specifically agreed

(Licence conditions 4.2.13 and 8) that, in the absence of negligence etc on the part of the licensor

(the pursuers), the licensor would have no liability to the subsidiary for any loss due to

deficiencies in the premises. That was the manner in which the parties elected to arrange their

affairs. If the subsidiary's losses disappeared into a black hole, it was one of their own creation.

As Lord Pentland states (at para [104]) it is reasonable to proceed on the basis that contracting

parties can be expected to look after their own interests.

[36]

The pursuers seek to rely on three Outer House cases which follow the dictum of

Lord Clyde in Alfred McAlpine Construction v Panatown [2001] 1 AC 518. They argue that they

are suing on behalf of the subsidiary and will be accountable to them for any sums recovered.

The short answer to that is that they are not suing on behalf of the subsidiary. Had they wished

to do that, they could have concluded for payment to the subsidiary. This would have required

them to call the subsidiary as a defender, at least for what interest they might have. As matters

stand, any sum made payable to the pursuers would be inmixed with their funds, be

expendable by them and be attachable by their creditors. There would be no immediately

enforceable obligation to account, even if such an obligation existed. It would be the pursuers

who would swallow the damages, leaving the black hole still in existence.

[37]

The pursuers' claim for damages, based upon losses sustained by their subsidiary, must

fail because, in accordance with the general rule of contract law, they have not sustained these

losses. As Lord Pentland explains (at para [101]), the pursuers' approach places no meaningful

limits on the extent of the exceptions. If there are exceptions to this rule in cases based on

contract, either on narrow or broad grounds (see infra), the pursuers' claim does not meet the

criteria for either exception. However, in deference to the arguments presented, the pursuers'

case can be analysed in light of the authorities cited.

Foundation

[38]

The foundation is Lord Clyde's obiter dictum in Panatown as adopted in three Outer

House decisions. In a detailed analysis, Lord Clyde accepted (at 522 et seq) that the Albazero

[1997] AC 774 was an exception to the general rule that, in a claim for breach of contract, a

person could only recover damages for a loss which he has himself sustained. Lord Clyde held

on the facts that the narrow ground exception, which involved the parties contemplating the

transfer of property to a third party prior to any breach, did not apply because the third party

had a direct remedy under a separate contract with the party in breach. Lord Clyde then

continued (at 535), under reference to no authority, a principle whereby a party could sue in

respect of losses suffered by a third party on behalf of that party and then be accountable to him

for any damages recovered. Although the third party could not sue in contract, and could not

compel the contracting party to do so, the latter could apparently volunteer to instigate

litigation on his behalf, presumably even if the third party did not wish to recover from the

other contracting party.

[39]

This hitherto unknown concept, at least in Scots law, was not adopted by the majority of

the House of Lords in Panatown. Lord Goff accepted the existence of both the narrow (Albazero)

exception, which was dependent on an anticipated transfer of property, and a broader ground

which envisaged the contracting party having a performance interest which allowed him to sue

directly for losses sustained by a third party for whom the performance was entitled to benefit

(see also Linden Gardens Trust v Lenesta Sludge Disposals [1994] 1 AC 85, Lord Griffiths at 97).

Although Lord Goff was in the minority on the ultimate outcome, Lord Jauncey (at 574) and

Lord Browne-Wilkinson (at 577) agreed with him on this point.

Developments in England

[40]

This court must be very careful when analysing English authorities. Its judges are not

qualified to determine English law. It should certainly exercise caution before stating what it

considers English law to be. It is not without moment to comment that, as is seen in the cases in

England following the Albazero [1997] AC 774, whilst English common law often proceeds by

increment, Scots law looks to find a general principle which it can apply to the facts.

[41]

Much has been written about the development of English law following the loss of the

barrel of whisky aboard the Ardincaple steamer en route from Leith to Newcastle (Dunlop v

Lambert (1839) Macl & Rob 663 ). The subsequent misunderstanding of what was a Scottish

appeal led to the enshrinement, in subsequent English cases, of an erroneous general principle

that a consignor could sue the carrier for damages in respect of the loss of a cargo even when

ownership of, and risk to, that cargo had transferred to the consignee; the so called Albazero

exception (Lord Diplock at 846-847). The jurisprudence which followed in England was

rigorously analysed by Lords Clyde and Goff in Panatown; each reaching a different conclusion,

with Lord Clyde prevailing in the 3-2 majority. By that time what had been an exception in

carriage by sea had been translated into building, and subsequently to other, contracts.

[42]

Swynson v Lowick Rose [2018] AC 313 may represent the current thinking of the UK

Supreme Court. Lord Neuberger neatly encapsulates the exception (at para 102) as applying to

the transfer of, and subsequent damage to, property. As Lord Neuberger narrates, in so far as

the exception contravenes the general principle on damages in English (and Scots) law, it is an

anomaly. For that reason, the exception should be applied in "defined" and limited

circumstances. The performance principle may require to be revisited in English law (ibid at

106).

[43]

More recently, in Nederlandse Industrie v Rembrandt Enterprises [2020] QB 551, Coulson LJ

carried out another extensive exploration of the authorities. He concluded (at para 73), without

hesitation, that:

"... for a successful claim for transferred loss that seeks to rely on the so-called broader

ground, as explained in Linden Gardens and Panatown, the claimant must show that, at

the time that the underlying contract was made, there was a common intention and/or a

known object to benefit the third party or a class of persons to which the third party

belonged."

Developments in Scotland

[44]

Whatever the current thinking south of the border may be, there is little reason for Scots

law to follow it down a rabbit burrow which was formed as a result of an admittedly erroneous

interpretation of Dunlop v Lambert (The Albazero, Lord Diplock at 843-845). The place of

transferred loss in Scots law was extensively examined by the Scottish Law Commission, under

Lord Pentland's chairmanship, in a discussion paper (no 163) in 2017 (Remedies for Breach of

Contract, chapter 9) and in its report (no 252) in 2018 (Review of Contract Law etc., chapter 18).

Ultimately (para 18.53 et seq) the SLC recognised that, in terms of the Outer House cases (infra),

Scots law did encapsulate some form of transferred loss. The SLC recommended confining that

to cases of property transfer (following the guidance of Lord Neuberger in Swynson v Lowick

Rose (at paras 102 et seq). This has not found its way into legislation. However, a third party

who has suffered losses may have a claim under the Contract (Third Party Rights) (Scotland)

Act 2017 (replacing the ius quaesitium tertio) or, outwith contract, under quasi-delictual or

unjustified enrichment principles. The present case is pled only under the law of contract.

[45]

Lord Clyde's dictum in Panatown was accepted by the Lord Ordinary (Drummond

Young) in McLaren Murdoch & Hamilton v The Abercromby Motor Group 2003 SCLR 323 (at 343).

As was said in that case, the problem of the black hole did not arise on the facts (ibid at 340).

Nevertheless, the Lord Ordinary went on to analyse an alternative basis for the claim; being the

broader performance interest ground which had been accepted by most of the judges in

Panatown, and which involves no obligation to account to the third party. Having rejected the

application of the ius quaesitium tertio, the Lord Ordinary rejected the performance interest

ground on the basis (at 343) that a party to a contract did not have a right to recover substantial

damages merely because he was such a party (cf specific implement). The Lord Ordinary

repeated the general purpose of damages; to place the other contracting party in the same

position as he would have been in but for the breach.

[46]

The Lord Ordinary in McLaren Murdoch & Hamilton went on to look at the problem of

the black hole. He adopted Lord Clyde's view, restating, as a rule, that (at 344):

"the party who is not in breach may recover substantial damages even if that loss has

been sustained by another person; ... however, the contracting party must sue on behalf

of that other, and must accordingly account to that other for the damages recovered".

Other than its reference to Lord Clyde's dictum, this "rule" appears to have emerged from the

ether. Not only is it not based on any principle of Scots law, it is also contrary to the general

principle, to the opposite effect, on what a party may recover in damages. Other than in well-

known situations, such as agency or insurance, a contracting party cannot sue for damages

suffered by a third party and, even if he could, there is no hitherto known obligation to account.

The Lord Ordinary in McLaren Murdoch & Hamilton excluded the situation in which the third

party had a direct right of action against the contractual party. Here, the third party (the

subsidiary) has expressly disavowed in his licence any right of recovery against the pursuers;

thus potentially creating the so-called black hole. It would be baffling if the subsidiary could

then sue the licensors' landlords, who were not even aware of the subsidiary's existence.

[47]

The obiter dictum in McLaren Murdoch & Hamilton has been accepted in two other Outer

House cases (Marquess of Aberdeen and Temair v Turcan Connell 2009 SCLR 336, Lady Smith at

para [45]; and Axon Well Intervention Products Holdings v Craig [2015] CSOH 4, Lord Doherty at

para [29]). In neither is there any explanation of where the transfer of loss concept comes from

in Scots law beyond Lord Clyde's dictum in the English appeal in Panatown. There may require

to be a deeper analysis of that in an appropriate case. Suffice it to say, for present purposes, the

pursuers' case falls into neither the narrow (property transfer) or broader (interest

performance/common intention to benefit) grounds.

Conclusion

[48]

The court should sustain the defenders' seventh plea-in-law. To that extent, the

reclaiming motion should be allowed.

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2024] CSIH 38

CA31/23

Lord President

Lord Malcolm

Lord Pentland

OPINION OF LORD MALCOLM

in the reclaiming motion

in the cause

FORTHWELL LIMITED

Pursuers and Respondents

against

PONTEGADEA UK LTD

Defenders and Reclaimers

____________

Pursuers and Respondents: Borland KC, D Ford (sol adv); Brodies LLP

Defenders and Reclaimers: Dean of Faculty (Dunlop KC), G Reid; Burness Paull LLP

31 October 2024

[49]

The issue of principle raised in this appeal regarding transferred loss claims can be

summarised as follows. Suppose A contracts with B for the provision of services by B. A does

not mention that they will accrue to C's benefit, not his, and this is not obvious to B who

assumes that only A's interests are involved. A similar scenario would arise if after completion

of the contract but before performance, and unknown to B, circumstances changed in a way

which inserted C as the beneficiary of performance of the bargain. The contract is performed

badly, or not at all. Also let us assume that specific implement is not available, or if it is open, in

the meantime C has sustained consequential loss. C is a stranger to the contract and he has no

direct right of his own to sue B for damages under it or on any other legal basis such as delict or

a collateral warranty. The question is, can A as the disappointed contracting party sue B for

damages despite the fact that the loss was sustained by C, not him; and if so, is he subject to an

obligation to account to C for them?

[50]

The argument against is that such a claim breaches the compensatory principle of

damages in that A is recovering monies in respect of harm sustained by another. The contract

in the present case is one of lease with a number of rights and obligations on each side, and no

doubt at any proof relevant facts and circumstances one way or the other might emerge, but

resolution of the above general point of principle should resolve whether the pursuer is at least

entitled to a proof before answer on the attempt to recover damages for losses sustained by

Lynnet Leisure (Rogano) Ltd, its licensee trading company.

[51]

It has been said (Lord Drummond Young in McLaren, Murdoch and Hamilton v The

Abercromby Motor Group, 2003 SCLR 323) that if neither A nor C have a remedy, the first because

he did not sustain the harm, the latter because he is not a party to the contract, the loss caused

by B's default has fallen into a "legal black hole", and in a well-regulated legal universe they

should not exist (para 33). In Alfred McAlpine Construction v Panatown, [2001] 1 AC 518, an

English case, at 535 Lord Clyde constructed a legal principle which he described as "a realistic

and practical solution" to the problem, namely permitting A to recover for the loss sustained by

C and being duly accountable therefor to C. He recognised that C would have no right to

compel A to do this, however in most cases where the problem was likely to arise, namely the

domestic affairs of a family or the commercial affairs of a group of companies, this would not be

a practical issue. If C had no relationship with A, for example if in the commercial field he was

a remote future proprietor, a solution by way of a collateral warranty might still be required.

The need for reasonableness in the quantification of damages should ease any concerns as to

excessive recoveries.

[52]

Earlier in his speech at 530 Lord Clyde said: "If the exception is founded primarily upon

a principle of law (which was his view), and not upon the particular knowledge of the parties to

the contract, then it is not easy to see why the necessity for the contemplation of the parties that

there will be potential losses by third parties is essential." He also disclaimed a need for an

intention to benefit a third person. Lord Drummond Young considered that Lord Clyde's

speech provided helpful guidance which could be adopted in Scots law. It outlined a solution to

the legal black hole problem "that is capable of almost universal application" (para 42).

The submissions of parties

Defenders

[53]

Under reference to certain recent decisions south of the border, namely Swynson Ltd v

Lowick Rose, [2018] AC 313, and BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises,

[2020] QB 551, the defenders accept that in certain circumstances A can recover on behalf of C,

but only if and when it was within the reasonable contemplation of B that his defective

performance would adversely affect C or a class of persons to which he belongs. This would

apply if the contract concerned property which it was appreciated might be transferred to a

third party, which does not arise here, or where both parties anticipated that a third party

would benefit. There is no offer by the pursuers to establish such, therefore it follows that this

part of the claim should be refused now. Were it otherwise a coach and four would be driven

through the general rule that in a claim by A for a breach of contract by B, A can recover only in

respect of losses which he has sustained. The development of the law in Donaghue v Stevenson,

1932 SC (HL) 31, would have been unnecessary. There would be no further need for collateral

warranties. And there would be no restraint on recovery for damages well in excess of those

foreseeable at the time of the contract, for example if leased premises were converted by a third

party from a take-away to a Michelin starred restaurant. (Clearly this example proceeds on the

assumption that the latter establishments are considerably more profitable.)

Pursuers

[54]

The pursuers observe that there are well established exceptions to the general rule, for

example a subrogated claim or that by an undisclosed agent. Lord Clyde's solution to the black

hole problem was adopted by Lord Drummond Young. This was approved in two subsequent

Outer House decisions by Lady Smith and Lord Doherty, and again by the commercial judge in

the present case ([2024] CSOH 59). It reflects appropriate legal policy and has been, failing

which should be, adopted in Scots law. It does not allow recovery for all and any loss sustained

by a third party, but only for that directly caused by the breach of contract with the usual rules

as to remoteness of damage, etc, applying. Since Lord Drummond Young's opinion, the

floodgates have not opened. If after Swynson and Nederlandse Industrie this diverges from the

approach currently in vogue south of the border, Scots law can follow its own path and avoid

an unjust windfall benefit for the defaulting party.

Discussion

[55]

There are fundamental differences which might render separate outcomes on either side

of the border less than surprising. Scots law has no doctrine of consideration, and has long

recognised that third parties can have rights arising from promises in a contract between other

persons. A greater emphasis on privity of contract might explain why the perceived injustices

to third parties have largely been the subject of discussion by judges in England and Wales,

with the resultant fashioning of the concept of what has been dubbed transferred loss.

[56]

Similarly it can be noted that south of the border damages are considered the primary

remedy, whereas in Scotland they have no priority over specific implement. If however an

order for specific implement forcing B to carry out his side of the bargain is unavailable or not

obeyed, or if in the meantime C has sustained loss consequential on the breach, it would seem

odd to deny a remedy in damages. If notwithstanding the interposition of a benefitting third

party damages remained available, this would protect what is sometimes described as the

"performance" or "expectation" interests of the aggrieved contracting party, for example see

Thomson "Restitutionary and Performance Damages" 2001 SLT (News) 71. If it is objected that this

is contrary to damages being compensatory, an obligation to account would direct the monies

to the person suffering the harm and provide no more and no less than substitutionary redress.

In any event, damages are described as compensatory not generally by reference to the person

entitled to receive them, but to differentiate from other possibilities such as penal awards or the

disgorgement of profits accruing to the defaulter from the breach. In Panatown much of Lord

Goff's speech encouraged active recognition of the innocent party's interest in the performance

of the contract, an interest which has always enjoyed prominence in our law.

[57]

The cases in England and Wales have developed third party rights incrementally and

have been marked by numerous expressions of dissatisfaction with the general rule, see for

example Beswick v Beswick, [1968] AC 58 at 72; Woodar Investment Development Ltd v Wimpey

Construction UK Ltd, [1980] 1 WLR 277 at 291D, 297-298, 300-301; and Darlington Borough Council

v Wiltshier Northern Ltd, [1995] 1 WLR 68 at 76, where Steyn LJ (as he then was) said that there

was no doctrinal, logical or policy reason for it, and that while barely tolerable in Victorian

England, it had been recognised for half a century that the privity rule "has no place in our

more complex commercial world." However more recently in Swynson Lord Sumption said that

transferred loss is an exception, not an alternative to a fundamental principle of the law of

obligations (para 16). Lord Neuberger described it as anomalous and should "only apply in

defined and limited circumstances" (para 102). Perhaps it was Lord Clyde's background in

Scots law which enabled him to describe a solution which was required "where the law will not

tolerate a loss caused by a breach of contract to go uncompensated through an absence of

privity between the party suffering the loss and the party causing it" (Panatown at 535F).

[58]

The number of recognised exceptions to the general rule whereby substantial damages

can be recovered by the contracting party for loss caused to a third party raises questions as to

how much force it should have. In the hypothesis mentioned at the outset, if A was an

undisclosed agent for C there would be no difficulty. Similarly if B had defaulted on a contract

to ship goods when the risk and property had passed from A to C and the latter was without

means of redress. This is The Albazero exception ( [1977] AC 774 ) which allowed a party to sue in

his own name to recover a loss he had not suffered, he being accountable for any monies

obtained to the person who sustained the loss. While this particular exception can be justified

by the foreseeability of the property involved being transferred after the contract was made, it is

equally possible to see it as designed to prevent a claim from falling into a black hole. Indeed at

847 Lord Diplock recognised that there could be other cases where a "rational legal system"

would require the person causing loss to compensate the person harmed. It is not obvious why

the law should tolerate a black hole simply because the involvement of C was not within the

contemplation of both A and B when the bargain was made.

[59]

There are two parts to the general rule. The first is that a contract between A and B

cannot impose liabilities on C. This makes good sense and has caused no difficulties. As a

generality the second element, namely that the contract affords no rights to C, also makes sense.

Absent a clear intention to the contrary, only the parties to a contract should have title to

enforce its terms. In the scenario mentioned at the outset, if B defaults and A sits on his hands,

C cannot sue on the bargain. But if A is keen to hold B to account on behalf of C who has no

direct means of redress, why should this be refused if otherwise it means that B has breached

the contract with impunity? Lord Clyde's "realistic and practical solution" recognises A's

entitlement to performance of B's promise to him, and avoids a windfall benefit to an

undeserving B. There is no breach of the compensatory principle if, as in The Albazero, the

appropriate level of damages are directed through A to the party directly harmed by B's

default.

Panatown

[60]

St Martins Property Corp Ltd v Sir Robert McAlpine & Sons, [1994] 1 AC 85, extended The

Albazero exception beyond contracts for the carriage of goods. In White v Jones, 1995 2 AC 207, at

267 Lord Goff described it as a noteworthy decision which reflected a need for the court to make

a remedy available as a matter of law in a case where it was clear that there was no common

intention to benefit the third party. Lord Mustill recognised the decisions in The Alabazero and

St Martins as addressing situations "where there was a single loss which might have been

suffered indifferently by the obligee or by someone else, and which the courts were content to

attribute to the obligee" (282). The Darlington BC decision provided an exception to the general

rule where there was no transfer of property.

[61]

Panatown was decided on the basis that it was not a black hole case because a separate

deed of duty of care had been granted to the third party. However it seems plain that absent

that document, all of their Lordships would have refused the contractor's appeal and, despite it

having suffered no loss, would have affirmed the employer's right to recover substantial

damages. Lord Clyde examined the earlier cases and identified that they discussed three

possible routes to recovery. The first, sometimes called "the narrow ground", is that developed

from The Albazero and proceeds on the basis that the parties have contracted for the benefit of a

third party (532C-D). This approach was described as "contract-based" by Evans LJ in Panatown

in the Court of Appeal. Secondly, a broader ground involved A suing for his own loss and with

no obligation to account to C. It had to be shown that the cost of putting matters right had

fallen or would fall on A (533C). Thus it involved no conflict with the privity of

contract/compensatory principle; in truth it is not an exception to the general rule. However it

was noted that Lord Griffiths' speech in St Martins also contained the idea that it would be

enough simply to show that the bargain had not been performed. Lord Clyde described this as

"a more radical formulation" of the broader ground whereby it would not matter whether A

was or was not going to carry out repairs. The breach of the contract would in itself constitute a

recoverable loss by A.

[62]

Having articulated the more radical formulation of the broader ground, Lord Clyde

explained the difficulties with it, including its failure to compensate the party who sustained the

adverse consequences caused by the defective performance. Furthermore, it may not be able to

embrace consequential losses. In his Lordship's view a breach of contract may cause a loss but

is not itself a loss in any meaningful sense (534D). Lord Browne-Wilkinson considered it a

nonsense for the party sustaining real tangible damage to recover nothing with an award made

to someone who suffered no loss.

[63]

Lord Clyde noted that no one had suggested a solution on the lines of a jus quaesitum

tertio (the third party has acquired a right), and in any event it would probably require

legislation. However, the gap created by its absence could be filled by his "realistic and

practical solution" (described above at paras 51/52) which would be achieved by operation of

law. "If the entitlement to sue is not to be permitted to the party who has suffered the loss, the

law has to treat the person who is entitled to sue as doing so on behalf of the third party." It

was acknowledged that this may carry with it some element of artificiality and "may not be

supportable on any clear or single principle" (535D). The issue arising for decision by this court

is whether in our law Lord Clyde's solution should be rejected in favour of restricting

transferred loss claims to a narrow ground based on a need for the harm to the third party to be

within the reasonable contemplation of the parties when the contract was made.

[64]

In Panatown Lord Goff considered that it is commonplace for contracts to be made for

the benefit of third parties, often in the context of the family, and that it would be "an

extraordinary defect in our law" if there was no remedy for defective performance (538H). He

was not surprised that the authority for the supposed rule excluding a right to damages was

thin, and he noted that its very existence had been doubted by distinguished writers, including

Professor Treitel and Duncan Wallace QC. In St Martins Lord Griffiths was not concerned with a

problem of privity of contract but with the effective remedy of the party who has made a

bargain for the benefit of another (545D). For Lord Goff the issue concerned not privity of

contract, but the supposed rule that A could recover only for his own loss. "In truth, what we

are concerned with here is the effectiveness of the rights conferred on Panatown under the

building contract" (545H). The task was "to reach a solution which is in accordance with

principle and also does practical justice as between the parties, without leaving too great a

legacy of problems for the future" (546B).

[65]

Lord Goff's starting point was the protection of A's interest in the performance by B of

his contractual obligations. He asked, why should the fact that the loss has fallen on C prevent

the recovery of damages for B's failure to fulfil his side of the bargain and for which B will have

received consideration? It is clear from his discussion of the issue that Lord Goff was adopting

Lord Griffiths' "more radical formulation" of the broader ground, driven it would seem by a

desire to enforce A's performance or expectation interest in B's compliance with the contract. It

was this which (subject to a reasonableness qualification, see 556B-F) enabled him to sanction

substantial damages for the employer notwithstanding that the third party had its own right to

sue the contractor under the duty of care deed. This would include damages for delay in the

completion of the development. There was no good reason why that must fall on the owner of

the site (554E -555C). For Lord Goff, the broader ground as so understood was an alternative

route to the same conclusion as that reached by the Court of Appeal on the narrow ground; it

was the "underlying principle " on which earlier decisions were based (557G-H). Towards the

end of his speech Lord Goff departed from the most extreme expression of the broader ground

when stating that there could be no double recovery in that Panatown would be obliged to use

any recoveries for the completion of the development (559 G- 561A). Thus although Lord Goff

does not refer to it, the practical difference between his approach and Lord Clyde's solution to

the problem is hard to detect.

[66]

Lord Goff insisted that his discussion was in accordance with existing principle, but in

any event, and faced with a submission that the matter should be left to the legislature, he

observed that "it is surely within the scope of the type of development of the common law

which, especially in the law of obligations, is habitually undertaken by appellate judges as part

of their ordinary judicial function" (553C-D). It was noted that the Law Commission itself

recognised that legislation within a developing part of the common law can lead to ossification

and a rigid segregation of legal principle which disfigures the law and impedes future

development of legal principle on a coherent basis.

[67]

With regard to the differing approaches of Lord Clyde and Lord Goff, the author of

Treitel's Law of Contract, 15th ed. offers the view that a need to avoid a black hole should generate

the remedy, para 14-038. He cites Rix LJ in Offer-Hoare v Larkstore Ltd, [2006] 1 WLR 2926 at

para 85: "where a real loss has been caused by a real breach of contract, then there should if at

all possible be a real remedy which directs recovery from the defendant towards the party

which has suffered the loss." This seems a reasonable objective for our law which, as a matter

of general principle, favours the provision of redress for a wrongful act such as a breach of

contract. It was the dynamic driving Lord Clyde's solution and the enthusiastic reception

afforded to it by Lord Drummond Young. The defenders' principal objection rests on more

recent decisions south of the border, so it is necessary to turn to them.

Swynson v Lowick Rose

[68]

The first is Swynson. It was an unusual case on its facts. A lending company made three

loans to a borrower relying on a due diligence report prepared by a firm of accountants. The

borrower having failed to repay the loans, the accountants were sued for negligence for not

having reported a substantial adverse difference between the borrower's forecast and actual

working capital. Before the judge could assess damages, two of the loans were repaid using

monies lent to the borrower as part of a refinancing by H, the owner and controller of the

claimant lending company. H did this because he wanted the loans off the company's books.

[69]

The UK Supreme Court held that the repayments should not be ignored as res inter alios

acta and were not collateral benefits. It was irrelevant that H had provided the means to repay

the loans. The loss arising from the first two loans had been made good when they were repaid

to the claimant. There was no unjust enrichment of the accountants. Furthermore, H's loss

could not be transferred to the claimant thereby allowing it to recover damages from the

accountants.

[70]

On this last matter Lord Sumption distinguished between (a) transferred loss and (b)

what had become known as the broader ground whereby the claimant seeks recovery of his

own loss. The former had been recognised only in cases where the third party suffers loss as the

intended transferee of the property affected by the breach. It was a limited exception to the

general rule that a claimant can recover no more than his own loss. It applies only where the

known object of the transaction is to benefit a third party and the anticipated effect of a breach

will be to cause loss to that person. The broader ground was not limited to cases of transferred

property. However both were an exception to a fundamental principle driven by legal necessity

to give effect to the object of the transaction and avoid a "legal black hole". Thus the general

rule will apply if the third party has his own right of action.

[71]

In the circumstances of the case only the broader principle could be relevant. Lord

Sumption considered that there was much to be said for it. (It is unclear whether this covered

both formulations of the broader ground.) However, since it was no part of the transaction

between the lenders and the accountants to benefit H, it was plain that neither ground could

apply. H's loss was caused by the refinancing arrangement with the borrower and had nothing

to do with the accountants. Lords Neuberger, Clarke and Hodge agreed with Lord Sumption,

though Lord Neuberger gave a short judgment of his own with which Lord Clarke agreed.

[72]

Lord Mance noted a recognised exception to the general rule when at the time of the

contract the parties contemplated that the property which was the subject of the contract and

the breach would be transferred to or occupied by a third party. The claimant could then sue on

the third party's behalf and account to him accordingly. Another broader principle had been

suggested by Lord Griffiths in St Martins whereby the contracting party's interest in

performance of the bargain enabled a claim in damages without proof of actual loss. (This is a

reference to the "more radical formulation" of the broader ground.) In his Lordship's view this

theory faced a prima facie difficulty in embracing any consequential losses sustained by the third

party, and it was not clear whether and on what basis the recovering party would be under a

liability to account to him. However, in the circumstances of the case neither ground assisted

the claimant. As to the narrow principle, the claimant lending company did not contract with

the accountants on behalf of or for the benefit of H. And the broad principle could not apply

when the claimant's performance interest had been met when the loans were repaid.

[73]

The issue was also considered by Lord Neuberger. For him transferred loss applied if a

contract concerned property subsequently acquired by a third party. That A could recover for

loss suffered by C was self- evidently an anomalous principle and so should apply only in

defined and limited circumstances. The law had moved to the point that in order to avoid a

black hole transferred loss can apply if (a) at the time of the contract with A, B would

reasonably have anticipated that A would transfer the property concerned to a person such as C

who would suffer loss if B breached the contract so that the contract can be seen as having been

entered into by B partly for C's benefit, and (b) there is nothing in the contract or surrounding

circumstances which negatives the conclusion that the principle should apply. Panatown had

decided that one such circumstance was if C enjoyed direct contractual rights against B.

[74]

For Lord Neuberger it was unnecessary to discuss the validity of another version of the

principle, first articulated by Lord Griffiths, namely that B could be liable to A if, despite

transferring away the property, A retained an interest in B performing his obligations. Given

that the loans had been repaid, the lending company could not sensibly still have an interest in

the performance of the accountants' duties.

[75]

Lord Neuberger identified two defects in the transferred loss argument in the appeal.

First, this was not a case involving property coming into the hands of H. Rather he sustained

loss because of the new loan made by him, whereas the lending company would have suffered

a loss in relation to the original loans. Secondly, the principle could not apply because when the

accountants were tendering their advice it was not reasonably foreseeable that the loan would

be repaid through the medium of a fresh loan made to the borrower by a third party. It was not

anticipated that there would be a refinancing arrangement. It followed that H could not be

regarded as an intended beneficiary of the original lender's rights against the accountants.

[76]

Perhaps Swynson was not the best vehicle for an examination of the issue at hand. The

particular facts made transferred loss a non-starter whichever approach was adopted. Two of

the loans were repaid thus in respect of them the accountants' alleged negligence did not cause

loss to anyone. The third party's loss flowed from an entirely separate contract between himself

and the borrower. There was no question of a claim against the accountants disappearing into a

black hole. This might explain the absence of any consideration of Lord Clyde's approach and

its adoption in Scotland. That said, the justices who spoke on the topic stressed the importance

of the general rule and described a restricted approach confining the narrow ground, and per

Lords Neuberger and Sumption also the broader ground, to contracts intended to benefit a third

party. All three confined the narrow ground to cases of transferred property.

Nederlandse Industrie

[77]

Nederlandse Industrie was also an unusual case on its facts. It concerned a contract

whereby A agreed to supply a large amount of egg product to B for set prices per kilo. After

shipments began, A arranged for some of the product to be supplied by C, another company in

the same corporate group. When B refused to accept and pay for the product C had no cause of

action against B. A claimed for the entire loss of profits. It was held that A could not recover

the profits lost by its sister company.

[78]

Longmore and Peter Jackson LJJ agreed with Coulson LJ's judgment on this aspect of the

case. He noted that to all intents and purposes C was a subcontractor to A and had no basis for

suing B for its loss. A late amendment whereby A sought to rely on a settlement it had reached

with C had been refused, but a part of it based on a claim of transferred loss was allowed to

proceed. However it was rejected by the trial judge since, as per Lord Sumption in Swynson, B

was unaware of any intention to benefit C.

[79]

Coulson LJ reviewed various passages from the judgments in St Martins, Panatown and

Swynson, and made reference to other decisions, including And So To Bed Ltd v Dixon,

[2001] FSR 47 (Ch D). It was accepted by counsel for A that the narrow ground had no application and

that the claim depended on the broader ground. (Again there appears to have been no reliance

on Lord Clyde's "realistic and practical solution" to the avoidance of a black hole.) Three sub-

issues were identified: (a) is the broader ground subject to a known third party benefit test? (b)

does the broader ground apply to contracts for the sale of goods? and (c) since C could recover

from A, was it a "black hole" case at all?

[80]

Coulson LJ considered that the broader ground was still good law. After reference to

passages in the speeches of Lord Griffiths in St Martins; Lord Browne-Wilkinson and Lord Goff

in Panatown; and Lord Sumption and Lord Neuberger in Swynson, his Lordship concluded that

for the broader ground to apply "the claimant must show that at the time the underlying

contract was made, there was a common intention and/or a known object to benefit the third

party or a class of persons to which the third party belonged" (para 73). However when the

agreement regarding the supply of egg product was made B was not even aware of C's

existence, thus the claim must fail. (It was common ground in the present appeal that if the

pursuers require to demonstrate a known intention to benefit its trading company, the

transferred loss claim must fail.)

[81]

Coulson LJ considered that if the plea were successful it would turn transferred loss

from a narrow exception to the rule that a party can recover only for his own loss "into a

commonplace route for recovery", and something which would go far beyond even what Lord

Griffiths had in mind (para 75). It mattered not that A and C were sister companies with a

common owner. They traded with each other on commercial terms and could not rely on their

separate personalities when it suited them and break down the barriers when they created

difficulties.

[82]

As to the other sub-issues, Coulson LJ suggested that it would be difficult to treat

different types of contracts in a different way. Also loss of profit is a recognised head of loss in

claims under or for breach of commercial contracts so "it may again be difficult to exclude the

principle of transferred loss merely because of the nature of the damages claimed" (para 78).

He had sympathy with the submission that since C could look to A for redress, this was not a

black hole case. It might be said that since A was not successful in recovering from B the

monies paid out to C, this was such a case, but it was not necessary to decide the point

(para 79).

[83]

It is of interest that at the end of his judgment Coulson LJ articulates Lord Griffiths' less

radical formulation of the broader ground; one which does not require an exception to any

general rule since A would be suing for its own loss. Other than perhaps that the late

amendment raising the point was refused, it is not explained why A could not recover in

respect of its payments to C.

Discussion continued

[84]

It was and remains possible to explain the exception set down in The Albazero by

reference to a common intention to benefit a third party. It is more difficult to do so in non-

transfer cases such as Darlington. And as noted earlier, Lord Goff described St Martins as a case

where there was no such common intention (White v Jones at 267). Prior to the decisions in

Swynson and Nederlandse Industrie there seemed to be broad approval of Lord Griffiths' wide

approach based on the innocent contracting party's interest in the performance of the bargain,

albeit there was controversy as to whether there would be an obligation to account, and on

whether recovery was excluded if the third party had a direct claim. It seems odd that now that

legislation in England and Wales (The Contracts (Rights of Third Parties) Act 1999) has allowed

third parties to have rights in contracts intended to benefit them, the courts are limiting black

hole avoidance claims to such arrangements, albeit no doubt there might be occasions when the

terms of the statute are not met. The added restriction of both the narrow and broader grounds

to cases of transferred property is a further significant retrenchment on the scope of exceptions

to the general rule recognised in earlier decisions.

[85]

A study of the judgments in Swynson suggests that this has been caused by a renewed

emphasis on a claimant being able to sue only for loss caused to him by a breach of contract,

described by Lord Sumption in Swynson as "a fundamental principle of the law of obligations"

in England and Wales. As to north of the border, it would be hard to say that Scots law has set

its face against third party rights. It is true that our own legislation on the topic has now

replaced the jus quaesitum tertio. But it would be curious if Scots law accepted transferred loss

claims only on proof that the parties wanted to confer a benefit on a third party, the very

circumstance when they are unlikely to be needed. And if the underlying concern is to prevent

an outcome whereby a defaulter can breach a contract with impunity, what is the rationale in

allowing this to happen simply because the case does not involve a transfer of property?

[86]

To put some flesh on the bones of the hypothesis mentioned at the outset of this opinion,

suppose I ask a contractor to do work on an empty cottage. I am paying for it. He does the work

badly. Why should the fact that, unknown to the contractor, the cottage belongs to someone else

prevent me from recovering damages for harm directly caused by his breach of the contract, for

example the cost of putting matters right, if otherwise he escapes liability? Or suppose after

instructing the work I sell the property to someone. Why should the outcome depend on

whether the contractor was made aware of an intention to do this at the time of the bargain?

[87]

There is a subsidiary issue as to whether if I recover damages I must account to the

owner of the cottage? If, as Lords Clyde and Drummond Young said, the answer to that is yes

and the monies go to the party sustaining the loss, what harm is done to the principle that

damages are compensatory? The compensatory principle is usually mentioned for the purpose

of ruling out damages assessed on some other basis. And if I take it upon myself to finance the

necessary work, surely I would be entitled to make a claim but why should that make a

difference?

[88]

Transferred loss claims as discussed by Lord Clyde in Panatown at 530 and 535/6 and by

Lord Drummond Young in McLaren, Murdoch at para 42 respect the primary measure of

damages, namely that "a party who breaks his contract is liable for those consequences which a

reasonable man, possessing the knowledge which the party had at the time of contracting,

would have anticipated" (Gloag 697); here that the restaurant business would lose trade if the

premises were not repaired. The general rule that there is no liability for indirect adverse effects

on third parties is not affected. In transferred loss claims the harm to the third party is not

consequential on, or parallel with, loss suffered by the contracting party; the breach of contract

is its direct and proximate cause. The usual limitations on recovery such as causation;

remoteness; reasonableness; failure to minimise loss and contributory negligence apply in the

normal manner. If such a claim imposed an uncovenated burden on the defaulter that would be

a reason for refusing or reducing recovery. The argument that the floodgates would open is not

compelling.

[89]

I respectfully agree with Coulson LJ that loss of profit claims are in no separate category

and that it would be difficult to discriminate depending on the type of contract involved. The

majority view in Panatown that a direct claim available to the third party rules out a transferred

loss claim seems sound; the remedy depends on avoiding a black hole. As to accountability, this

was recognised and applied in The Albazero. I see no problem in principle in the court framing

an appropriate order whereby there is an enforceable obligation upon the pursuers to pass on

monies recovered to Lynnet.

[90]

I agree with the commercial judge that the licence agreement between the pursuer and

Lynnet is not relevant to the issue at hand (para 39 of his opinion). The claim is based on the

landlord's breach of contract, and there is nothing in the licence which excludes the pursuer

from recovering damages for that on the licensee's behalf. In any event, I do not understand

your Lordships' views to be that but for the terms of the licence the claim would be available. If

the licence does present a difficulty for the pursuer, it is a matter specific to this case, and might

appropriately be explored along with all other relevant circumstances at a proof before answer.

[91]

In short, I am in agreement with the commercial judge (para 35) that in McLaren,

Murdoch Lord Drummond Young "offered a reasoned Scots law solution to the problem,

recognising, as had Lord Clyde, that the right of the contracting party to sue was conferred as a

matter of general legal policy to ensure that if a loss results from a breach of contract it can be

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2024] CSIH 38

CA31/23

Lord President

Lord Malcolm

Lord Pentland

OPINION OF LORD PENTLAND

in the reclaiming motion

in the cause

FORTHWELL LIMITED

Pursuers and Respondents

against

PONTEGADEA UK LTD

Defenders and Reclaimers

____________

Pursuers and Respondents: Borland KC, D Ford (sol adv); Brodies LLP

Defenders and Reclaimers: Dean of Faculty (Dunlop KC), G Reid; Burness Paull LLP

31 October 2024

[93]

I have had the advantage of reading the Lord President's opinion in draft. I am in full

agreement with it for the reasons he has cogently set out and would dispose of the reclaiming

motion in the manner he proposes. I add some observations of my own on the topic of

transferred loss.

[94]

The question before the court on the transferred loss issue is whether a factual inquiry

should be allowed into the pursuers' attempt to recover losses suffered by a third party arising

from the defenders' alleged breach of contract. In my opinion, the pursuers are not entitled to

such an inquiry. Their pleadings do not, as it seems to me, instruct a sound legal basis for this

aspect of their claim.

[95]

There are a number of well-recognised exceptions to the general principle of Scots law

that a person cannot recover substantial damages for breach of contract where he himself has

suffered no loss by reason of the breach, for example in the case of a subrogated claim by an

insurer who has paid out to its insured under a policy of insurance. Another exception may be

found in the particular circumstances which arose in a case cited by the pursuers: the general

principle is subject to relaxation in circumstances where an agent has been sued and elects to

bring a counterclaim in a representative capacity on behalf of its principal, whose existence is

not initially disclosed. That is the ratio of Craig & Co v Blackater 1923 SC 472 (see Lord Justice

Clerk (Alness), 481-482, Lord Ormidale, 485-486 and Lord Hunter, 489).

[96]

The pursuers accepted that in Scots law contractual damages cannot "generally

speaking" be recovered in respect of a loss which falls on a third party (note of argument

para 25). In this the pursuers were correct. It is undoubtedly a basic and clear principle of our

law of contract that a person cannot recover substantial damages for breach of contract where

he himself has suffered no loss by reason of the breach. Lord Drummond Young acknowledged

this to be the case in McLaren Murdoch & Hamilton v The Abercromby Motor Group Ltd 2003 SCLR

323, at para [35]. The transferred loss exception is not, as Lord Sumption observed in Swynson

Ltd v Lowick Rose llp [2018] AC 313 at para 16, an alternative to the fundamental principle of the

law of obligations that a claimant is entitled to recover only the loss which he has himself

suffered. The essential feature of the transferred loss exception is that the contracting party's

right to recover the third party's loss is necessary to give effect to the object of the transaction

and to avoid the loss disappearing into a "legal black hole" (Lord Sumption ibid). The

transferred loss exception therefore applies so as to allow contractual damages to be recovered

on behalf of a third party where the contract envisaged that title to property in respect of which

the loss arose would be transferred to the third party; in such circumstances it can be foreseen

that a breach of the contract would cause loss to the third party rather than to the innocent

promisee (McAlpine Construction v Panatown Ltd [2011] 1 AC 518, Lord Clyde at 530F-G). Lord

Diplock was to the same effect in The Albazero [1977] AC at 847D-G where he referred to the rule

applying in the case of a commercial contract where it was in the contemplation of the parties

that the proprietary interest in the goods may be transferred from one owner to another after

the contract has been entered into and before it has been breached. In such circumstances, as

Lord Diplock explained, an original party to the contract, if such be the intention of both

contracting parties, is to be treated in law as having entered into the contract for the benefit of

all persons who have or may acquire an interest in the goods before they are lost or damaged,

and is entitled to recover by way of damages for breach of contract the actual loss sustained by

those for whose benefit the contract was made.

[97]

It is not difficult in the type of case described by Lord Diplock to regard the award of

damages for loss sustained by the third party as necessary in order to satisfy the objective of the

contract. Foresight will not always be necessary, however. Losses may also be recovered,

under what has sometimes been referred to as the broader ground (or some version of it), where

a party enters into a contract which is intended to be for the benefit of a third party and as a

result of a breach of that contract the third party does not receive the benefit in question. In

such cases the known third party benefit is an essential component in engaging the principle; in

order to succeed the claimant must show that at the time of the underlying contract there was a

common intention and/or a known object to benefit the third party or a class of persons to

which the third party belonged (BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises

Inc [2020] QB 551, Coulson LJ at para 72).

[98]

For my part, I do not read Lord Drummond Young in McLaren Murdoch as having

expressed the view that Scots law differs from the law applying in England and Wales in regard

to the circumstances in which transferred loss is recoverable. He said that Scots law should

adopt the same general rule as applied by the majority in the House of Lords in Panatown. He

referred (para [33]) to recovery being permitted typically in two categories of case: where one

family member has concluded a contract on behalf of himself or herself and other members of

the family, and where a contract has been concluded by a company forming part of a group and

the subject-matter of the contract belongs to or has been transferred to another member of the

group. His Lordship was careful in that section of his judgment to state that the underlying

contract had to have been concluded on behalf of other family members or that the subject-

matter of the contract had to have been transferred to another group company. He returned to

the same examples in a later section of his judgment see para [41]. As I understand his

approach, Lord Drummond Young was saying that the principle was limited so as to apply only

in such circumstances, although there is perhaps a tension between that limited approach and

certain other passages later in his opinion where on one reading he might be taken to have been

expressing the rule on a somewhat wider basis. Overall I agree though with the defenders'

submission that Lord Drummond Young was not purporting to set out a separate Scots law

doctrine. His analysis proceeded on the basis that Scots law should follow the rule set out by the

majority in Panatown: McLaren Murdoch at para [42].

[99]

In the present case none of the requirements for permitting the recovery of transferred

loss is satisfied on the pursuers' pleadings. The pursuers do not suggest that the defenders

were aware or should at any material time have been aware that failure to carry out the

repairing obligations under the lease would cause Lynett to sustain financial loss. The claim is

not based on it having been foreseeable that Lynett would sustain loss if the defenders breached

any of their obligations under the lease nor is it averred that a failure to allow the pursuers to

recover damages on behalf of Lynett would defeat the aim of the contract. It is not said that

there was property which was to be transferred to another group company. The pleaded basis

of the pursuers' claim, insofar as it relates to the interest of Lynett, is stated in the broadest of

terms and appears to me to be put forward at a particularly high level of generality, which has

no support in the case law or in principle. Thus in article 1.1 of the condescendence the

pursuers simply aver that they sue "on behalf of a third party, which has suffered loss, injury

and damage as a result of the defenders' breaches of ... the lease, in order to recover such losses

on behalf of that third party". In article 6.6 the pursuers plead that as a result of the defenders'

continuing refusal to carry out the necessary repairs pursuant to their obligations under

clause 13.2 of the lease Lynett has suffered and will continue to suffer loss of profits. The

pursuers contend that they are "as a matter of law" bound to account to Lynett as the party

suffering the loss for any of Lynett's losses that are recovered for its benefit in this action, but

these is no explanation or indication of why they assert that such a legal liability on their part

arises. There is nothing to suggest that there would be a legally enforceable obligation to

account to Lynett for any damages recovered. The pursuers have not sued for damages to be

paid to Lynett. They have chosen not to convene Lynett as parties to the action. In these

circumstances, the pursuers would be entitled to retain any damages awarded for loss of

Lynett's profits and to apply them as they saw fit; the damages could be attached by the

pursuers' creditors. The pursuers merely state that Lynett is not a party to the lease and so

cannot sue the defenders for their breaches of clause 13.2. The pursuers then aver that "in all

the circumstances" they are entitled to recover Lynett's losses on its behalf.

[100] From the foregoing summary of the pursuers' case it can be clearly seen that there is

nothing pleaded as to the facts that were within the parties' contemplation at the time the

contract was entered into (cf. The Albazero). There is equally nothing to suggest that the

defenders should have foreseen that Lynett would suffer economic loss (cf. Linden Gardens Trust

Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corporation Ltd v Sir Robert McAlpine Ltd

[1994] 1 AC 85). There is no basis in the pleadings on which the court could hold that the

contract between the pursuers and the defenders was entered into on the footing that the

pursuers would be entitled to enforce contractual rights against the defenders for the benefit of

Lynett (cf. Lord Goff Panatown 538G). There is no ground on which it could be said that the

pursuers contracted for the benefit of Lynett. It cannot be maintained that there was a

transaction whose known object was to benefit a third party, namely Lynett or a class of third

parties to which Lynett belongs. In short, the pleaded circumstances of the case do not come

within the parameters of any of the tests for applying the principle of transferred loss which

have arisen in the case law to date either in Scots law or in the law of England and Wales.

[101] The fundamental difficulty with the pursuers' approach is that it places no meaningful

limits on the reach of the exception. Counsel for the pursuers, when pressed to explain the

limits of the principle for which he contended, submitted that the application of the transferred

loss principle would on his approach be restricted to cases involving family groups and

corporate groups. This would, he submitted, provide the necessary closeness of connection. He

was not able to say how a family group would be delineated or how a corporate group would

be defined. I consider that such a formulation of the circumstances in which the principle of

transferred loss should apply is substantially too broad and open-ended. It has the potential to

extend the scope of the exception well beyond any case in which it has been applied to date.

Given the complete absence of any boundaries, I consider that the Dean of Faculty was right to

say that the pursuers' approach would have the effect of transforming the exception into the

general rule.

[102] If one considers what the object of the contract of lease was in the present case, it can be

seen that there is no basis for holding that an award of damages for Lynett's loss of profits is

necessary in order to give effect to the object of the contract. The object of the contract of lease

was to permit the pursuers to occupy the premises as tenants on the terms and conditions

stipulated in the lease. There was no contractual intention to benefit a third party. There is

nothing to suggest that at the time when the pursuers took on the tenancy the defenders knew

that Lynett would be trading from the premises or even that Lynett existed. It cannot in these

circumstances be suggested that there was a contract entered into between the pursuers and the

defenders for the benefit of Lynett. This is important because if known third party benefit is

irrelevant for the purposes of engaging the transferred loss principle, it would mean that a main

contractor would always be able to claim against the employer for the losses suffered by its

subcontractor, even if the employer had no knowledge of the subcontractor, or even that a

subcontractor was going to be engaged at all (see BV Nederlandse Industrie, Coulson LJ at

para 75). In my view this consideration shows that the pursuers' argument goes substantially

too far and is unsound.

[103] Lynett traded from the premises by virtue of a licence granted to them by the defenders.

The licence provided in clause 4.2.13 that the pursuers would at no time become liable to Lynett

for any loss the latter might sustain from any deficiency in the premises or damage to any

property (except in the case of negligence by the pursuers). Provision to the same effect appears

in clause 8. How then can a liability on the part of the pursuers to account to Lynett for

damages for loss of profits be said to arise in view of the express terms of the licence? The

commercial judge dealt with the point by saying that there was a short answer to it: the

obligation to account arose from the recovery of damages itself, not from any pre-existing or

contractual obligation to account. For my part I am unconvinced by this answer. The mere

recovery of damages cannot per se create a liability to account, particularly in circumstances

where the relationship between the pursuers and their licensee (Lynett) is governed by the

terms of the licence. The licence makes clear that absent negligence there is to be no liability

owed at any time by the pursuers to Lynett arising from any deficiency in the premises or

damage to any property. Since damages for loss of profits due to the effects of flooding would

arise from a deficiency in the premises or from damage to property in the premises it follows

that the pursuers can have no liability to account to Lynett for any such damages.

[104] The outcome cannot be said to give rise to any injustice. It is reasonable to proceed on

the basis that contracting parties can be expected to look after their own interests when they

agree to enter into a contract. A party, such as Lynett, who elects to enter into an unauthorised

licence of premises does so at its own risk. It has no legitimate cause for complaint when it

suffers loss as a result of a breach of contract by a party, the defenders, with whom it has not

contracted. Any other approach would be of potentially limitless application.

[105] I would allow the reclaiming motion on the transferred loss point and recall the Lord

Ordinary's interlocutor of 13 June 2024 to the extent that he repelled the defenders' seventh

plea-in-law. I would sustain that plea.

	[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Reclaiming Motion in the cause Forthwell LTD against Pontagadea (Court of Session) [2024] CSIH 38 (31 October 2024) URL: http://www.bailii.org/scot/cases/ScotCS/2024/2024csih38.html Cite as: [2024] CSIH 38

Scottish Court of Session Decisions