Judgment explained: Forthwell v Pontegadea and the limits of transferred loss claims

Lord Doherty gave the judgment, with which Lord Reed, Lord Stephens, Lady Simler and Lord Hodge agreed.

The facts

The Rogano, which the court described as “one of the oldest and most celebrated restaurants in Glasgow”, traded from 11 Exchange Place until it closed in 2020 at the height of the Covid-19 restrictions [4]. Forthwell is the tenant and Pontegadea the landlord of the premises under a lease dated 18 and 29 March 1996; the tenant’s interest was assigned to Forthwell in August 2013 [5]. Forthwell granted a licence to occupy to its wholly owned subsidiary, Lynnet Leisure (Rogano) Ltd, which traded from the premises [1], [5]. Forthwell did not aver that Pontegadea was aware of the licence [5].

On 9 and 14 December 2020 and 10 January 2021 the premises were damaged by flooding and water ingress, and a fire after the first flood left the electrical installations unsafe [7]. The parties disputed the nature and scope of the repairs and liability for some of them; repairs were not carried out and the restaurant could not reopen [8].

In its commercial action Forthwell sought specific implement of Pontegadea’s repairing obligations, or damages, among other remedies, and it was common ground that those claims would need a proof before answer [9]. Forthwell also sued for Lynnet’s loss of profits: £178,696.94 for the period from 10 December 2022 to 31 March 2023, and an estimated further £934,056.13 to 31 July 2024 [10]. The court said these were “for the consequential losses suffered by Lynnet”, not losses suffered by Forthwell [12].

The issue

The appeal concerned “the circumstances in which a party to a contract may recover damages for breach of contract in respect of losses that were sustained by a third party” [1].

Forthwell accepted that its claims did not fall within either of the two recognised or suggested routes [14], [15], [20]:

• The narrow ground, or Albazero exception, under which a contracting party may recover a third party’s loss caused by breach of a contract relating to property where the parties contemplated that the proprietary interest would be transferred to the third party, or otherwise contemplated that the third party might suffer loss in respect of the property, provided the contractual arrangements gave the third party no direct remedy [14].
• The broader ground posited by Lord Griffiths in St Martins, under which a contracting party with no proprietary interest may have a “performance” or “expectation” interest in the contract being performed [15].

Instead, Forthwell relied on a solution suggested by Lord Clyde in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518: that the contracting party may recover the third party’s loss, “being duly accountable to them in respect of their actual loss” [23]. Lord Drummond Young had adopted that approach as part of Scots law in McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323 [20], [35]. Forthwell proposed that a claim should only be available where the contracting party had “a material interest” in the third party’s loss [20].

Withdrawal refused

On the morning the hearing was due to begin, the court was told that the parties had settled and that Forthwell would move to withdraw the appeal [2]. The court refused, “because the settlement was not dependent upon the court allowing its withdrawal, and because the appeal raises a point of law of general public importance where authoritative guidance is desirable, in particular because at least one other case is awaiting the decision in this appeal” [3]. Senior counsel had told the court that a commercial action raising a very similar issue had been sisted to await the outcome [2].

The decisions below

The commercial judge, Lord Braid, held that the transferred loss claims should proceed to a proof before answer, considering that Scots law on the point differed from the law of England and Wales [16]. The First Division, by a majority (the Lord President, Lord Carloway, and Lord Pentland, with Lord Malcolm dissenting), allowed Pontegadea’s reclaiming motion and dismissed those claims [17].

The decision

The Supreme Court held that the First Division was correct and dismissed the appeal [44]. Forthwell is not entitled to recover damages for losses said to have been suffered by Lynnet [44].

The reasoning

Lord Clyde’s solution in England and Wales

None of the other members of the House of Lords in Panatown expressed concurrence with Lord Clyde’s solution, and it “is inconsistent with the reasoning of the other judges forming the majority” [24]. Nor did Swynson Ltd v Lowick Rose LLP [2017] UKSC 32 or the Court of Appeal’s decision in BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc support it [31]. The court said the solution “is inconsistent with the requirement that it should have been in the contemplation of the parties at the time of contracting that the contract was intended to benefit the third party or at least persons in the same position as the third party”, and that “It is very clear that Lord Clyde’s solution does not represent the law of England and Wales” [31].

The Scottish authorities

The court held that “Lord Drummond Young was not correct to describe Lord Clyde’s solution as the view of the majority in Panatown”, so “The basis upon which Lord Drummond Young adopted Lord Clyde’s solution was therefore erroneous” [36]. The view that any exception rests on a rule of law, rather than “a rule of implication based upon the intention of the parties”, was not the majority view in Panatown and “is contrary to the guidance given by this court in Swynson” [37]. In the later Outer House cases, Marquess of Aberdeen and Temair v Turcan Connell and Axon Well Intervention Products Holdings AS v Craig, the correctness of that approach had not been challenged [38].

Too wide and too indefinite

The court gave “further compelling reasons” for rejecting the solution: it “would constitute too wide and too indefinite an exception to the general rule that a party can only recover damages in respect of their own loss” [39]. It endorsed Lord Neuberger’s statement in Swynson that the principle “should only apply in defined and limited circumstances” [39].

It would be too wide because it would allow recovery where the third party’s involvement was not within the parties’ contemplation when contracting, which “would be likely to produce unforeseen consequences for the party in breach”, and the parties are unlikely to have arranged their affairs, for example in relation to insurance, on the basis that such a liability might arise [40]. It would be too indefinite because its limits are vague, and the court was “not convinced” that Forthwell’s material interest test “would provide a clear, robust and workable solution” [41].

The court also noted that third parties may in some cases rely on the Contract (Third Party Rights) (Scotland) Act 2017 and, in England and Wales, the Contracts (Rights of Third Parties) Act 1999, and that legal black holes occur in a relatively small number of cases [42]. It was “not satisfied that there is a cogent case for the creation of the exception” [42].

No injustice

The court was not persuaded the outcome was unjust: “Forthwell and Lynnet chose to organise their affairs in the way in which they did”, and had no reason to believe that the ordinary consequences of their separate corporate personalities would not apply [43]. It added that the lease prohibited sub-letting and parting with or sharing possession, and that “Prima facie, the grant of the Licence appears to have been in breach of the Lease” [43].