Forthwell v Pontegadea: the UK Supreme Court clarifies the scope of transferred loss in Scots law

The Supreme Court has now handed down its judgment in Forthwell Limited v Pontegadea UK Limited, dismissing the appeal.^[1]  

The key legal question the Supreme Court was asked to consider is whether a contracting party can recover damages for losses incurred by a non-contracting third party under an expanded transferred loss principle. The Supreme Court rejected Forthwell’s proposed extension.  

This judgment is a welcome clarification of the existence and scope of the transferred loss principle in Scots law. For more information on the operation of the transferred loss principle in Scots law, please see our previous Legal Update here. 

Background

Forthwell and Pontegadea were the tenant and landlord respectively under a lease for restaurant premises in Glasgow. Forthwell granted a licence to occupy the premises to its subsidiary, Lynnet Leisure (Rogano) Limited (Lynnet). Following flooding and fire damage in late 2020 and early 2021, the restaurant was forced to close. Forthwell claimed that Pontegadea had breached its repairing obligations under the lease, preventing the restaurant from reopening and causing financial loss not only to itself, but also to Lynnet. The principal issue in the case was whether Forthwell could recover damages for losses suffered by Lynnet, a third party that was not itself a party to the lease. 

Forthwell’s Attempt to Broaden the Scope of the Transferred Loss Principle 

Transferred loss is a well-established principle in English law and was developed in the case of Alfred McAlpine Construction Limited v Panatown Limited.^[2] In that case, the House of Lords considered two exceptions to the general rule in contract law that a party cannot recover damages for breach of contract for losses sustained by a third party. These two exceptions, which could give rise to a transferred loss claim were: (i) a narrow ground, where a contracting party may recover a third party’s losses when the contract relates to property and the contracting parties contemplated, when they concluded the contract, that breach may cause loss to the third party; and (ii) a broad ground, where someone contracts for work to be performed on a property which is owned by another person. In this event, the contracting party may have a “performance interest” in the contract and suffer loss for breach of contract when they do not get what they bargained for.  

The claim made in Forthwell did not rely on either of those two grounds. Rather, Forthwell argued that there was a more expansive transferred loss principle under Scots law. Forthwell’s claim relied on comments made by Lord Clyde in Panatown and endorsed by Lord Drummond Young in the Outer House decision of McLaren Murdoch & Hamilton Limited v The Abercromby Motor Group Limited.^[3] Lord Drummond Young had considered that, while Panatown turned on some specialities of English law, the comments of Lord Clyde provided some guidance as to how Scots law might approach “the problem of the black hole”.^[4] Lord Drummond Young considered that the existence of “legal black holes” was “undesirable”; if a breach of contract had caused a loss, “it should be possible to obtain redress for that loss from the party in breach”.^[5] He was of the view that Lord Clyde’s suggested approach in Panatown, of deeming the innocent party to be claiming on behalf of himself and any others who had suffered a loss, should be adopted by Scots law, with the innocent party then obliged to account to the person who suffered the loss for the damages recovered.  

Forthwell argued that the Supreme Court should endorse this approach, though such a claim should only be available where the innocent contracting party had a “material interest” in the loss suffered by the third party, as Forthwell did in relation to the losses suffered by Lynnet.  

Lord Braid in the Outer House of the Court of Session found in favour of Forthwell, holding that Lord Drummond Young’s approach offered a principled and reasoned solution for Scots law and Forthwell was therefore entitled to claim damages on Lynnet’s behalf. However, this was overturned on appeal with the majority of the Inner House of the Court of Session finding that Forthwell’s claim did not represent Scots law.  Forthwell appealed to the Supreme Court. 

Judgment

The Supreme Court rejected Forthwell’s argument, noting that the suggested approach relied on an inaccurate reading of the current state of the law. Lord Drummond Young had erred in treating the comments of Lord Clyde as representing the view of the majority in Panatown. Further, this view was contrary to the guidance given by the Supreme Court in Swynson Limited v Lowick Rose LLP.^[6]

Moreover, Forthwell’s approach was objectionable for other “compelling reasons”.^[7] It could impose liability for losses suffered by third parties who were not within the parties' contemplation when the contract was made, and it would be difficult to establish clear limits on when the exception would apply. The Supreme Court also acknowledged that “legal black holes” are relatively rare and may already be addressed via other mechanisms (such as through the Contracts (Third Party Rights) (Scotland) Act 2017). There was therefore not sufficient policy justification for recognising such a broad exception.  

It is also worth noting that the Supreme Court recognised that Forthwell, by entering into a license to occupy with Lynnet, appeared to have been in breach of its lease with Pontegadea. They and Lynnet chose to organise their affairs in the way they did and had no reason to believe the ordinary legal consequences of this would not apply. In view of this, the Supreme Court was not persuaded the outcome was unjust.  

Commentary

Up until this decision, there had been uncertainty around the existence and scope of a transferred loss principle in Scots law. However, the Supreme Court’s judgment in Forthwell has now provided some much-needed clarification. 

The expansive principle Forthwell argued for has been firmly rejected. 

The narrow ground has been confirmed to be as much a part of Scots law as it is a part of
English law given it is “far too long-established to be questioned”.^[8]

The position regarding the broad ground is less clear. The Supreme Court refrained from commenting on the status of the broad ground in either Scots or English law since deciding that point was not required to determine the appeal, nor had the point been fully argued. The comments on this in the judgment therefore raise questions over the recognition of the broad ground in both Scots and English law as well as raising the possibility of divergence between Scots and English law on this point. These are questions which may arise in future cases. 

This article was prepared with the assistance of Adam Forbes, Trainee Solicitor at CMS.
 

^[1] [2026] UKSC 33 

^[2] [2001] 1 AC 518

^[3] 2003 SCLR 323

^[4] 2003 SCLR 323 at paragraph 33

^[5] 2003 SCLR 323 at paragraph 42

^[6] [2017] UKSC 32 

^[7] [2026] UKSC 33 at paragraph 39 

^[8] [2026] UKSC 33 at paragraph 46