Transferred loss: a limited exception to the general rule for recovering damages

Forthwell Ltd v Pontegadea UK Ltd [2026] UKSC 33 (17 September 2026)

The Supreme Court has considered 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.

Although the parties settled the dispute on the morning of the appeal hearing, the Supreme Court refused the application to withdraw the appeal because the appeal raised a point of law of general public importance where authoritative guidance was desirable. Furthermore, there was at least one other case awaiting the decision in this appeal.

The Supreme Court has unanimously held that the transferred loss in this case could not be recovered. In doing so, it confirmed the Supreme Court decision on transferred loss in Lowick Rose LLP v Swynson Ltd & Anor [2017] UKSC 32 (11 April 2017), namely that it is a very limited and defined exception to the general rule that a contracting party can only recover for its own loss.

The Supreme Court in this case declined to widen the scope of the exception because to do so might result in uncertainty and unforeseen consequences.

The background facts

Forthwell Ltd (Forthwell) was the tenant and Pontegadea UK Ltd (Pontegadea) the landlord of premises at 11 Exchange Place in Glasgow pursuant to a lease (Lease), the benefit of which was assigned to Forthwell in August 2013.

Forthwell granted its wholly owned subsidiary, Lynnet Leisure (Rogano) Ltd (Lynnet), a licence to occupy the premises (Licence) and Lynnet traded from them as the Rogano Restaurant and Bar. It was not argued that Pontegadea was aware of the Licence.

Pursuant to the Licence, Forthwell was not obliged to carry out any repairs or other work on the premises, nor was it liable to Lynnet for any loss, injury or damage sustained by Lynnet due to any deficiency in the premises.

The restaurant closed during Covid-19 restrictions in 2020. During December 2020/January 2021, the premises were damaged by flooding, water ingress and a subsequent fire. Due to a dispute between the parties as to responsibility for the repairs that needed to be carried out, the restaurant remained closed.

The claims

Forthwell had a claim in respect of the repairs it required Pontegadea to carry out on the premises, alternatively damages in respect of the alleged breach of the landlord’s obligation to maintain the common parts.

However, this litigation was concerned with Forthwell’s claim for past and anticipated future loss of profits said to have been suffered by Lynnet because it was unable to trade from the premises.

Pontegadea maintained that Forthwell could not recover in respect of consequential losses alleged to have been suffered by Lynnet (transferred loss claims).

The Scottish commercial judge found in favour of Forthwell. On appeal, the majority of the First Division of the Inner House of the Court of Session allowed the appeal, finding that Forthwell could not claim for Lynnet’s losses.

Forthwell appealed to the UK Supreme Court.

The law

In general, only a party to a contract can sue for damages for breach of that contract and it can only recover for losses it has itself suffered.

Albazero

One exception to the general rule was set out by the House of Lords in Albacruz -v- Albazero (Albazero) [1977] AC 774, in which it was held that an innocent contracting party can recover a third party’s losses where the contract relates to property and the contracting parties contemplated, when they agreed the contract, that breach may cause loss to the third party. This is referred to as the narrower ground exception.

Another possible exception is where a person contracts for work to be performed on a property which is owned by someone else (such as a family member). The contracting party may have a ‘performance interest’ in the contract and suffer loss for breach of contract because they have not got what they bargained for. This is referred to as the broader ground exception.

Panatown

Forthwell’s case did not fit into either of the above scenarios. However, it relied on Alfred McAlpine Construction Limited v. Panatown Limited [2000] UKHL 43; [2000] 4 All ER 97; [2000] 3 WLR 946 (27th July, 2000), in which Lord Clyde in the House of Lords suggested that in order to avoid a legal black hole, the law should deem the innocent party to be claiming on behalf of himself and any others who have suffered loss.

In Panatown, the employers under a building contract sued the contractors for breach of their contractual obligations. The site and the building were owned by another company (UIPL) in the same group. In terms of the building contract, the contractors were obliged to grant a duty of care deed (DCD) in favour of UIPL which they duly did.

Panatown advanced a transferred loss claim to recover damages for defective work and delay. The Court, by a majority of three to two, held that Panatown were not entitled to recover the damages claimed. The two dissenting Lord Justices would have upheld the claim on the broader ground.

The majority were influenced by the fact that UIPL had a direct contractual remedy (the DCD) against the contractors. Lord Clyde thought that solution was somewhat artificial and that a contracting party should be able to recover for its loss and that of a third party, so long as it accounted to the third party for that loss. However, none of the other members of the House of Lords concurred with this suggestion.

Forthwell argued nonetheless that Lord Clyde’s approach had been followed in a Scottish case and that it, therefore, formed part of Scottish law.

Swynson

In Swynson, the Supreme Court considered transferred loss and made it clear that:

1. The distinct legal personality of companies is a fundamental feature of English commercial law. Individual businessmen and commercial entities should, therefore, arrange their affairs accordingly.

2. The principle of transferred loss is an exception to the general rule that a contracting party can only recover for its own loss. It is not an alternative to that principle and is based on legal necessity. Therefore, it must be necessary to give effect to the object of the transaction and to avoid a legal black hole.

3. Consequently, as decided by the majority in Panatown, it is not available where the third party has a direct right of action for the same loss, on whatever basis.

The Supreme Court decision

The Supreme Court confirmed that Lord Clyde’s solution in Panatown did not represent the law of England and Wales.

Furthermore, the basis upon which it had been relied on in the Scottish case cited by Forthwell was erroneous. Nor did any of the other Scottish cases considered by the Supreme Court indicate that it formed part of Scottish law.

The key authority on transferred loss was Swynson, in which it was made clear that the principle should only apply in defined and limited circumstances. The proposed exception argued by Forthwell would be too wide because it would allow recovery in circumstances where the involvement of a person such as the third party was not within the contemplation of the parties at the time of contracting.

That would be likely to produce unforeseen consequences for the party in breach. They were unlikely to have arranged their affairs (eg in relation to insurance) on the basis that such a liability might arise.

Additionally, the limits of its applicability were too vague. Forthwell’s suggestion, that the third party must have a material interest in the relevant contractual obligation, did not provide a clear, robust and workable solution.

The Supreme Court, therefore, dismissed the appeal.

Comment

The Supreme Court did not think the outcome was unjust. Forthwell and Lynnet had chosen to organise their affairs in a way that ultimately proved to be disadvantageous to them. They must accept the ordinary legal consequences associated with their separate corporate personalities.

The Supreme Court also noted that the Lease prohibited sub-letting and the parting with or sharing of possession of the whole or part of the premises. It appeared, therefore, that the grant of the Licence was in breach of the Lease.

Application

In commodities and sale of goods contracts, an issue may arise where one company in a corporate group enters the contract, but a subsidiary or other group company suffers the loss because the goods were intended for the latter’s benefit. This latest decision reinforces the fact that transferred loss claims are exceptional and will seldom succeed. A party seeking to preserve the potential for such a claim would need to ensure the contract clearly identified third parties for whose benefit the contract is entered into and made clear the parties’ agreement to permit transferred loss claims in respect of those third parties.

This was underlined in Palmali Shipping SA v Litasco SA [2020] EWHC 2581 (Comm) (01 October 2020), where an attempt to claim transferred loss failed because there was no common intention between the parties to a contract of affreightment (COA) to confer a benefit on the third parties in question, nor did the counterparty know that this was the objective. In that case, Palmali sought to calculate the losses resulting from the breach of the COA on the basis of losses borne by different companies within the same corporate group.

The Court decided that the basis on which Palmali contracted with other intra-group companies in order to enable them to perform their obligations under the COA was irrelevant for these purposes. Furthermore, the intra-group companies had an alternative remedy for recovering their losses, so there was no ‘legal black hole.’

Find out more about our Commodities expertise or contact us today to discuss how we can support you.