Mind the Gap: the UK Supreme Court clarifies the law surrounding transferred loss where there can be a ‘legal black hole’ for recovery of loss

The Rogano restaurant was recognised as one of Glasgow’s oldest and most celebrated restaurants, until it ceased trading in 2020 (after circa.146 years), during Covid-19 restrictions, and following significant property damage caused by water ingress and a fire.

It has recently made headlines for different reasons, after being at the heart of a lengthy and complex legal dispute, which culminated in the UK Supreme Court (UKSC) clarifying the law surrounding transferred loss, deciding that legal black holes for recovery of loss can, and in this case do, exist in Scots law. This article considers the case of Forthwell Ltd v Pontegadea UK Ltd [2026] UKSC 33.

Background

The property that the Rogano restaurant operated from was owned by Pontegadea UK Limited. Pontegadea let the property to Forthwell Limited under a lease.

At the time the property damage occurred, Lynnet Leisure (Rogano) Limited, a wholly owned subsidy of Forthwell, operated the Rogano restaurant under a license to occupy, granted by Forthwell.

So, there was no direct contractual link between Lynett, operating the Rogano restaurant, and Pontegadea, meaning Pontegadea, as landlord, did not owe any contractual obligations to Lynett.

The Court Action

Forthwell raised an action against Pontegadea, claiming, among other things, that Pontegadea was in breach of their repairing obligations under the lease. Part of Forthwell’s claim included consequential losses suffered by Lynett, which Forthwell argued were incurred due to Pontegadea’s breach.

Pontegadea argued that Forthwell’s claim regarding consequential losses suffered by Lynett was irrelevant and ill-founded in law because Forthwell had no right to recover losses suffered by Lynett, being a third party to whom Pontegadea, as landlord, owed no duty or contractual obligations to.

The general rule in relation to damages for breach of contract is that a party can only recover damages in respect of its own loss. However, there can be situations where the loss is suffered by someone else, who may not have a right of action against the party who caused the loss, creating a ‘black hole’ for recovery of loss. Such situations have been tussled with over the years, with a number of exceptions and suggestions being contemplated. This case forced the UKSC to consider in what circumstances Scots law allows a party with a right of action to recover a third party’s loss, on the basis of transferred loss.

The Doctrine of Transferred Loss

Lord Braid (the judge at first instance), described the doctrine of transferred loss as follows:

“The concept of transferred loss arises where a person, A, contracts with another, B, but due to B’s non-performance of the contract a third party, C, suffers loss. Leaving aside situations where C has a direct remedy against B…, the general rules are that (i) C is unable to sue B to recover its loss, since it has not contracted with B; and (ii) the loss cannot be recovered by A, because the innocent party in a contract can sue for, and recover, only its own losses, not those suffered by another.”

The Procedural History

At first instance, the court rejected Pontegadea’s argument, holding that it was possible for Forthwell to claim for Lynett’s loss, notwithstanding the contractual gap.

Pontegadea successfully appealed that decision to the Inner House of the Court of Session, who held that, even if it was possible to transfer loss under Scots law, Forthwell had failed to satisfy the necessary requirements.

Forthwell then appealed to the UKSC, who heard the case while sitting in Glasgow for the first time, and considered transferred loss in Scots law. That hearing continued despite the parties reaching a commercial settlement prior to the hearing. The UKSC refused the application to withdraw the appeal as it concerned a point of law “of general public importance where authoritative guidance is desirable”.

The UKSC’s Analysis

The court began its analysis by explaining that there might be two exceptions to the general rule that a party can only recover its own losses:

The first is known as the “narrow ground” exception, which applies to property transactions in which the contracting party can recover a third party’s losses in circumstances where, at the time of contracting, parties contemplated that any breach may cause loss to the third party.
The second is the “broader ground”, which can apply where a contracting party contracts for works to be carried out on a property owned by someone else such as a family member.

Forthwell did not argue its claim fell within these two exceptions, but rather was based on Lord Clyde’s suggested solution to the “black hole” problem in the case of Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, where Lord Clyde proposed that “a more realistic and practical solution is to permit the contracting party to recover damages for the loss which he and a third party has suffered being duly accountable to them in respect of their actual loss”. The other judges in Panatown disagreed with Lord Clyde.

Panatown is an English case, although Lord Drummond Young considered Lord Clyde’s solution to be part of Scots law in the case of McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323.

Forthwell argued the solution should only be available where the contracting party has a “material interest” in the loss suffered by a third party, and the usual rules around remoteness and reasonableness would apply. Forthwell argued it had a “material interest” in the losses suffered by Lynett, and that Pontegadea must have contemplated that Lynett would have suffered loss if it breached its obligations, meeting the requirements to plug the contractual gap.

The UKSC’s Judgement

The UKSC rejected Lord Clyde’s solution, and Lord Drummond Young’s analysis of Panatown, on the basis that it was “too wide and indefinite”, holding it was not part of Scots law (or the law of England and Wales).

The UKSC found it was: (i) “too wide” because it allows recovery where the involvement of the third party was not in contemplation of the parties; and (ii) “too indefinite” because the parameters of its application are vague and not defined.

The UKSC accepted that ‘black hole’ situations exist, but that a majority of ‘black hole’ cases will be able to rely on the “narrow” or “broader” grounds of exception to the general rule. Where they don’t, it is likely that the problem arises from inadequate consideration and planning for the ordinary legal consequences associated with separate corporate personalities.

The UKSC considered that the ‘black hole’ was avoidable in this case, as Forthwell and Lynett had chosen and created their corporate structure, and could have, for example, assigned the lease to Lynett, which would have provided Lynett with direct recourse against Pontegadea for their losses.

Practical Implications

The judgement reinforces the importance of businesses ensuring their contractual relationships reflect the operational structure of their business (which is of critical importance to group companies). Courts respect separate corporate personalities, and companies cannot assume that the courts will come to their aid to plug a contractual gap.

The decision is not a general prohibition on transferred loss. It confirmed the “narrow ground” exception is a long-established part of Scots law, while deciding this was not a suitable case to confirm the “broader ground” exception. It is, however, a rejection of an uncertain and potentially open-ended route to recovery, meaning the courts will only likely resolve a contractual gap in very limited circumstances.

The practical message is clear: if a particular corporate entity could suffer loss, the contractual arrangement should expressly address that position at the outset of the business relationship, in order to avoid the loss falling into a ‘black hole’.

If you have any questions about this case or how we can assist your business, please contact a member of our Construction, Engineering and Infrastructure Disputes team.

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