There have been a number of recent decisions in Scotland referencing the principle of 'transferred loss'. This article takes a look at what the principle is, how that has developed in England & Wales and the extent to which transferred loss is recognised in Scotland.
What is 'transferred loss'?
Transferred loss is an exception to the principle of privity of contract and the compensatory principle of damages which can allow a third party to recover damages arising out a breach of contract which they are not party to. The rationale for the exception is to prevent the loss otherwise falling into a 'legal black hole', which should not exist in 'a well-regulated legal universe'. The classic example is when A enters into a contract with B which is breached by B and causes loss to a third party, C. In the ordinary course, (i) C could not sue B, because C was not a party to the contract; and, (ii) A would be unable to sue B as A was not the party who suffered the loss. The transferred loss exception allows A to sue B on C's behalf, despite A not suffering personal loss.
Position in England and Wales
Whilst the exception originated in the Scottish case of Dunlop v Lambert in 1839 6 Cl. & F 600, it has been incrementally developed and enshrined into English and Welsh law, attracting notable judicial discussion over the last twenty years. Lord Clyde has been instrumental in forging the principle South of the border in the case of Alfred McApline Construction Ltd v Panatown Ltd [2001] 3 W.L.R 946 ("Panatown").
In England and Wales, the exception is now recognised as being applicable in limited breach of contract cases. It applies when the known object of a transaction is to benefit a third party, and the breach causes loss to that third party. The boundaries of the exception have varied over time and there is a lack of certainty surrounding when the exception can apply. It has been conceptualised on a 'narrow' and 'broader' ground basis.
The 'narrow' ground has been developed to apply when the object of the contract involved property being transferred to a third party who would suffer a loss arising from the breach of contract. For example, the principle has been applied to allow a third party to recover damages in respect of damaged cargo, despite not having title (although the contract envisaged it would be passed), given that it could have been foreseen that the breach would cause the third-party loss.
The 'broader' ground is not confined to transfer of property. It instead recognises the exception based on the contracting party's interest in performance, enabling them to claim damages without proving loss. The 'performance interest' of the contracting party involves ensuring that the third party receives the benefit that had been intended in the terms of the contract. For example, if A has an interest in the performance of a promise by B, then A can recover damages in the sum of the cost of providing C with the benefit that had been promised.
The right is established to avoid a legal black hole, accordingly, on both grounds, if a right is available to the third party under tort (delict in Scotland) or by statute under the Third-Party Contracts Act 1999/ Contract (Third Party Rights) (Scotland) Act 2017, transferred loss will not apply.
Transferred Loss in Scots Law
Transferred loss has previously been referenced in the Outer House[1] and encountered judicial discussion in the Inner House for the first time in the decision of Forthwell Ltd v Pontegadea UK Ltd 2024 CSIH 38 ("Forthwell") (considered by Lord Braid at first instance). That case involved pursuers seeking to recover losses for property damage incurred by a wholly owned subsidiary as a result of the defender's breach of contract where the subsidiary was the licensee of a bar, but the restaurant had been leased by the pursuer from the defender.
- Inner House Decision
The Inner House decision of Forthwell seems to recognise the exception, albeit the boundaries of the exception are difficult to discern, particularly as there were divergent opinions from the bench in respect of its nature and applicability. In Forthwell, the pursuers sought to rely upon the dictum of Lord Clyde in Panatown; they argued they were suing on behalf of a subsidiary and would be accountable to them for any sums recovered.
Lord Carloway was unenthusiastic about recognising the applicability of the principle in Scots law, which he considered appears to have, "emerged from the ether". Lord Carloway found that transferred loss did not apply in Forthwell, finding that the circumstances fell into neither the narrow or broad category, but he did appear to leave the door open to recognising the exception in Scotland by stating, "there may require to be a deeper analysis of that in an appropriate case".
Lord Pentland agreed with Lord Carloway and found that the principle did not apply in Forthwell but confirmed that Scots Law recognises transferred loss in the same way as English law. He considered that it can be applied when the object of the transaction can be clearly identified to benefit a third party to prevent loss falling into a legal black hole, either 1) when the object of the contract was for title to property to be transferred to a third party and loss arose in respect of that; or 2) where the party enters into a contract conferring a benefit on the third party and the third party does not receive the benefit.
Lord Malcolm, providing a dissenting opinion, went further to conceive that the exception could be extended when loss would otherwise fall into a legal black hole, without requiring the contract to confer a benefit on the third party. He therefore did not confine transferred loss to only apply to contracts which display a common intention to benefit a third party.
- Recent Outer House Decision
In the recent case of Simmers v Green Cat Renewables Ltd [2025] CSOH 11, Lord Braid grappled with transferred loss again in an action by a wind farm developer against consulting engineers and a contractor in which the wind farm developer sought payment for losses sustained by him, as well as loss suffered by three special purpose vehicles. The pursuer sought compensation for the breaches of contract which had caused loss to himself personally, as well as to the special purpose vehicles.
Lord Braid recognised that whilst the ratio in Forthwell was narrow and difficult to discern, he considered transferred loss exists in Scots law. He stated, "…the ratio of Forthwell is narrow, and that case does provide some support for the view that the current state of the law is that in some circumstances a loss sustained by a third party can be recovered by a pursuer, at least where there was a contractual intention to benefit that party, or where property has been transferred. Beyond that, however, I acknowledge that it is difficult to discern from Forthwell any encouragement for a right to recover such a loss in any other circumstance". In Simmers, the pursuer was not able to establish intention to benefit the third party objectively from the terms of the contract and therefore transferred loss was not found to apply and the action, so far as it related to recovery of loss sustained by the special purpose vehicles, was dismissed.
Current Position
The Scottish Law Commission considered transferred loss in 2018 in the Report on Review of Contract Law: Formation, Interpretation, Remedies for Breach, and Penalty Clauses. Whilst the Commission provided support for statutory intervention in this area, they ultimately considered that there is a need for further investigations to identify an acceptable solution to the transferred loss problem.
It seems from the recent caselaw that Scots law will continue to recognise transferred loss to fill 'a legal black hole'. However, the Inner House decision does not serve to provide clarity on the particular circumstances and boundaries to which the exception applies.
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