Forthwell Ltd v Pontegadea UK Ltd [2026] UKSC 33

A Glasgow restaurant tenant sued its landlord for repair failures and sought its subsidiary licensee's lost profits as "transferred loss". The Supreme Court dismissed the appeal, rejecting Lord Clyde's Panatown approach as too wide and indefinite to form part of Scots law, while confirming The Albazero exception applies in Scotland.

Facts

Forthwell Limited was the tenant, and Pontegadea UK Limited the landlord, of premises at 11 Exchange Place, Glasgow, under a lease dated 18 and 29 March 1996 (“the Lease”). Neither was an original party; the tenant’s interest was assigned to Forthwell in August 2013. Forthwell granted its wholly-owned subsidiary, Lynnet Leisure (Rogano) Ltd (“Lynnet”), a licence to occupy (“the Licence”), and Lynnet traded from the premises as the Rogano Restaurant and Bar, one of Glasgow’s oldest and most celebrated restaurants, trading from 1874 and at those premises from 1935 until closure in 2020 during the Covid-19 restrictions.

Clause 8 of the Licence provided that Lynnet could not oblige Forthwell to carry out repairs and that Forthwell would never be liable to Lynnet for loss arising from any deficiency in the premises. The Lease prohibited sub-letting and the parting with or sharing of possession (clauses 5.3.2, 5.3.3.1) and obliged the landlord to rebuild parts destroyed or damaged by insured risks, including flooding (clauses 1, 13.2). Forthwell also averred an implied term requiring Pontegadea to repair the common parts. Forthwell did not aver that Pontegadea knew of the Licence.

Flooding and water ingress occurred on 9 and 14 December 2020 and 10 January 2021, with a fire rendering electrical installations unsafe. Repairs were not carried out and the restaurant could not reopen. In a commercial action Forthwell sought specific implement, damages in lieu, damages for breach of the common parts obligation, and professional fees (first to third and sixth conclusions, all destined for proof before answer). The fourth and fifth conclusions claimed Lynnet’s past and anticipated future lost profits (£178,696.94 and an estimated £934,056.13), expressly pleaded as claims brought on behalf of Lynnet, with Forthwell averring it was bound to account to Lynnet.

Lord Braid, the commercial judge, allowed those claims to proceed ([2024] CSOH 59), holding that Scots law on transferred loss, as stated by Lord Drummond Young in McLaren Murdoch & Hamilton Ltd v The Abercromby Motor Group Ltd 2003 SCLR 323, rested on legal policy rather than the parties’ contemplation. The First Division, by a majority (Lord President Carloway and Lord Pentland; Lord Malcolm dissenting), allowed the reclaiming motion and dismissed the transferred loss claims ([2024] CSIH 38).

Withdrawal of the appeal

The parties settled on the morning of the hearing and Forthwell moved to withdraw the appeal. The Supreme Court refused the application, because the settlement was not dependent on withdrawal, the appeal raised a point of law of general public importance, and at least one other commercial action had been sisted pending the decision.

Issues

The court had to decide the circumstances in which a contracting party may recover damages for breach of contract in respect of losses sustained by a third party, and specifically whether the solution proposed by Lord Clyde in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, as adopted by Lord Drummond Young in McLaren Murdoch & Hamilton, forms part of the law of Scotland. It was common ground that Forthwell’s claims did not satisfy the narrow ground (Albacruz v Albazero (“The Albazero”) [1977] AC 774, as developed in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corpn Ltd v Sir Robert McAlpine Ltd [1994] 1 AC 85) and were not advanced on the broader ground proposed by Lord Griffiths in St Martins.

Arguments

Forthwell submitted that the court should endorse Lord Clyde’s approach as adopted into Scots law by Lord Drummond Young and followed in Marquess of Aberdeen and Temair v Messrs Turcan Connell [2008] CSOH 183 and Axon Well Intervention Products Holdings AS v Craig [2015] CSOH 4. It was a just solution consistent with fundamental Scots law principles. Recovery should be limited to cases where the contracting party had “a material interest” in the third party’s loss (as in family or corporate group cases), with remoteness and reasonableness rules providing further control. Forthwell had such an interest, Lynnet had a close connection with the Lease, and Pontegadea must have contemplated that “the restaurant trader” would lose profits if the repairing obligations were breached.

Pontegadea maintained that the claims were irrelevant (ill-founded in law) and should be dismissed, Forthwell not having sustained the losses claimed.

Judgment

Lord Doherty delivered the sole judgment, with which Lord Reed, Lord Stephens, Lady Simler and Lord Hodge agreed. The appeal was dismissed.

First, the court characterised the claims precisely: they were not claims for loss to Forthwell’s own performance interest but for Lynnet’s consequential losses, brought on Lynnet’s behalf, and rested squarely on Lord Clyde’s Panatown solution.

Secondly, the court analysed Panatown. The majority denied recovery because the third party, UIPL, had a direct contractual remedy under a duty of care deed. Lord Clyde’s proposed solution — permitting the contracting party to recover the loss suffered by himself and a third party, being duly accountable — was not endorsed by any other member of the committee and was inconsistent with the reasoning of the other majority judges.

Thirdly, relying on Swynson Ltd v Lowick Rose LLP [2017] UKSC 32; [2018] AC 313 and BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596; [2020] QB 551, the court held that transferred loss depends on the contemplation of the parties at contracting that the contract would benefit the third party or persons in that position; the narrow ground is a rule of implication, not a rule of law. Lord Sumption in Swynson had emphasised (at para 16, as quoted in the judgment) that the principle “is an exception to a fundamental principle of the law of obligations and not an alternative to that principle”. Lord Doherty concluded: “It is very clear that Lord Clyde’s solution does not represent the law of England and Wales.”

Fourthly, the Scottish line of authority was examined. Lord Drummond Young’s remarks in McLaren Murdoch & Hamilton were obiter, and his premise was mistaken:

Plainly, Lord Drummond Young was not correct to describe Lord Clyde’s solution as the view of the majority in Panatown. None of the other judges agreed with it. The solution does not represent the law in England and Wales. The basis upon which Lord Drummond Young adopted Lord Clyde’s solution was therefore erroneous.

In Marquess of Aberdeen and Temair and Axon Well the correctness of that approach had not been challenged, so those decisions added nothing.

Fifthly, and independently of those errors, the court gave substantive reasons for rejection. Echoing Lord Neuberger’s warning in Swynson (para 102) that the principle “should only apply in defined and limited circumstances”, Lord Doherty held:

The proposed solution 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.

It was too wide because it would permit recovery where the third party’s involvement was not contemplated at contracting, producing unforeseen consequences for the party in breach, who would not have arranged matters (for example insurance) on that footing. It was too indefinite because Lord Clyde set no limits and Lord Drummond Young envisaged “almost universal application”; Forthwell’s “material interest” test would not be clear, robust and workable. The court also noted the Contracts (Third Party Rights) (Scotland) Act 2017 and the Contracts (Rights of Third Parties) Act 1999, and that legal black holes arise in relatively few cases.

Finally, the outcome was not unjust: Forthwell and Lynnet chose their corporate structure and had no reason to expect separate personality to be disregarded. Moreover, “Prima facie, the grant of the Licence appears to have been in breach of the Lease.”

The court confirmed, contrary to the Lord President’s open question, that “There can be no real doubt that The Albazero exception is as much a part of the law of Scotland as it is of the law of England and Wales”, its origin being Dunlop v Lambert (1839) 6 Cl & Fin 600. Like the court in Swynson, Lord Doherty thought there was much to be said for the broader ground but declined to decide whether it forms part of English or Scots law, there having been no developed submissions or reasoned judgments below on that question.

Implications

The decision authoritatively settles that Lord Clyde’s Panatown solution — and Lord Drummond Young’s adoption of it as a Scots law rule founded on legal policy — is not the law of Scotland, and is not the law of England and Wales. Transferred loss remains a limited exception dependent on what the contracting parties contemplated, not a general policy-driven mechanism to prevent uncompensated loss. The Outer House decisions in McLaren Murdoch & Hamilton, Marquess of Aberdeen and Temair and Axon Well can no longer be relied upon for that proposition.

For practitioners, the case is a caution about group structures: where a tenant or contracting party allows a related company to trade from or benefit from premises without a direct contractual nexus with the counterparty, that company’s trading losses may be irrecoverable. Parties wishing to protect third party losses should use express third party rights (the 2017 Act in Scotland, the 1999 Act in England and Wales), duty of care warranties, or assignation, or should structure the contract so that the intended third party benefit is apparent at the outset.

Two points remain open. The court expressly declined to decide whether the broader ground forms part of Scots law or English law, noting that Lord Drummond Young considered it inconsistent with Scots contract principles and that Lord Malcolm had identified possible divergences (no doctrine of consideration, recognition of jus quaesitum tertio, differing emphasis on privity). It also left for another case the “deeper analysis” of the source of transferred loss in Scots law flagged by the Lord President. The confirmation that The Albazero exception applies in Scotland is, however, a clear holding.

Procedurally, the court’s refusal to allow withdrawal of a settled appeal is notable: where the settlement is not conditional on withdrawal and the appeal raises a point of general public importance with other proceedings sisted behind it, the Supreme Court may insist on hearing and determining the appeal.

Verdict: The appeal was dismissed. The Supreme Court first refused Forthwell’s application to withdraw the appeal notwithstanding settlement, then held unanimously (Lord Doherty giving judgment, with Lord Reed, Lord Stephens, Lady Simler and Lord Hodge agreeing) that Lord Clyde’s proposed transferred loss solution in Panatown, as adopted in McLaren Murdoch & Hamilton, is not part of the law of Scotland (nor of England and Wales), and that the First Division had been correct to allow the reclaiming motion and dismiss the transferred loss claims (the fourth and fifth conclusions). The court confirmed that The Albazero exception forms part of Scots law, but declined to decide whether the broader ground is part of Scots or English law.

Source: Forthwell Ltd v Pontegadea UK Ltd [2026] UKSC 33