Forthwell held the lease of a Glasgow restaurant, but its subsidiary operated the business and suffered the lost profits when flooding prevented it from trading. Could the tenant recover those profits from the landlord under a lease to which the subsidiary was not a party? The Supreme Court rejected Forthwell’s proposed exception to the ordinary rule that a contracting party recovers its own loss.
The premises, the lease and the licence
Forthwell acquired the tenant’s interest in the lease of the Rogano restaurant in 2013. Pontegadea was the landlord.
Forthwell then granted a licence to occupy to its wholly owned subsidiary, Lynnet Leisure (Rogano) Ltd, which traded from the premises. Forthwell did not say that Pontegadea knew of that licence. Clause 8 provided that Lynnet could not require Forthwell to carry out repairs, and that Forthwell would not become liable to Lynnet for loss caused by any deficiency in the premises.
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The lease limited use of the premises to licensed restaurant purposes, prohibited sub-letting and the parting with or sharing of possession, and required the landlord to rebuild any part destroyed or damaged by an insured risk, including flooding. Forthwell also said that the lease contained an implied term requiring Pontegadea to repair the common parts. The parties disagreed about what repairs were required and who was responsible for them.
Flooding and water ingress in December 2020 and January 2021 left the restaurant unable to reopen. A fire after the first flood left the electrical installations unsafe.
The claims in dispute
Forthwell sought repairs or the cost of carrying them out, along with other damages and professional fees. Pontegadea did not admit breach. The appeal concerned only the separate heads of claim for its subsidiary’s lost profits.
Forthwell claimed about £179,000 for profits Lynnet had lost after its business-interruption cover expired and an estimated £934,000 for further lost profits. It said it would account to Lynnet for any recovery. The difficulty was the separation between the company entitled to enforce the lease and the company whose business had suffered.
The suggested exception
Ordinarily, a party to a contract may recover damages only for its own loss. Forthwell did not rely on either of the two limited exceptions discussed in the existing authorities.
The narrower exception can apply where the contracting parties contemplated that property, or loss connected with it, would pass to or be suffered by a third party, and the arrangements gave that third party no direct remedy. It depends on what the parties intended, rather than operating automatically as a rule of law. Forthwell accepted that its pleadings did not meet that test.
A broader suggestion treats the contracting party as having lost the performance for which it bargained, even if someone else owns the property. Forthwell did not put its claim on that basis either.
Forthwell instead invoked a suggestion by Lord Clyde in Panatown. Where the contracting party had suffered no loss and the third party could not sue, the former would recover on behalf of the latter to prevent the loss falling into a legal “black hole”. On Forthwell’s case, that result did not depend on the parties having contemplated a benefit for the third party. It distinguished this proposed rule from both existing grounds.
The decisions below
The commercial judge, Lord Braid, allowed the claims to proceed. He considered that Scots law differed from the law of England and Wales and followed Lord Drummond Young: the exception existed as a matter of policy so that loss would not go uncompensated, and Forthwell would have to account to Lynnet.
A majority of the First Division reversed the commercial judge. It dismissed the claims for Lynnet’s profits without hearing evidence on the landlord’s alleged breach. Forthwell appealed to the Supreme Court.
Why the Supreme Court rejected the exception
Lord Doherty, giving the unanimous judgment, explained that Lord Clyde’s suggestion had not been adopted by a majority in Panatown. The Scottish decisions that had relied on it therefore required closer examination.
Those decisions had not established that Scots law should adopt a new exception for cases such as this. The Court considered whether the suggested rule could be justified on its own terms.
The proposed exception was in any event too wide and too uncertain. It would allow recovery where the third party’s involvement had not been contemplated, exposing the party in breach to consequences it was unlikely to have foreseen or insured against. Its limits were vague, and Forthwell’s suggested requirement of a “material interest” was not a clear or workable boundary. Transferred loss is an anomalous departure from the ordinary rule and should be available only in defined and limited circumstances.
Lord Doherty was not persuaded that so wide an exception was necessary. Some third parties may be able to use the Contracts (Third Party Rights) (Scotland) Act 2017, legal black holes arise in relatively few cases, and the narrower exception will be available in some of them. It also remains possible that the broader ground may be available in some cases.
Nor was the outcome unjust. Forthwell and Lynnet had chosen to organise their affairs through separate companies and had no reason to expect that the ordinary consequences of that choice would not apply. The lease prohibited sub-letting and sharing or parting with possession. On its face, Lord Doherty observed, the grant of the licence appeared to have breached the lease. That observation did not decide the separate dispute about Pontegadea’s repairing obligations.
The Court held that the narrower exception is part of Scots law as well as the law of England and Wales. It is now too long established to be reopened, although its historical origin involved a misunderstanding of earlier Scottish proceedings. There was much to be said for the broader ground, but this appeal was not a suitable case in which to decide whether that ground forms part of either system. The parties had throughout accepted that Forthwell’s claims did not meet it, so the point had not been fully argued or decided below. Any view expressed on it would not have been necessary to the decision.
Verdict: The Supreme Court unanimously dismissed Forthwell’s appeal. The narrower exception recognised in The Albazero forms part of Scots law. Whether the broader ground applies in Scotland or in England and Wales was left open. The parties had settled before the hearing; the Court gave guidance on the disputed point and made no further order.
Source: Forthwell Limited v Pontegadea UK Limited [2026] UKSC 33
