In a recent judgment relevant to the construction industry, the Supreme Court has held that a broad right to recover “transferred loss” does not exist in Scotland. The decision in Forthwell Limited v Pontegadea Limited has important implications for the construction industry, and emphasises the need to think thoroughly about contracting structures and third-party rights, so that a claim is not frustrated due to a ‘black hole’.

Background

The general rule in disputes is that a party can only recover its own losses. The general rule is also that only parties to a contract can bring a claim for breach of that contract.

Imagine, then, a contract between Party A and Party B, where Party A employs Party B to construct a new office block. However, Party A contracts for the benefit of Party C – another company within its corporate group, which will own the constructed building. Defects are found in the building. Party A has a claim under the building contract but no loss as it does not own the defective building. Party C has suffered the loss because it owns the defective building but has no claim, as it is not a party to the building contract.

Circumstances like these are known as ‘black holes’. The risk of black holes is prominent in the construction sector and several of the key cases – such as Linden Gardens and Panatown – concern construction projects. ‘Black holes’ are avoided by various methods, including collateral warranties and third-party rights pursuant to the Contracts (Third Party Rights) (Scotland) Act 2017 (or in England, the similar 1999 Act). Where such mechanisms giving Party C a claim do not exist, the courts have developed a principle allowing Party A to recover Party C’s loss where the contracting parties contemplated that the property or the loss in respect of the property would be transferred to Party C (known as the “narrow ground”).

There had, however, been a line of cases in Scotland holding that there was a general ability – of “almost universal application” – to recover damages on behalf of a third party, irrespective of whether it was the intention of the parties. Whether that was correct in Scots law came before the Supreme Court in Forthwell.

The Supreme Court’s decision in Forthwell

The dispute concerns the Rogano restaurant in Glasgow. Pontegadea was the landlord and Forthwell the tenant of the property. However, Forthwell did not operate the restaurant; its subsidiary, Lynnet Leisure (Rogano) Ltd, did through a licence granted by Forthwell. In December 2020 and January 2021, the restaurant was badly damaged by floods and fire. It was not possible to operate the restaurant and it has not since reopened.

Forthwell brought litigation against Pontegadea. It sought an order requiring Pontegadea to repair the premises. Importantly for the present discussion, it also brought a claim for Lynnet’s lost profits arising from the restaurant being shut. Forthwell did not argue that Pontegadea was aware of the licence granted to Lynnet or rely upon the “narrow ground”. It instead sought to establish its claim based on the general ability to recover damages for a third party in Scots law.

The court held that there was no such general principle in Scots law, and therefore Lynnet’s losses could not be recovered by Forthwell.

One of the Supreme Court’s reasons was that such a general right to recover for a third party would be too wide and indefinite, allowing recovery where the involvement of a third party was not within the contemplation of the parties at the time of contracting. Parties are therefore unlikely to have arranged their affairs (such as insurance) on the basis of such potential liabilities.

What does this mean for construction projects?

First, the decision re-emphasises the importance of considering contracting structure carefully from the outset, and securing collateral warranties or third-party rights for those who need them. Doing so avoids the prospect of a ‘black hole’ arising, and Forthwell emphasises that there will be no broadly applicable cure for such a problem.

Second, if there is no collateral warranty in place, it may still be possible to raise a claim. The Supreme Court held that the “narrow ground” formed part of Scots law. In addition, while not deciding the issue it also noted that the “broad ground” – where the contracting party can recover its losses for defective works even if not the owner of the property – may exist in Scots law, albeit it did not decide the point because it had no application to the case. However, you don’t want to be in that circumstance if it can be avoided - had there been a collateral warranty or third-party rights, then Lynnet may have been able to recover its lost profit.

Visit both Axiom Advocates and MFMac at the Scottish Construction Summit on 22 October 2026.