Do ‘legal black holes’ exist in Scots law?

In the case of Arthur Simmers v Green Cat Renewables Limited and Green Cat Contracting Limited^[1], the Court of Session has revisited the principle of transferred loss and whether it forms part of Scots law. This principle relates to whether there are situations in which one contracting party may sue their counterparty for losses suffered by a third party, who is not a party to the contract. The Court decided in this case that the pursuer had not pled a relevant transferred loss claim. Whether or not the principle of transferred loss forms part of Scots law remains uncertain but the Court confirmed, with reference to the earlier case of Forthwell Limited v Pontegadea UK Ltd^[2], that ‘to the extent that Forthwell might offer a glimmer of hope to third parties in some situations that a transferred loss might be recoverable, the pursuer does not make relevant averments to bring himself within the limited circumstances where that might be the case.’ 

Background

In 2016 the pursuer, Mr Simmers, entered into contracts with the defending engineering and construction companies, Green Cat Renewables Limited (GCR) and Green Cat Construction Limited (GCC), to design and construct three wind turbines in Aberdeenshire. Each turbine was owned, not by the pursuer, but by an SPV company. Each of the three turbines was then accredited by Ofgem as part of the Feed-In-Tariffs (“FIT”) Scheme, such that the electricity generated would entitle each of the three SPVs to receive FIT payments. 

The pursuer then brought proceedings to recover losses allegedly incurred by himself and the SPVs, on the basis that the defenders were in breach of contract because they had erected the turbines in the wrong locations and had failed to construct the turbine bases in accordance with the contract.

A preliminary question arose as to whether the pursuer, as the employer under the relevant contracts, was entitled to sue the defenders for the losses incurred by the SPVs which did not have a contractual relationship with the defenders. 

The existence of a transferred loss principle in Scots law

Up until 2024, while there was some support for the view that the principle of transferred loss was recognised in Scots law, the position was far from clear. The rationale for such a principle was that the law should not allow third party losses to fall into a legal black hole, which would occur, if a party to a contract was unable to recover those losses from the other party in breach. Transferred loss is a well-established principle in English law and developed in the case of Alfred McAlpine Construction v Panatown^[3]. In that case, the House of Lords considered two exceptions to the general rule in contract law (that a person cannot recover damages for breach of contract where he has suffered no loss) which would give rise to a successful transferred loss claim. These were (i) the narrow ground, where the loss arises in respect of property and the parties to a contract intended to transfer title to that property to a third party; and (ii) the broad ground, which is only available when a party can show that, at the time of contracting, there was a common intention to benefit the third party.

In 2024, the Scottish appeal court, the Inner House of the Court of Session, provided some limited clarification in the case of Forthwell on the question of whether there is a principle of transferred loss in Scots law.

The majority (consisting of Lord Carloway and Lord Pentland) provided differing views on the existence of the principle in Scots law – Lord Pentland recognised that it did, whereas Lord Carloway was less convinced by this stating that transferred loss “appeared to have ‘emerged from the ether’ in an unprincipled way” and suggested that this might be explored further in an appropriate case. However, both judges acknowledged, following the decision in Panatown, that if transferred loss did form part of Scots law, third party losses could only be recovered within the scope of the narrow or broad ground. The third judge, Lord Malcolm, who gave a dissenting Opinion, was of the view that the transferred loss principle exists in Scots law and that it should not be restricted only to cases where there is an intention to benefit a third party. In his view, the principle arose as a matter of a general legal policy to ensure that if a loss results from a breach of contract then it should be recoverable from the party responsible for the breach (as discussed in Panatown). The scope and extent of the transferred loss principle in Scotland therefore remained uncertain following Forthwell and it was against this background that the Simmers case was heard.

In Simmers, Lord Braid began by acknowledging that transferred loss was a ‘thorny topic’ when considered in the context of Scots law. Having analysed the three judges’ opinions in Forthwell, he concluded that the current state of Scots law is that, in some circumstances, a loss sustained by a third party can be recovered by a pursuer, at least when a case falls within the exceptions of the narrow or broad grounds as defined in Panatown. However, it was “difficult to discern… any encouragement for a right to recover such a loss in any other circumstance.” The Simmers decision is therefore aligned with the Opinion of Lord Pentland in Forthwell.

Lord Braid also pointed out that, on any view, it was not possible for a pursuer to sue in respect of a third party’s loss if the third party has a direct right of action by virtue of the jus quaesitum tertio (a principle of Scots law that permits contracting parties to confer an enforceable right on a third party). 

In respect of Mr Simmers’ claim, Lord Braid held that, since the transferred loss part of the claim did not fall within either of the two exceptions referred to by the majority in Forthwell, a large part of his case fell to be struck out. 

Commentary

While the current case law provides limited support for the existence of a transferred loss principle in Scots law, there is an element of uncertainty around this (given the split decision in Forthwell) and, if such a principle is recognised, its scope and whether that mirrors the English law position. It is understood that that the pursuer in Forthwell intends to appeal this decision and so it may be that further clarity is forthcoming on whether the transferred loss principle forms part of Scots law. Until then, it cannot be said with confidence that it does.

* CMS is instructed to act on behalf of the defenders in the Simmers case.
 

^[1] [2025] CSOH 11

^[2] [2024] CSIH 38

^[3] [2001] 1 AC 518