Here one contracting party (who has suffered no loss) can recover damages from its defaulting contractual counterparty in respect of loss that has been suffered by a third party who is not party to the contract.
● A ‘legal black hole’ presents itself when a party other than contracting parties suffers loss due to the lack of an enforceable remedy. The lack of contractually enforceable remedy is due to the nonexistence of contractual relationship between the third party and the contracting party responsible for damage caused to it , in such cases the contracting party having a legal relationship with the third party will have to adopt remedial measures to cover the losses suffered by such party and claim the same from the defaulting party on his own behalf. [Most Honourable Alexander George Gordon, Marquess of Aberdeen and Temair v Messrs Turcan Connell 2008 [CSOH] ]
● In Palmali Shipping SA v. Litasco SA, [2020] EWHC 2581, Lord Foxton J bifurcated the principle of transferrable loss into ‘narrow’ and ‘broader’ basis. The broader basis of the principle states that: “The broader basis applies where one contracting party (B) has promised another (A) that it will confer a benefit on a third party (C) but does not do so. If A has a performance interest in the performance of B’s promise, A can recover damages in the amount of the cost of providing C with the promised benefit.”
● Lady Smith and Lord Drummond Young brought into light the importance of preeminently conferring damages to the Plaintiff by interpreting principle of transferred loss on a broader basis , specifically in situations wherein the presence of ‘legal black whole’ is ascertained . Further they also clarified that in such situations damages should be accorded regardless of whether contractual intention regarding the same can be conclusively determined or not [Most Honorable Alexander George Gordon, Marquess of Aberdeen and Temair v Messrs Turcan Connell 2008 [CSOH] 1 ].
● The systematic thought behind it is that , even if the contracting parties either deliberately or due the lack of application of mind fail to confer such benefit , the law nevertheless on its part imposes the means of recovering the third party’s loss. It is essential therefore to differentiate the principle of transferred loads from third party right , as the latter and not the former requires the intention to benefit the third party [Most Honorable Alexander George Gordon, Marquess of Aberdeen and Temair v Messrs Turcan Connell 2008 [CSOH] 1].
● In lieu , if the tribunal deems such intention indispensable the threshold to be ascribed to should be that of ‘imputed intention’ , wherein the contracting parties are likely to be aware of or can reasonably envision and asses from the facts and circumstances surrounding the contract , that the benefit arising out of such contract would ultimately befall a third party [Axon Well Intervention Products Holdings v Michael Craig [2015] CSOH 4, 2015 GWD].
● Further in keeping with the requirement of ‘intention ‘ Lord Neurberger while analyzing the same in Rembrandt Case [BV Nederlandse Industries van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596, [2019] 1 Lloyd's Rep 491], took into heed the positions taken by Lord Sumptions and Lord Neuberger in Lowick Rose Case [Lowick Rose LLP (in liquidation) u Swynson Ltd and another [2017] UKSC 32, [2018] AC 313].
They made two pronged observations:
Firstly, that principle of transferred loss applies when the “known object of transaction is to benefit a third party or a class of person to which the third party belongs and the anticipated effect of any breach would betide on third party or such class of person to which the third party belongs”.
Secondly, they proffered that the test to determine intention is that of ‘reasonable anticipation’ and not conclusive knowledge , thereby , the requirement is that the defaulting party which is in breach of the contract can reasonably assume, based on the relevant discussions pertaining to the contract that the property may be transferred to a person such as the third person and that person would suffer loss in event breach. This in turn becomes indicative of the fact that contracting parties are neither required to know that the loss would transpire on the third party in question nor that the party in question was intended to actively be benefited from the contract.
Thirdly such a clause was put in place to evade difficulties which emphatically arise in those situations where the defendants have no say knowledge or influence over the assignment made. Honourable Justice Foxton in Palamali Shipping SA v Litasco SA, ([2020] EWHC 2581 ) assessed the perils of such a situation
“ Whether any particular vessel be used, when, for what voyage and at what freight rate would depend entirely on decisions taken by Palmali after the COA was signed, by reference to the prevailing circumstance and without reference to Litasco. The difficulties in identifying which third parties suffered the the “transferred loss” and in what amounts, and what legal or economic connection with Palmali is necessary to bring them within the class of third party beneficiaries, all illustrate the inherent inapplicability of the principle of transferred loss to a case such as the present”
● The Court of Appeal in Alfred McAlpine v Panatown ([2000] UKHL 43] took a ‘contract-based approach’. The court proffered that a “claim for damages in respect of a third party’s loss ought to be successful where the contracting parties intended or contemplated that the contracting party not in breach should have right to make such claim.”
● Further, including loss of profit in the claim for damage would not vitiate the application of the principle of transferred loss on the basis of reasonableness. Honorable Coulson LJ in BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc 2019 EWCA Civ 596 (CA) where he stated obiter at:
“... since a claim for loss of profit is a recognised head of loss in claims under or for breach of commercial contracts, it may again be difficult to exclude the principle of transferred loss merely because of the nature of damages claimed.”
Nonetheless this position remains controversial due to the clashing positions adopted by the authorities. The cost of damages should be calculated in a reasonable manner. If the burden sought to be imposed on the defendant is “out of all proportion” to the cost of rectification , then such a claim is deemed reasonable.
● Lord Goff and Lord Millet in Alfred McAlpine v Panatown ([2000] UKHL 43] acceded to the requirement of ‘reasonableness’.The cost of damages should be calculated in a reasonable manner. If the burden sought to be imposed on the defendant is “out of all proportion” to the cost of rectification , then such a claim is deemed reasonable.
● Judge David Donaldson QC, In And So To Bed Limited v Dixon ([2001] FSR 47), while rejecting the claim of transferred loss not only analyzed what constitutes a performance interest’ but also held that loss of profit does not fall within the rondure of such rectification
“ However, it does not appear to me that Lord Griffiths’ approach assists ASTBL in the present case. The “performance interest” of party A to a contract, as envisaged by Lord Griffiths in Linden Gardens and by Lords Goff, Jauncey and Millett in Panatown, is no more than the obverse of the positive obligations assumed by the other party B. It is the benefit inherent in the performance of those obligations itself to the exclusion of any further consequential loss. Even if that were not right, A’s “performance interest” cannot, in my judgment, encompass benefits which a third party C can anticipate in consequence of steps taken by B to put himself in a position to perform the positive obligations owed by B to A. More concretely in the present case the positive obligations of the Licensee under the Agreement were, in essence, to sell bedding and associated products under the franchised name from the agreed premises. The correlative “performance interest” of the Licensor did not extend beyond that to the benefits which would enure to C under future contracts of sale by C to the Licensee of bedding products merely because the motive for their purchase by the Licensee was to resell them from the franchised premises...Loss of profit suffered by the second claimants in respect of the anticipated sales cannot therefore constitute a loss to ASTBL inherent in the defendants’ non- performance of the Agreement and is not recoverable by ASTBL as damages for repudiation under Lord Griffiths’ alternative approach.”
● This position was further reaffirmed by Justice Foxton in Palamali Shipping SA v Litasco SA, ([2020] EWHC 2581 )
“ The fact that the transferred loss in question is the loss of profits which the owning companies would have made under contracts which they would have entered into with Palmali further militates against the claim which Palmali seeks to advance. This is not a case in which the loss transferred arises from interference with or diminution in the value of a legally protected interest on the part of the third party such as a right of property or to possession (such as the owner of a home in Lenesta or cargo in The Albazero) or even a contractual right (an interest at best precariously protected in private law against interference by anyone other than the contractual counterparty), but at best from the loss of the opportunity to conclude a contract. There is no case which suggests that the principle of transferred loss is capable of extending so far”.
CONCLUSION
It is a reminder of the care parties should take when administering the retention provisions under their contract. On entering the contract, parties should agree upfront how the retention will be released, and make sure the contract records that agreement.
In addition, before entering the contract, consideration needs to be given to any third parties who will expect to rely on the contractor’s proper performance of its obligations under the contract. Any benefit that is intended to extend to third parties should be drafted for by way of reliance on an obligation to provide collateral warranties and/or third party rights under the Contracts.