Transferred loss after Forthwell: what group companies can recover
In short: transferred loss remains a narrow exception to the rule that a contracting party recovers only its own loss. In Forthwell v Pontegadea [2026] UKSC 33, decided on 17 September 2026, the Supreme Court rejected a general route for group company losses while leaving the separate performance-interest argument open.
A contract sits with one group company. The asset and trading revenue sit with another. When the counterparty breaches, the company holding the contract may have a claim but little loss, while the operating company has the loss but no claim. In Forthwell, the Supreme Court confirmed that common ownership does not repair that mismatch. The result depends on the rights created when the parties contracted.
A telecoms group may place the master service agreement, operating revenue and network assets in different companies. The Supreme Court applied the ordinary rules of contract damages and separate corporate personality to that kind of group mismatch. Contract owners have a practical reason to map rights and losses before signing.
Key points
- A contracting company ordinarily recovers the loss that it has suffered. A subsidiary’s lost profit does not become the parent’s loss because both companies form part of the same group. Source: Forthwell at [39] to [43]
- The narrow transferred loss exception in Albazero remains settled. It protects a contemplated third party where the contract concerns property and the loss would otherwise fall into a legal gap. Source: Forthwell at [14], [28] and [46]
- The broader ground based on the promisee’s own performance interest has serious judicial support, but the Supreme Court has still not decided whether it is a free-standing part of English law. Source: Forthwell at [29], [30] and [47]
- Lord Clyde’s separate proposal in Panatown, which would have allowed recovery of third-party loss on a general policy and accounting basis, is not English law. Source: Forthwell at [23], [24], [31] and [36] to [42]
| Proposition | Position after Forthwell | Practical effect | Authority |
|---|---|---|---|
| The claimant recovers only its own contractual loss | Settled | Separate companies must identify their own loss, even within one corporate group. | Forthwell [39] to [43] |
| The narrow transferred loss exception in Albazero, developed in Linden Gardens | Settled but confined | It depends on contemplated third-party benefit, property loss and the absence of a direct remedy. | Forthwell [14], [28] and [46] |
| The broader performance-interest ground | Open | It may support a claim for the promisee’s own loss, but it cannot yet be treated as an established route. | Forthwell [29], [30] and [47] |
| Lord Clyde’s general policy and accounting solution | Rejected | A black hole and a material group interest do not themselves transfer another company’s loss. | Forthwell [24], [31] and [36] to [42] |
The ordinary rule remains separate company, separate loss
A contracting party usually recovers only loss that it has itself suffered. In Forthwell v Pontegadea [2026] UKSC 33, the Supreme Court applied that rule to losses pleaded as the operating subsidiary’s lost profits. Forthwell held the lease and its wholly owned subsidiary, Lynnet, ran the Rogano restaurant.
Water ingress and a fire left the premises unfit for trading. Forthwell claimed Lynnet’s past and future lost profits from the landlord, Pontegadea. The claim was pleaded as Lynnet’s consequential loss, brought on Lynnet’s behalf. It was not pleaded as a loss to Forthwell’s own performance interest under the lease.
That distinction was the key question in the appeal. The Court dismissed it and confirmed that Forthwell’s interest in its subsidiary did not entitle it to recover the subsidiary’s loss. Group accounts may show the economic effect in one place, but the law still asks which legal person contracted and which legal person suffered the relevant loss.
This is a transferred loss issue, rather than reflective loss. Reflective loss concerns a shareholder’s attempt to recover a fall in share value or distributions that reflects damage to the company. Transferred loss asks whether a contracting party can recover a third party’s loss when the third party cannot enforce the contract.
The narrow transferred loss exception remains available
The narrow transferred loss route is often called the Albazero exception. It permits the contracting party to recover a contemplated third party’s property loss where the contractual structure would otherwise leave the loss without a claimant. In The Albazero [1977] AC 774, the House of Lords based that exception on the parties’ intention at formation. Legal necessity confines its use.
In The Albazero [1977] AC 774, Lord Diplock traced the exception to contracts concerning goods where the parties contemplated that ownership might pass before a breach. The original contracting party could recover for people who later acquired an interest, if that was the parties’ intention. The House refused to extend the rule where a bill of lading gave the cargo owner its own contractual remedy.
Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd extended the reasoning to building work. The parties knew that later owners or occupiers would bear the effect of defective performance, while the contract prevented assignment without the contractor’s consent. The original employer could recover for those contemplated property holders because they could not acquire a direct claim.
The exception remains narrow because the third party or class must have been within the contract’s intended benefit and must lack a direct remedy for the same loss. In Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518, the landowner had a duty-of-care deed. That direct right was critical to each judge in the majority and the contracting employer’s claim failed.
Performance-interest damages remain open
Within the transferred loss authorities, performance-interest damages are conceptually different because the contracting party claims its own loss: it paid for, or was promised, a performance that the defendant did not provide. Lord Griffiths advanced that reasoning in Linden Gardens. The majority decided the case on the narrow exception and did not establish his broader ground.
Lord Griffiths used the example of a husband who contracts and pays for repairs to a house owned by his wife. If the builder performs badly, the husband’s lack of title should not confine him to nominal damages. His loss can be measured by the reasonable cost of obtaining the performance for which he contracted.
The House of Lords divided on this analysis in Panatown. Lord Goff and Lord Millett adopted it in dissent. Lord Browne-Wilkinson assumed it was sound without deciding the point, then held that the landowner’s direct right under the deed defeated the claim. The majority result did not make the broader ground binding law.
The Supreme Court in Lowick Rose LLP v Swynson Ltd [2017] UKSC 32 said there was much to be said for the ground, but did not need to decide it. The Court of Appeal later described it as good law in BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596. Forthwell has now clarified that Swynson went no further than leaving the point open.
The unresolved ground cannot sensibly be treated as permission to claim every loss within an economic group. In SmithKline Beecham plc v Apotex Europe Ltd [2006] EWCA Civ 658, the Court of Appeal rejected an argument that the performance interest extended to anyone adversely affected by a breach. In Forthwell, Lynnet’s trading loss remained Lynnet’s consequential loss.
The Supreme Court rejects a general transferred loss solution
In Forthwell v Pontegadea [2026] UKSC 33, the Supreme Court rejected Lord Clyde’s separate proposal in Panatown. He would have allowed a contracting party to recover losses suffered by itself and third parties, subject to accounting to each loss-bearer, where that avoided a legal black hole. No other member of the House agreed.
The Supreme Court held that the proposal is not the law of England and Wales and declined to adopt it in Scots law. It sat uneasily with the requirement that the relevant third-party benefit should have been contemplated when the contract was made. A test based on the claimant’s material interest in another person’s loss was also too indefinite and potentially extended to unanticipated third parties.
The Supreme Court addressed the argument for recovery of a group company’s loss. Before Forthwell, parties could point to Scottish first-instance authority and argue for Lord Clyde’s practical solution. The Court rejected the route advanced in the appeal. A corporate group cannot rely on that policy argument to move an affiliate’s actual loss to the company that holds the contract.
Express clauses can allocate group-company costs
An express group-performance clause can help the contracting company establish its own loss. In DRC Distribution v Ulva [2007] EWHC 1716 (QB), the contract deemed acts and omissions of a performing group company to be acts and omissions of the contracting supplier.
DRC Distribution contracted to supply products that its sister company manufactured. The internal arrangements left the contracting company with no actual margin. Flaux J held that the deeming clause treated DRC Distribution as having incurred the manufacturing costs. It could therefore recover its own loss, measured by the contract price less those costs.
The deeming clause did not create a group-wide recovery principle. The result depended on its language. The judge’s later discussion of the broader ground was an alternative analysis, and his doubt about its status must now be read with the Supreme Court’s conclusion in Forthwell that the point remains open. A general right to use affiliates may not achieve the same allocation of acts, costs and loss.
Contract design for group structures
The parties can align the contractual right with the company expected to suffer the material loss, or create direct rights for that company. The drafting exercise starts with a map of the asset owner, operating company, revenue recipient, performance funder and company that will pay to remedy a breach.
Where those roles sit in different companies, the available tools include:
- making the exposed operating or asset-owning company a contracting party;
- for a contract governed by the law of England and Wales or Northern Ireland, giving that company an express right under the Contracts (Rights of Third Parties) Act 1999, subject to the exclusions in section 6;
- for a Scots-law contract, creating a right under the Contract (Third Party Rights) (Scotland) Act 2017;
- using a collateral warranty, direct agreement or deed where a direct claim is appropriate;
- providing workable assignment and novation mechanics for an asset sale or group reorganisation; and
- stating how affiliate performance, costs and liabilities are attributed to the contracting company where that company is meant to recover them.
A direct third-party right may remove the legal necessity for a transferred loss claim and gives the loss-bearing company its own claim. A court must make an appropriate reduction to a third party’s award where the promisee has already recovered specified loss or expense under section 5 of the 1999 Act. The parties can state whether third-party rights may be varied or rescinded without consent and how liability limits apply across all claimants.
These points belong in transaction design and due diligence. The Bratby Law Transactions practice covers the allocation of contractual rights and risk. The mergers and acquisitions and private equity pages address the wider deal setting in which group contracts are placed, transferred or reorganised.
Viewpoint
The Supreme Court’s reasoning in Forthwell brings useful discipline to a difficult corner of contract law. The intention-based exception remains available for contemplated property transfers, while the proposed policy rule had no clear boundary. The scope of the performance-interest ground remains unresolved because the pleadings did not raise it.
For contracting groups, the practical analysis starts with the contract, the company named in it and the loss that company can prove. Consolidated accounts do not supply the answer. A group structure that separates the promise from the exposed business needs a remedy structure built at the same time.
Frequently asked questions
Can a parent company use transferred loss to recover a subsidiary’s lost profits?
Ordinarily no. The parent must identify loss that it has suffered under its own contract. Common ownership, control or an economic interest in the subsidiary’s results does not transfer the subsidiary’s loss to the parent. A recognised exception or an express contractual route is required.
What is the narrow transferred loss exception?
The Albazero exception allows a contracting party to recover a contemplated third party’s property loss where the parties intended the contract to protect that person or class and the loss-bearer has no direct remedy. The claimant recovers for the third party’s benefit and must account for the damages.
Did Forthwell decide that performance-interest damages are available?
No. The Supreme Court said there was much to be said for the broader performance-interest ground but held that Forthwell was not a suitable case in which to decide it. Its status as a free-standing part of English and Scots law remains open.
How can a contract protect an operating group company?
The operating company can be made a party, given an enforceable third-party right, or protected by a collateral warranty or direct agreement. The parties can also attribute affiliate performance and costs to the contracting company. The choice depends on the intended claimant, remedies, liability limits and control of enforcement.
If your group contracts separate the company holding the contractual right from the company operating the business or holding the asset, email Rob Bratby or use the Bratby Law contact page to discuss the remedy structure.
