Legal Terms Explained: Transferred Loss

What is transferred loss?

"Transferred loss" is a limited exception to the general rule that a claimant can recover only loss which it has itself suffered (Swynson Ltd v Lowick Rose LLP [2017] UKSC 32). The principle is underpinned by the need to avoid a "legal black hole", which can arise where for example:  

• Party A and Party B enter into a construction contract to perform works to Party B's property;
• Party B's property is subsequently acquired by Party C; and
• Party C later suffers loss due to defective work originally performed by Party A under the construction contract with Party B. 

The principle of transferred loss allows Party B to recover damages for Party A's breach of contract resulting in damage to the property, even though the loss flowing from the damage is suffered by Party C and not Party B.

The legal authorities

The main authority for transferred loss is Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and others; St Martin's Property Corporation Ltd and another v Sir Robert McAlpine & Sons Ltd [1994] 1 AC 85, which identified two possible grounds for a claimant in the position of Party B to recover the loss suffered by a third party in the position of Party C:

1. Where, at the time of contracting, it was in the contemplation of Parties A and B that Party B's property would be transferred to or occupied by a third party, who would consequently suffer loss arising from Party A's breach (the "narrow ground"). In this situation, Party B is treated as bringing a claim on behalf of and for the benefit of Party C to whom it would be accountable for any damages recovered. This ground is unlikely to be available where Party C has a direct cause of action against Party A (e.g. a collateral warranty or third party rights). 
2. Party B has itself suffered loss since it had its own interest in being able to give Party C the benefit of the relevant property (the "broad ground"). Under this ground, Party B can recover the cost of rectifying defects because it represents what it would need to spend to give Party C that benefit, even where it has no legal liability to spend it. An essential component of this ground is that, at the time of contracting, the contracting parties had a common intention and/or a known objective that its terms should benefit the third party or a class of persons to which that third party belonged (also referred to as the "known third party benefit").  

Transferred loss in practice

In practice, courts tend to apply the principle of transferred loss only in "defined and limited circumstances". Parties to construction contracts, therefore, tend to address the potential risk of a legal black hole by using collateral warranties, third party rights, and/or assignments. It is noted, however, that certain standard form construction contracts exclude third party rights, which can have the effect of precluding the application of the principle (e.g. clause 1.6 JCT Design and Build Contract 2024).

* This article was originally published as part of the "Legal Terms Explained" series of Construction Law.