5.  The problem of transferred loss

In English law another type of promise benefitting a third party has exceptionally been recognised by the courts, though with such promises the third party is neither given a right to sue nor is it enforcement of the promise which is sought but rather damages suffered by the third party as a result of breach of the promise. This type of exceptional recovery has been referred to as ‘transferred loss’ recovery.127

Any recovery for a third party’s losses in contract must be exceptional for the fundamental reason that the default rule for assessing the quantum of recoverable contractual damages by A under its contract with B is that only such losses of A as are reasonably foreseeable to B may be recovered by it. Both unforeseeable losses of A, as well as losses of any party other than A, fall outside this rule. The reason for the losses of other parties being excluded stems from the privity or ‘parties only’ rule of contract law. If only A gets rights under its contracts with B, to allow A to claim for another’s losses would be to subvert that rule by potentially allowing C to claim through A and thus to derive, albeit tangentially, rights from a contract to which it is not a party.128 Transferred loss claims clearly amount to a subversion of the rule and ought therefore to be permitted only for an overriding policy reason determined by the courts or implemented in relevant legislation. Such a policy reason has been held to be constituted by an equitable concern that contract breakers should not be permitted to escape liability for damage purely on account of a post-contractual division between two parties of title to sue and incidence of loss.

The circumstances in which a transferred loss claim has been thought permissible by the English courts may be stated as follows. Where A and B contract, and B’s breach of contract causes loss to C (a third party who has no right under the contract to sue for those losses) but not to B (the party who has a right to sue under the contract but has suffered no loss), then A

127In English law, the term ‘transferred loss’ was first used by Robert Goff LJ (later Lord Goff of Chieveley) in The Aliakmon [1985] QB 350. See generally on this type of claim, Unberath, Transferred Loss.

128In The Albazero [1977] AC 774, Lord Diplock remarked (at 841) that the ‘general rule’ against recovering third party losses was not, in English law, one of great antiquity. His Lordship illustrated this remark by commenting that, until the early nineteenth century, a plaintiff in an action of assumpsit relating to non-delivery of goods was entitled to recover for the full value of the goods or the full amount of the damage, notwithstanding the fact that the goods were not his own and that he had sustained no loss himself as a result of the defendant’s breach of contract. However, this remark on the alleged recent origins of the general rule fails properly to distinguish the history of actions of debt or indebitatus assumpsit (where loss to the plaintiff was indeed irrelevant) from actions of special assumpsit (where demonstration of loss by the plaintiff was required): see on the relevant history, Ibbetson, A Historical Introduction, pp. 148–51, 243–4.

and B may be taken to have entered into the contract on the basis that A will be able to sue for C’s losses on C’s behalf. Two types of fact situation have given rise to most transferred loss claims: (i) cases where goods are committed to transit by an original owner of them (A), the goods being damaged or destroyed in transit in breach of contract by the carrier (B) to the loss of the new owner (C), and (ii) cases where a building is constructed by a builder (B) for a customer (A), the building being sold as construction is ongoing to a third party buyer (C), who suffers loss when the building is subsequently discovered to be defective. In both such cases, A will have received full value for the goods or building at the time of sale (no damage or defect having yet arisen at that point), thus suffering no loss; C, on the other hand, suffers the economic loss of getting damaged goods or a defective building, but appears to have no claim against the carrier/ contractor as it is not in a contractual relationship with such party. The concern of the courts in both such cases is that, if some route to recovery by C is not found, losses which can be said to have ‘transferred’ from A to C will fall into a so-called legal ‘black hole’, and the party which has breached its contract will be allowed to escape the consequence of having done so. Such a result is considered to be inequitable, and thus as meriting a remedy. This equitable concern is similar to that which mandates recovery of third party losses in cases of bailment and of beneficiaries under the trust over a promise, and which is operative in subrogation claims by insurers, a similarity which it has been argued by Unberath indicates that transferred loss cases in English law should not be seen as the unique example of recovery for third party losses as some have suggested.129

A seemingly obvious way to achieve recovery in the problematic circumstances outlined in the previous paragraph would be for A to assign its claim against B to C, thus ensuring that C has not only suffered a loss but also possesses title to sue. However, before transferred loss recovery is permitted such an assignment must be impossible, either because assignment is not permitted under the contract or because, though permitted, B’s consent is required for such an assignment and it is being lawfully withheld (in such a case, any purported assignment by A will be invalid). If assignment is not possible, then a further conceivable avenue could be for C to argue that it is the third party beneficiary under a stipulatio alteri. However, a problem with that potential route is that, in many cases, at

129See Unberath, Transferred Loss, pp. 143–63. Recovery for third party losses by a bailor is one of the recognised cases of recovery in German law justified by reference to the principle of transferred loss: see later discussion in the main text at p. 331.

the time the contract was made no identifiable third party was intended by both A and B as the recipient of an enforceable benefit under the contract. This is certainly so in typical cases of the consignation of goods, or the construction of a building, subsequently sold to a third party. In most jurisdictions, delict or tort is not likely to provide a solution either, as the losses suffered by an owner of defective goods or a defective building will be treated as pure economic loss and thus likely to be irrecoverable. A more radical solution in contract, by which more than nominal losses would be held to have been suffered by a claimant not by virtue of any pecuniary effect upon that claimant but simply by virtue of the fact that the claimant did not receive the bargained for performance, has not found favour with the courts.130 Given the difficulty of utilising any of these different avenues of claim, the English courts developed transferred loss claims as an equitable and exceptional type of claim which would allow A to sue for C’s losses.

Initially such an exceptional claim was permitted only in cases of ­contracts for the carriage of goods sold by the owner while in transit but subsequently damaged or lost by the carrier. The right of the former owner to sue the carrier in such circumstances for the losses of the new owner131 was established in The Albazero.132 The principle justifying recovery in that case was described by Lord Diplock as being that

in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party, if such be the intention of them both, is to be treated in law

130Such a radical reformation of the principle of the assessment of damages (subsequently dubbed the ‘broad approach’) was suggested by Lord Griffiths in St Martin’s Property Corporation Ltd v. Sir Alfred McAlpine & Sons Ltd [1994] 1 AC 85, 96–97, and reiterated by Lord Goff in Alfred McApline Construction Ltd v. Panatown Ltd [2001] 1 AC 518, 546–7. These two attempts to promote the broad approach have however not found favour with the wider bench.

131Any direct claim which the new owner in The Albazero might have had under the bill of lading had prescribed (after one year) in accordance with the relevant prescriptive period specified under the Hague Rules of 1924 on the carriage of goods by sea.

132[1977] AC 774, [1976] 3 All ER 129. In the earlier nineteenth-century Scottish case, Dunlop v. Lambert (1839) 6 Cl & F 600, (1839) Macl & R 663, which was highly influential in the minds of their Lordships in The Albazero, it had been suggested by Lord Chancellor Cottenham that circumstances might arise where a consignor of goods was permitted to sue in respect of loss of or damage to them without the need to demonstrate ownership of the goods (and therefore, by implication, without the need to show any losses which it had suffered).

as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual losses sustained by those for whose benefit the contract is entered into.133

It will be remarked from this description that a blend of elements from both the stipulatio alteri (note the emphasis upon the parties’ contemplation of a third party and of their intentions) and agency (note that the non-breaching contracting party is said to have entered into a contract for the benefit of others) is used in order to create an equitable solution which amounts to neither a stipulatio alteri nor agency but rather to a new solution­ for the specific third party problem raised by the facts.

Lord Diplock’s summary of The Albazero principle suggests the following required elements to a claim:

(1)there must be a ‘commercial contract’ between A and B concerning goods (in fact, the strict ratio of the case does not extend beyond ­commercial contracts for the carriage of goods at sea);

(2)both parties must ‘contemplate’ the possible sale of the goods by A to C at a point after formation of the A–B contract but before breach by B. Note therefore that, unlike a stipulatio alteri, no definite intention that there be a third party who will have rights is necessary, merely a contemplation that there might be such a third party; and

(3)both parties must ‘intend’ that, where such a sale takes place, A will be treated as having entered into the contract with B ‘for the benefit of’ all persons (not just C, but conceivably further buyers D, E, etc.) who may acquire an interest in the goods before they are damaged or lost.

If (1) – (3) apply, then A is entitled (though note, is not forced)134 to recover C’s (or D’s etc.) contractual losses on its behalf. The elements to the claim are quite narrow. There is, for instance, no question of the principle being applicable to the recovery of damage arising out of a tort committed by B which happens to harm C, or for a breach of contract by B which causes A loss but, also, in addition, further loss to B.

133Lord Diplock, [1977] AC at 847.

134This marks a distinction with German law, to be discussed below, where the courts have said that C may compel A to transfer its claim to C, thereby ensuring that its interests are protected. The reliance, in English law, of C upon A’s willingness to raise the claim is clearly a weak link in the protection afforded to C.

No mention is made in Lord Diplock’s remarks of how C will recover these losses from A, but later decisions have held that A holds any ­recovered damages in trust for C.135 It is obvious, however, that a crucial element to the claim described by Lord Diplock is A’s and B’s joint intention to allow A to claim on behalf of C. But how is such an intention to be judged? Is one to have regard to the express contract terms and thus attempt to judge the actual intention of the parties? Or does the mere possibility of an onward sale by A to C justify an inference that A and B must have intended to give A the right to sue for C’s losses unless there is some contra-indication against such an inference? When The Albazero was decided there was no possibility in English law of C being the beneficiary under a stipulatio alteri, but now that such a status is possible for C it will, in the absence of any express statement in the contract, be a difficult task for a court to decide whether A and B intended C to be a tertius (and thus gain a direct right to sue for any losses) or whether they intended only that A might sue on behalf of C .

The problem raised in The Albazero of loss caused during shipment to a new owner of goods having no contractual title to sue for the loss was subsequently addressed in the Carriage of Goods by Sea Act 1992, which provided a statutory footing for a claim by the contracting party on the new owner’s behalf.136 However, the common law principle developed in The Albazero did not disappear with the passage of the Act.137 In fact, the principle was later extended beyond cases concerning goods damaged in transit to cases of a defective building erected under a contract between A and B, ownership of which building is transferred by A to C together with a purported but invalid assignment by A of its rights under the contract with B. This extension of the transferred loss exception was effected in

St Martin’s Property Corporation Ltd v. Sir Robert McAlpine & Sons Ltd.138

In that case, a building was sold by A to C for full value, so that A suffered no loss when the building was discovered to be defective. However, the

135This was the view taken by the Court of Appeal in Darlington Borough Council v. Wiltshier Northern Ltd [1995] 1 WLR 68. An alternative would be to see a claim as lying in unjustified enrichment.

136The Carriage of Goods by Sea Act 1992, s. 2(4).

137The statutory remedy under the 1992 Act is, for instance, inapplicable to cases in which there is no bill of lading relating to the goods. Moreover, The Albazero common law remedy remains of continued potential use in cases of carriage of goods by land which result in transferred loss.

138[1994] 1 AC 85, [1993] 3 WLR 408, [1993] 3 All ER 417 (HL). Similarities may be drawn between such circumstances and the German cases of indirect representation discussed in the main text below at p. 331.

purported but invalid assignment139 of A’s contractual rights potentially opened A up to liability in damages for breach of contract with C: why was this potentially substantial loss on A’s part not claimable by A as actual losses of its own against B? The House of Lords took the view that this was because such losses would be unforeseeable so far as B was concerned, and therefore irrecoverable (B could not be expected to have foreseen that A would fail to seek its permission for the assignment, as the contract required). As on these facts, C’s losses potentially fell into the same sort of black hole as in the cases of the consignment of goods, their Lordships decided to extend The Albazero exception to the facts of the case before them.

The principle so extended to the St Martin’s facts was, however, analysed differently in two respects (quite apart from the extension of the principle beyond the field of carriage of goods by sea) to the analysis adopted in The Albazero:

(1)The rationale for the claim was said in St Martin’s to rest upon the ‘presumed intention’ of A and B that A would be treated as having a right to sue on C’s behalf, rather than on an actual intention that that be so, as Lord Diplock had required in The Albazero. This might at first glance be thought to be an improvement on the earlier formulation, as discovering actual intention in such cases is likely to be a difficult, if not fruitless exercise. However, even the reference to a presumed intention faces two objections. First, in St Martin’s Lord BrowneWilkinson comes close to suggesting that such an intention could be presumed from the fact that the project was a ‘large development of property which … was going to be occupied, and possibly purchased, by third parties and [A]’.140 This suggests that a small development might not have benefited from the presumption. It also suggests that the mere possibility of a sale to some third party founds the intention, but such a possibility must surely exist in almost all developments with the result that the requisite intention will be nearly universally assumed. Such a position suggests that presumed intention is being used as a mask for an underlying but unexpressed judicial policy. Second, in St Martin’s the parties had expressly intended a means by which a party in C’s shoes might acquire rights, namely the assignment provided for (but not effectively undertaken) in the contract.

139The assignment was invalid because B’s consent to it had not been obtained, as the contract between A and B required. This rendered the assignment invalid.

140[1994] 1 AC at 114.

Given such an express intention to permit assignment as a means of conferring rights upon C, C’s acquiral of rights via the route of a claim by A on C’s behalf was arguably contrary to this express intention regarding third party rights. If the parties had wanted A to be allowed to sue on behalf of C, why include an assignment clause in the contract? This argument shows up the weakness in basing transferred loss analysis on the will and intention of the parties. A better solution would be to recognise that entitlement to a transferred loss claim rests upon legal policy. This was indeed recognised by Lord Clyde in the subsequent transferred loss case of Alfred McAlpine Construction Ltd

v.Panatown Ltd,141 who said of the Albazero principle that ‘it is preferable to regard it as a solution imposed by the law and not as arising from the supposed intention of the parties, who may in reality not have applied their minds to the point.’142

(2)The second difference from The Albazero was the focus on the question of the invalid assignment. In Lord Diplock’s judgment in The Albazero, there is no mention of the subject of a possible assignment of the charterer’s claim under the charterparty, and no consideration of whether, on the facts, that party might have assigned its right under the contract of charterparty to the new owner of the goods as an alternative to claiming damages on the new owner’s behalf.143 Assignment was at issue in St Martin’s, however, and such an assignment was attempted unsuccessfully. This makes a remark by one of the judges in St Martin’s, Lord Browne-Wilkinson, somewhat puzzling: his Lordship stated that it was proper to permit a transferred loss remedy because C was a party ‘who, under the terms of the contract, could not acquire any right to hold [B] liable for breach’.144 Such

astatement is factually incorrect: C could certainly have acquired a right of its own to sue for its losses had the procedure for effecting a valid assignment been followed by A. In arguing for the equities of fashioning the remedy which their Lordships did, the plaintiff’s disability appears to have been exaggerated by Lord Browne-Wilkinson.

141[2001] 1 AC 518 (HL).

142[2001] 1 AC 518, at 530. The same legal policy analysis was adopted in a Scottish transferred loss case: see the judgment of Lord Drummond Young in McLaren Murdoch & Hamilton Ltd v. The Abercromby Motor Group Ltd (2003) SCLR 323 (CSOH) at para. 42.

143The judgments in the case at the lower levels do however narrate that any direct claim by the new owner of the cargo under the bill of lading had prescribed (though no such claim had in any event been raised).

144[1994] 1 AC at 114.

Assignment was certainly, in theory, an alternative, though one which A had failed properly to utilise.

The possibility of an assignment in the latter case somewhat throws doubt on whether there was any absolute need to apply the Albazero principle to the St Martin’s facts; the better result may have been simply to refuse the claim, on the basis that A had had a way of benefiting C (through assignment) which it simply failed properly to exercise. Subsequently, in Panatown the House of Lords held that there was no sufficient reason to extend the Albazero principle to a case where the third party had an alternative means of suing under a collateral warranty in its favour relating to defects in a building. On the other hand, in Darlington Borough Council v. Wiltshier Northern Ltd145 a transferred loss claim by a financial intermediary which had never been the owner of the defective building was permitted, thus arguably extending the field of application of the principle in construction cases to any circumstances where A is indirectly representing C.146 With such an extension of the principle, it is the idea of transferred loss alone which seems capable of explaining the variety of cases said to be explicable by reference to the Albazero principle.

A transferred loss claim was not permitted in Panatown because such a claim was held to be the exception, not available where another avenue of recovery existed (even if that other avenue was potentially less remunerative to the third party). It is clear from the cases that if, on the facts of a case, an assignment, a third party right claim in contract, a tort claim,147 or a claim under a collateral warranty is available,148 the courts will insist that such an alternative avenue is utilised. This seems a reasonable conclusion­ given that transferred loss is seen as an equitable gap-filler (closing a deemed legal loophole or black hole), whereas directly enforceable third party rights, while also an exception to the privity or parties only rule, are not conceived of in such an exceptional manner, but as deriving from the intention of the parties.

It has been argued in the foregoing discussion that the preferable characterisation for a transferred loss claim is not as one which stems from

145[1995] 1 WLR 68. Similarities may be drawn between such a case and the German cases of indirect representation discussed in the main text below at p. 331.

146If the representation were direct, then the circumstances would be those of agency.

147In Riyad Bank v. Ahli United Bank (UK) plc [2006] EWCA Civ 780, [2006] 2 Lloyd’s Rep 292, the Court of Appeal held it unnecessary to consider a transferred loss claim against the defendants as they were in any event found liable in tort.

148As was the case in Alfred McAlpine v. Panatown.