Chapter 4 Updates to the Law

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Chapter 4: Privity Damages for the loss of the third party

p. 187-188 on the Albazero exception
In Swynson Ltd v Lowick Rose LLP [2017] UKSC 32, the Supreme Court clarified the scope of the narrower Albazero exception and the broad ground in Alfred McAlpine v Panatown [2001] 1 AC 518.  In 2006, S had lent money to another company (E), relying on a negligent due diligence report prepared by the accountants. E experienced financial difficulties. S lent more money in 2007, and again in 2008. S's owner H later undertook a refinancing exercise. He supplied funds to E, which repaid the 2006 and 2007 loans to S, leaving only the 2008 loan outstanding. The monies H had supplied to E were now due to him personally. Neither the 2008 loan nor the refinancing loan was repaid. Can S sue the accountant to recover H’s loss?
Lord Sumption (with whom Lord Neuberger, Lord Clarke and Lord Hodge agreed) held that: the principle of transferred loss had previously been recognised only where a promisee suffered loss as the intended transferee of property affected by the breach. There was much to be said for it not to be limited to cases where the loss related to transferred property. However, the principle could not apply:

  • on the narrow ground of Albazero as H did not suffer loss ‘in his capacity as owner of property’ or because S did not contract with the accountant on behalf of H; nor
  • on the broader ground as it was no ‘part of the object of the contract to benefit H.

H’s loss arose out of the refinancing, which had nothing to do with the accountants and did not arise out of their breach. Moreover, H has a direct right of action to recover the loan. Lord Sumption said, at [16]:

‘… the principle of transferred loss, whether in its broader or narrower form, is an exception to a fundamental principle of the law of obligations and not an alternative to that principle. All of the modern case law on the subject emphasises that it is driven by legal necessity. It is therefore an essential feature of the principle that the recognition of a right in the contracting party to recover the third party's loss should be necessary to give effect to the object of the transaction and to avoid a "legal black hole", in which in the anticipated course of events the only party entitled to recover would be different from the only party which could be treated as suffering loss …. That is why… it is not available if the third party has a direct right of action for the same loss, on whatever basis.’