Why technology lawyers should care about a Scottish landlord and tenant dispute

Last week, the UK Supreme Court handed down its decision in a long-running dispute concerning one of Glasgow's most well-known restaurants. 

At first glance, the decision appears to be of interest mainly to litigators and property lawyers. In reality, it contains an important lesson for anyone drafting or negotiating technology, SaaS, outsourcing or managed services agreements.

The issue

The court rejected a claim by a tenant who sought to recover losses suffered by its wholly owned subsidiary under the doctrine of "transferred loss", reaffirming the principle that, in general, only the contracting party can recover its own losses. 

The tenant sought to recover profits allegedly lost by its subsidiary, which operated the restaurant under a licence to occupy granted by the tenant. As the subsidiary was not a party to the lease, the tenant argued that Scots law should permit it to recover losses from the landlord as a matter of legal policy. 

The Supreme Court declined to apply the doctrine of “transferred loss” on that basis and held that such an interpretation would be “too broad and too uncertain”. It confirmed that, save for recognised exceptions such as The Albazero, a contracting party cannot generally recover losses suffered by a third party. 

Why didn't The Albazero exception help?

Whilst part of Scots law, The Albazero exception is concerned with situations where the parties know, from the outset, that the benefit of the contract, or the relevant property interest, is likely to be transferred and that any loss may ultimately be suffered by a third party. The classic examples are shipping, cargo and property transactions. 

In those narrow circumstances, the law may permit the original contracting party to recover the third party's loss. However, the current claim was different, as it was not originally contemplated that the subsidiary would acquire the benefit of the lease and therefore suffer any loss arising under it. 

Instead, it was argued that, because they were part of the same corporate group, the tenant should be able to recover the subsidiary’s lost profits as a matter of legal policy. The Supreme Court rejected that broad proposition. 

Why this matters for technology contracts

Group structures are commonplace in technology transactions.

Often SaaS, outsourcing, and managed services agreements may be entered into by a parent company while multiple subsidiaries may use the platform or receive the services. When a system fails, a data breach occurs, or a supplier misses a critical service level, the economic loss is often suffered by the user entity rather than by the contracting entity.

The Supreme Court's decision is therefore a useful reminder that lawyers should not assume that the law will automatically bridge that gap.

The drafting solution

Many technology agreements allow for access and use by affiliates via broad definitions of “authorised users” or sub-licensing provisions, but that does not automatically mean the customer can recover all loss suffered by every affiliate. Accordingly, a customer is likely to have limited recourse where it is left to rely on the doctrine of transferred loss which does not have broad application in Scots law. 

Instead, a customer should look to rely on the terms it has expressly negotiated. Where a technology contract is governed by Scots law, practitioners should look to include enforceable rights in accordance with the Contract (Third Party Rights) (Scotland) Act 2017, including:

• that affiliates are expressly identified as beneficiaries of relevant contractual rights;
• an intention that such rights are enforceable either by the affiliates directly or by the contracting party on behalf of its affiliates; and
• the losses that can be recovered by the affiliates, and confirmation that such losses are not considered indirect or consequential (or otherwise excluded).

From the technology supplier’s side, they will be focussed on:

• the interaction between direct enforcement rights and liability caps - ensuring that the commercial balance of the contract remains fair and that risk is not increased by virtue of granting such rights; and
• how claims will be managed by the contracting party on behalf of the affiliates - to avoid a significant increase in the administrative burden associated with any claim.
  
  

The practical takeaway

The real significance of the decision may be less about the doctrine of “transferred loss” and more about ensuring precise contractual drafting. 

The Supreme Court's ruling is a timely reminder why affiliate and third-party rights clauses matter, and that such provisions are more than just legal “boilerplate”.

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