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Black Holes and Revelations on the Transferred Loss Doctrine

Document Cited authorities 3 Cited in Related
Vincent
Pages388-393
Published date01 September 2015
DOI10.3366/elr.2015.0300
Date01 September 2015
<p>Lord Doherty's recent judgment in the Outer House case of <italic>Axon Well Intervention Products Holdings v Michael Craig</italic> <xref ref-type="fn" rid="fn1"><sup>1</sup> </xref><fn id="fn1"><label>1</label> <p><italic>Axon Well Intervention Products Holdings v Michael Craig</italic> <a href="https://vlex.co.uk/vid/axon-well-intervention-products-802052517">[2015] CSOH 4</a>.</p> </fn> is the most recent Scots authority to discuss transferred loss and the notion of damages “black holes”. Whilst the case affirms previous Scots case law on transferred loss, it appears to take a different approach to various aspects of transferred loss claims, namely, when it can be said that there is in fact a “black hole”, and the relevance of the intentions of the contracting parties regarding remedies available for third party losses.</p> WHAT IS A DAMAGES “BLACK HOLE”?

A damages “black hole” is the term used to refer to situations in which “a breach of contract has occurred, and loss has resulted from the breach, but that loss has been sustained, wholly or partly, by a person other than a party to the contract.”2

McLaren Murdoch v The Abercromby Motor Group 2003 SCLR 323 at para 33 per Lord Drummond Young.

In other words, following a breach of contract the contracting party who is not in breach has not suffered the loss, and the party on whom the loss falls is not party to the contract: neither has title to sue and the damages do not immediately appear to be actionable. The loss caused by the breach of contract is therefore said to fall into a damages “black hole” THE FACTS

The facts of Axon occur in a matrix of contracts concerning various businesses operating in the oil and gas industry. In accordance with an Arabian Equity Purchase Agreement (“AEPA”) dated 19 January 2011, the defender and his son sold their respective interests in Mechserv ME FZE (“JAFZE”) and Mechserv MEH FZE (“HAFZE”) to the pursuer, a limited liability company incorporated under Norwegian law.3

Axon at para 1.

An Equity Purchaser Agreement (“EPA”) of the same date enabled the sale of the defender's shares in Mechserv Ltd to the pursuer.4

Para 1.

 The defender remained Managing Director of Mechserv Ltd (which would become Axon Well Intervention Products UK Ltd) in accordance with the EPA.5

Para 2.

The pursuer claimed that the defender breached restrictive covenant clauses in the AEPA and EPA by competing with the businesses of JAFZE and HAFZE,6

Paras 2 and 4.

which resulted in loss on the part of Axon FZE.7

Para 4.

 The main issue in the case was whether the pursuer could recover for the loss sustained by Axon FZE,8

Para 6.

 which was at all material times a wholly-owned affiliate company of the pursuer.9

Para 9.

 A “black hole” thus appears to arise because the pursuer did not suffer the loss allegedly caused by the defender's conduct, and Axon FZE was party to neither the AEPA nor the EPA, and was thus unable to enforce the restrictive covenants

Lord Doherty's judgment focussed on whether the pursuer was able to make a claim in transferred loss. This doctrine allows, in essence, for the losses suffered by extra-contractual party C to be treated as if they were the losses of contracting party A, in order to advance a claim in respect of those losses against contracting party B, who has caused the loss.10

M Hogg, Obligations, 2nd edn (2006) para 3.174.

In accordance with the principle of transferred loss, generally C cannot recover damages for him- or herself: instead, A must sue B on C's behalf and transfer to C any damages which A has recovered on C's behalf from B.11

McLaren at para 42 per Lord Drummond Young; Hogg, Obligations (n 10) para 3.188.

 In Axon the transferred loss claim was...

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