Section 1 of the Contracts (Rights of Third Parties) Act 1999 (the “1999 Act”) provides that a third party can enforce a contract if it purports to confer a benefit on them and they are expressly identified in the contract “by name, as a member of a class or as answering a particular description”. Until recently, there has been little judicial guidance on the application of this provision.
However, in the case of Chudley & Others v Clydesdale Bank PLC (Trading as Yorkshire Bank)1 (the “Bank”), the Court of Appeal held that a letter of instruction from a customer to the Bank could be enforced by a group of third party investors notwithstanding the fact that they were not named in the contract and they were not aware of the letter of instruction at the time they invested. The decision suggests that the Court will adopt a flexible approach to determining whether a third party has been sufficiently identified in a contract for the purposes of relying on the 1999 Act.
The Appellants invested monies with a development company, Arck LLP (“Arck”) to finance a property development in the Cape Verde Islands.
Prior to the Appellants making their investment, Arck had provided the Bank with a letter of instruction (the “LOI”), pursuant to which it instructed the Bank to open a segregated client account for the development and not to withdraw any of the principal investment funds from it, save on receipt of a solicitor's undertaking that the money would be repaid. The Bank did not open any segregated account and the investment monies were instead paid into another account held by Arck at the Bank, which was not governed by any letter of instruction. Arck later withdrew those funds and failed to repay the monies to the investors on the redemption date. Arck then went into liquidation and the individuals that had incorporated the company were arrested for fraud.
The LOI was not drawn to the attention of the Appellants at the time of the investment. However, they later became aware of its existence and they brought a claim against the Bank on the basis that, inter alia, the LOI constituted a contract between Arck and the Bank and the Bank was in breach of that contract by failing to open a segregated account. Although the Appellants were not party to the LOI, they contended that they were entitled to claim the benefit of the contract pursuant to the 1999 Act.
First Instance Decision
At first instance, Mr. Hancock QC (sitting as deputy judge) held that the LOI was not a binding contract because it was subject to a condition precedent (albeit he was unable to identify what the condition was), which had not been satisfied. In any event, the Judge found that the claimants had failed to establish that they had suffered any loss as a result of the Bank’s purported breach of the LOI by demonstrating what would have happened if the Bank had complied with its obligations.
Court of Appeal
The Appellants appealed the decision of Mr. Hancock QC and the Court of Appeal, with Lord Justice Flaux giving the lead judgment, unanimously found in favour of the Appellants.
With regard to the finding that the LOI was subject to a condition precedent, Flaux LJ commented that one of the oddities of the case was that the Bank did not in fact contend that the LOI was subject to any pre-condition. Consequently, there was no pleaded case as to what the condition precedent was or how and when it was agreed between the Bank and Arck. Moreover, when the point arose before the High Court and the Court of Appeal, the Bank was unable to confirm what the precise nature of the condition was. Therefore, the Court found that in concluding that the LOI was subject to a pre-condition and therefore not binding, the Judge had made a finding that was unsupported by evidence and had erred in law.
Turning to the question of whether the Appellants were entitled to the benefit of the LOI under the 1999 Act, this would, the Court held, depend on the construction of the contract as a whole, viewed against the admissible factual matrix. The Bank pointed out that the LOI did not refer to anyone other than the Bank, Arck and the solicitors who it was intended would provide an undertaking if monies were withdrawn from the segregated account. Therefore, the Bank argued that the Appellants were not expressly identified in accordance with section 1 of the 1999 Act and could not bring a claim against the Bank for breach of contract. However, construing the LOI as a whole, the Court concluded that it was clear that the reference to “a client account” in the LOI was express identification of the class, namely clients of Arck who were investing in the development and the Appellants plainly fell within that class. Furthermore, the Court noted that the provision for opening a segregated account was clearly intended to confer a benefit on the Appellants by ensuring that their monies were protected. Therefore, the requirements of section 1 of the 1999 Act, (i.e that the contract confers a benefit on the third party and they are expressly identified in the contract) were satisfied.
In addition, the Court confirmed that it was not relevant that the Appellants were unaware of the LOI at the time they made their investment. Flaux LJ noted that it is not a requirement of the 1999 Act that a third party who is entitled to the benefit of a contract was aware of its existence at the time it was made.
Finally, on the issue of loss, the Court of Appeal held that the loss suffered by the Appellants as a consequence of the bank’s breach was the payment out of their monies without any undertaking. Given that there was no issue regarding the scope of the Bank’s duty in negligence, the Appellants were not required to establish what would have happened to the monies if there had not been a breach. In any event, the Court of Appeal considered the counterfactual and held that if the monies had been deposited in a segregated account in accordance with the LOI, the Appellants would not have suffered the loss they did. Therefore, the Court concluded that the Judge was wrong to conclude that the Appellants had not established that their loss was caused by the Bank’s breach of contract.
This case demonstrates a willingness on the part of the Court to apply a broad interpretation when determining whether a person or class of persons satisfies the criteria under section 1 of the 1999 Act. Parties entering into a contract should continue to consider whether a third party may have rights to enforce that contract, even where they are not explicitly referred to in the contract.
To avoid uncertainty, contracting parties should exclude the 1999 Act entirely if possible. However, if the parties do intend to grant a third party enforceable rights, the proposed beneficiary or class of beneficiaries should be carefully defined in the contract.