18 March 2020

You may have Third Party Rights even if you don’t know a contract exists

Last year the UK Courts were not afraid to imply rights of third parties into contracts, such as letters of instruction. Chudley v Clydesdale Bank Plc showed possibility of third parties succeeding in making a claim under contracts to which they are not a party and highlights the importance of understanding (i) in which circumstances the Courts will do so; and (ii) which elements of drafting would help or hinder third party claims.

Chudley v Clydesdale Bank Plc (t/a Yorkshire Bank) [2019] EWCA Civ 344

Facts

Arck LLP (“Arck”),  a property development company had filled in an account opening form at Clydesdale Bank Plc (the “Bank”) to open an account called “Arck LLP – Segregated Client Account” (the “Account”) for the purpose of holding funds entrusted by two investors (the “Investors”) to Arck for the purpose of investing in property development (the “Funds”). 

Unknown to the Investors at the time, Arck had entered into a letter of instruction with the Bank (the “LOI”) which instructed the Bank to, among other things: 

  1. hold the Funds in the Account until 1 August 2010 and thereafter to make payments to accounts such as Arck LLP may direct; and

  2. ahead of 1 August 2010, make such payments as directed by Arck LLP on receipt of an unconditional undertaking from a specified solicitor confirming that withdrawn sums will be applied to project costs associated with a specific property (the “Property”) and repaid before 1 August 2020.

The Account was never opened, and the Funds were put into a different account held by Arck at the Bank. The Bank subsequently paid the Funds at Arck’s direction without the requirement of an undertaking. 

Arck later went into liquidation, the individuals who incorporated Arck were arrested for fraud and the Investors lost the Funds. After various court proceedings, the Investors learned of the LOI and pursued the Bank to recoup their losses by asserting their rights as third parties under the Contracts (The Rights of Third Parties) Act 1999 (the “1999 Act”). The case was heard by the High Court of England and Wales, and then by the Court of Appeal (together, the “Courts”).

Judgement

In considering whether the Investors could recoup their losses under a contract to which they were not a party, the Courts considered, among other things, whether the Investors had the right to claim their losses under such contract.

To enforce a term under the 1999 Act, third parties must demonstrate that they (i) intended to benefit under the contract in question; and (ii) are identified by the contract. The Courts held that, although these two requirements are separate and cumulative, the same term can serve to satisfy both requirements. In this instance, the High Court and the Court of Appeal found that both of these requirements were satisfied by one term.

The reference to a “client account” was both a clear indication of the intention to protect client money provided by the Investors to Arck to invest in property (thus conferring a benefit on a third party) and an identification of the third party, being a client of Arck, which the Investors were, who was intended to benefit under the 1999 Act. 

This case highlights the Courts’ willingness to uphold third party rights and to apply a broad interpretation when deciding if a party has rights under the 1999 Act. Express exclusion of rights of third parties in the contract is required if it is the desired position as there may be terms in the contract which, whether on their own or in combination with other terms of the contract, confer benefits to third parties whether or not they expressly identified, or could be identified from the information set out in the contract. 

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