Identifying third parties who can enforce contract terms
CHUDLEY v CLYDESDALE BANK [2017]
The Court set out its approach to identifying third parties who can enforce contract terms where they are not named in the contract. Before the Contracts (Rights of Third Parties) Act 1999 (“1999 Act”), only the parties to a contract could enforce its terms (the so-called ‘privity of contract’ rule). The 1999 Act changed all that although it is relatively rare for cases to look at how the 1999 Act operates.
Background:
Section 1 of the 1999 Act provides that a ‘third party’ (ie someone who is not a party to a contract) can enforce a term of the contract if the contract expressly provides that it may or the term seems to grant it a benefit. The third party must be expressly identified in the contract by name, as a member of a class or be within a particular description.
Facts:
- The claimants (“C”) were business partners who were persuaded to invest their money in a development.
- The development company (“D”) fraudulently withdrew that money from a bank account at Clydesdale Bank (“B”). B had signed a letter of instruction (“LOI”) from D to confirm that B would hold the money invested by C in a ‘segregated client account’ and would not release any money without a solicitor’s undertaking to confirm that the necessary financial arrangements were in place, that the project would proceed and C would be repaid.
- B did not open the segregated account but instead paid the money into D’s existing general bank account and allowed money to be withdrawn without any undertaking being provided.
- To recover their money, C tried to bring a claim against B but they did not have a contract with B. To overcome this, C sought to rely upon the 1999 Act by saying that the LOI amounted to a contract between D and B, and that the requirements of the 1999 Act were met as they were identified as third parties who could therefore enforce the contract terms directly against B and claim for breach of contract.
Decision:
- The Court held that the LOI was not intended to be legally binding so there was no contract and the claim failed. However, the question considered was, if there had been a contract, would C have been entitled to enforce it under the 1999 Act?
- It was concluded that the LOI was intended to benefit third parties, but query whether the LOI expressly identified C, whether by name, class or description.
- In a previous case, Avraamides v Colwill from 2006, the Court of Appeal said that, “use of the word ‘express’ simply does not allow [for the identification of the relevant class by] a process of construction or implication”.
- The judge here nevertheless decided that it was permissible to identify someone through such a process and that this would be sufficient ‘express’ identification, provided that the process of construction did not involve an implied identification.
- There was some discussion as to whether the same contract term can be used to satisfy both requirements under the 1999 Act of conferring a benefit and of express identification. The judge concluded that this was possible – here the reference in the LOI to a client account, and hence clients who paid into that account, would have sufficed to identify C as persons intended to benefit from the contract.
Points to note:
- The comments of the judge were not strictly necessary for the purposes of deciding the case and so they are not binding on future Courts.
- The apparent conflict with the Avraamides case means that there is inevitably some uncertainty here which will hopefully be resolved before too long. In the meantime, contracting parties will be well advised to either exclude the application of the 1999 Act entirely as a matter of routine (as tends to happen quite regularly currently) or expressly identify the individuals or class of persons who are to have rights to enforce, if that is the intention. However, that will not entirely prevent third parties seeking to make innovative use of the 1999 Act, where that appears to present the only available option.