The case of Chudley v Clydesdale Bank Plc [2017] EWHC 2177 (Comm) offers some rare guidance on the approach to establishing whether an unnamed class of people can enforce a contractual term under the Contracts (Rights of Third Parties) Act 1999 (the Act).

Although a banking case, the guidance the case provides will equally be useful for those dealing with construction contracts.

Reminder of the relevant terms of the Contracts (Rights of Third Parties) Act 1999

Under Section 1 (1) of the Act, a person who is not a party to a contract (i.e. a third party) may enforce a term in that contract if:

  • The contract expressly provides that they may, or
  • The term purports to give a benefit to them, unless on a proper construction of the contract it appears that the contracting parties did not intend for the term to be enforceable by the third party.

Under Section 1 (3) of the Act, the third party must be explicitly identified in the contract either as a member of a class or as answering a precise description./p>

If the third party can exercise a right under the contract then, under Section 1 (5) of the Act, in an action for breach of contract any remedy is available to the third party that would have been accessible to them as if they had been a party to the contract.

Background of the case

In 2007, Clydesdale Bank PLC (trading as Yorkshire Bank) (the Bank) received and recognised a letter of instruction (the LOI) from an investment company known as Arck LLP (the Customer). The LOI instructed the Bank to open and operate a segregated interest bearing "closed end property portfolio" for investment in the Cape Verde Islands, intended for third party investors (the Account).

Subsequently, the Bank produced a letter of reference (LOR) in favour of the Customer, both:

  • Confirming that the Account had been opened as instructed
  • Providing assurances to any interested third party investors of the Customer's reliability.

Certain third party investors did then deposit monies worth around £47.5 million with the Bank, in reliance on the LOR. Four of these were the claimants in this case (the Claimants) and they, like the other investors, had not been expressly named in the LOI.

It later transpired that the account into which the monies had been deposited was not the Account which, despite having taken steps to do so, the Bank had in fact never formally created. It had also become clear that the account in question was not segregated.All the deposited monies had been withdrawn by the Customer (unbeknown to all other parties) and the Claimants lost their investments.

The case

Consequently, the Claimants sought to recover their losses and commenced actions against a number of different parties. One of these actions was against the Bank. The Claimants' case was that:

  • The LOI had been a contract between the Bank and the Customer
  • The Bank had breached the terms of the LOI and had therefore breached the contract with the Customer
  • Although the Claimants were not expressly referred to in the LOI, the reference to a client account was sufficient to identify them as a class of third party beneficiary for the purposes of the Act. Therefore, they were entitled to enforce the terms of the LOI and recover damages from the Bank.

The ruling

Judge Hancock QC held that the Claimants' case fell at the first hurdle – there was no contract between the Bank and the Customer. This was because the LOI was not intended as it stood to be legally binding: it contained a "precondition" which had to be fulfilled in order for it to come into effect, that precondition being that the Account would be established. In fact that precondition was never met.

Nonetheless, the Court did go on to consider the third point (on a strictly obiter basis) and did agree to an extent with the Claimants' position. The Judge said that the "entire purpose" of the LOI had been to provide a safeguard to any third party investors and that it represented "a promise to those third parties that their monies [would] not be released unless specific contingencies [were] met. In short, it is likely that the Claimants would have been able to claim the damages under the Act had there been a contract in place.

The Court then added some further guidance on third party claims under the Act:

  • In identifying a class of claimants for the purposes of the Act, the requirement for a claimant to be "expressly identified" could be met through a process of contract interpretation, by examining the express terms of a contract. This is provided that the review of the terms did not involve a process of implication
  • In determining this, the Court distinguished this case from that of Themis Avraamides & Anor v Colwill & Anor [2006] EWCA Civ 1533. In that case, a beneficiary had attempted to rely on a class of beneficiary which was anyone to whom the company in question "owed money of any sort".The Court in that case had refused to allow the beneficiary a claim but the Judge in this case held that the Claimants' proposed class was a "much more limited category" and so the contract interpretation route could be used
  • The same contractual term could satisfy both the requirements for express identification under Section (1) (a) and the intention to confer a benefit under Section 1 (1) (b) of the Act.In this case, the Claimants were covered by both requirements of the Act as they were referred to expressly and the term purported to confer a benefit on them.

​Key points for the construction industry

The construction industry still heavily relies on collateral warranties and has not embraced the Act.

This case is unlikely to change that practise. However, it does provide comfort to beneficiaries who have to accept third party rights as opposed to separate express terms under a collateral warranty because it applies the Act more flexibly than previous case law, potentially providing benefits to a wider pool of beneficiaries. The key lesson for the beneficiaries though, is that they must ensure that the main agreement upon which they may seek to rely is a properly executed and enforceable contract, otherwise they are hamstrung in their ability to enforce any of its terms.