Elizabeth Stevens on the identification of third parties under the Contracts (Rights of Third Parties) Act 1999
The case of Chudley v Clydesdale  EWHC 2177 (Comm) has provided some rare commentary on the identification of third-party beneficiaries under the Contracts (Rights of Third Parties) Act 1999.
In brief, the Claimants had invested significant sums of money in an offshore property investment scheme run by an entity called Arck. Arck was, in fact, acting fraudulently and went into liquidation, which resulted in the Claimants losing their investments.
The Claimants brought their claims against the Defendant-bank, of which Arck was a customer. The bank had signed a letter of instruction (LOI) from Arck to confirm that the bank would hold the investors’ money in a “segregated client account” and would not release any money without a solicitor’s undertaking to confirm that certain financial arrangements were in place, such that the project would proceed and the claimants would be repaid.
The investors claimed that they had been shown the LOI by Arck and that they had relied upon it when deciding to invest in the scheme. It transpired that the LOI was not followed. The bank did not open a segregated account; instead, the money was paid into Arck’s general account and the bank permitted it to be withdrawn without any undertaking.
The investors brought claims against the bank for (1) breach of contract; (2) negligent misrepresentations made in the LOI; (3) breach of a Quistclose trust by the Bank; (4) dishonest assistance in Arck’s breach of trust; and (5) restitution.
The Claimants’ case failed in respect of all of their five causes of action but I intend only to consider the breach of contract claim. The Claimants contended that the LOI amounted to a contract between Arck and the bank and that the requirements of the Contract (Rights of Third Parties) Act 1999 were met such that they were entitled to enforce the terms of the LOI directly.
Section 1 of the 1999 Act provides that a “third party” can enforce the terms of a contract if:
“(1) (a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a benefit on him
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.
(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into”.
The judge considered whether the LOI contained an express identification of the Claimants so as to comply with section 1(3) of the 1999 Act. The Bank argued that the LOI did not refer to anyone expressly other than the bank, Arck and the solicitor who was to provide the undertaking. The Claimants countered that the mere reference to a segregated client account was sufficiently “express” to identify the investors paying into the account as a class of third-party beneficiary for the purposes of the 1999 Act.
The judge accepted the Claimants’ position. He concluded that although the Claimants could only be identified through a process of construction (as those investors paying into the account), this process resulted in a definite class of beneficiary that had been expressly identified.
Ultimately, however, the breach of contract claim failed as the LOI was not intended to be a legally binding contract between Arck and the bank and consequently there was no contract for the Claimant to enforce. Furthermore, the Claimants had failed to provide sufficient evidence to prove that they would not have lost their money even if the bank had complied with the LOI.
The judge’s approach to the 1999 Act is rather surprising given the conclusion of the Court of Appeal in the case of case of Avraamides v Colwill  EWCA Civ 1533, that “section 1(3), by use of the word “express”, simply does not allow a process of construction of implication”. The judge sought to distinguish this case on the basis that the Court of Appeal intended to exclude only “the process of construction which in fact amounted to implication” but it is difficult to see how this distinction was drawn. Further clarification from the Court of Appeal about the correct approach to identifying third parties for the purposes of the 1999 Act is needed.
Elizabeth's profile is available here.