Third party enforcement of contracts and class identification

9th May 2019

Natasha Dzameh

Background

The first appellant and the deceased were business partners. Their wives were the second and third appellants. The deceased’s estate was the fourth appellant. The appellants invested in a property development scheme which failed. The scheme was structured in such a way that investors would place a deposit on a plot and in return Arck LLP agreed to purchase said plot back from the investors at a profit on a specific date. The investors’ funds were paid into Arck LLP’s client account which was held with the respondent. Arck LLP provided investors with its letter of instruction to the bank detailing how the investments would be deposited but the client account it referred to was never opened. Instead the monies provided by investors were paid into a client account which was not governed by a Letter of Intent (“LOI”) and was not a segregated client account. The appellants were not provided with a LOI in any event and when redemption was to occur they received no funds. In 2009 funds were paid out of the account at the direction of Arck LLP.

In 2012 Arck LLP went into liquidation and its incorporators were imprisoned for fraud. The appellants became aware that the property development scheme had been subject to a fraud which involved extraction of funds by various parties thus the units they had invested in were unlikely to complete. They commenced a variety of proceedings including the claim against the bank. The appellants sought to recover their losses on the basis that a contract existed between Arck LLP and the bank as set out in the LOI and they were entitled to claim the benefit under the Contracts (Rights of Third Parties) Act 1999 (“CRTPA”).

The provisions of the CRTPA 1999 of particular importance in this case are those contained in section 1(1)-(3):

“(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if-
(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. “

First Instance Decision – [2017] EWHC 2177 (Comm)

HHJ Hancock QC determined that non contract existed between Arck LLP and the bank. The LOI was not intended to be legally binding. It did not come into effect until the account was opened, this being a precondition. Nonetheless the third-party issue was considered. He decided that, had there been a binding contract, the investors could take the benefit of it under the CRTPA 1999. The purpose of the LOI was to provide third party investors with a safeguard.

The bank would have been in breach of contract in not opening the account governed by the LOI however this breach was not causative of any loss to the investors. The causation point is not analysed in detail in this article.

“I suppose it is theoretically possible for a contract to be subject to a pre-condition but for the party relying upon it not to be able to inform the court what its terms were or how and when it was agreed, but it would seem inherently unlikely that such a case would succeed on the balance of probabilities.

Chudley v Clydesdale Bank Plc [2019] EWCA Civ 344, per Flaux LJ at [74]

The LOI did not refer to anyone other than the bank, the developer and the solicitor who gave the undertaking. Nonetheless for the purpose of section 1(3) CRTPA 1999 a third party could be “expressly identified” through construction of the contractual terms provided there was no implication involved.

The learned judge distinguished the case of Avraamides v Colwill [2006] EWCA Civ 1533. In that case a beneficiary asserted that a class of beneficiaries was anyone to whom the company in question “owed money of any sort”. The Court refused to allow the beneficiary’s claim. HHJ Hancock QC asserted that the prosed class in Chudley was much more limited therefore contractual interpretation was permissible.

The appellants appealed and contended that there was a contract in existence which they were entitled to the benefit of under the CRTPA 1999 and that they suffered loss as a result of the breach.

Court of Appeal

The CA was asked to consider:

  1. Whether the judge had erred in concluding that the LOI did not constitute a concluded and unconditional contract;
  2. Whether the appellants were entitled to claim the benefit of the contract under the CRTPA 1999
  3. Whether the judge has erred in concluding that the appellants had not established that their loss had been caused by the bank’s breach of contract.

The CA held that there was no evidence that the contract contained in the LOI was subject to a pre-condition or there was insufficient evidence to establish this on the balance of probabilities. The judge at first instance made a finding unsupported by the evidence and thus erred in law. The LOI was expressed to be an irrevocable and unconditional instruction to open the segregated client account and hold the monies as per the terms of the LOI. Consequently, the LOI constituted a valid binding contract between Arck LLP and the bank.

The bank had not put forward a case arguing the existence of an unfulfilled pre-condition or condition precedent. It was theoretically possible for a contract to be subject to a pre-condition and for the party relying on it to be unable to inform the Court what the terms were or how and when it was agreed. Nonetheless it was inherently likely that such a case would succeed on the balance of possibilities and the judge had lost sight of that.

The issue of express identification for the purpose of section 1(3) CRTPA 1999 depended on construction of the contract as a whole, but viewed against the admissible factual matrix. In considering the LOI as a whole it was clear that reference to a client account constituted express identification of the class, this being clients of Arck LLP investing in the relevant property development scheme. The appellants were within that class. The same contractual term was capable of satisfying section 1(1)(b) of the CRTPA 1999 and the principle purpose of the LOI was to protect investors. The judge was correct to decide that he would have determined the CRTPA 1999 issue in favour of the appellants.

The appellants’ claim was for breach of contract rather than a reliance based claim (their negligent misstatement claim having failed at trial) and the CRTPA 1999 contained no requirement that a third party entitled to the benefit of a contract needed to be aware of it at the time of the contract or any specific time thereafter.

If the bank had not been in breach of contract the monies would have been retained in the account and the appellants would not have suffered the loss. It was wrong for the judge to conclude that the appellants had no established their loss was suffered due to the bank’s breach of contract. It was not necessary for the appellants to demonstrate what would have happened to the monies if there had not been a breach.

“…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 the contract at the time it was made or at any particular time thereafter.

Chudley v Clydesdale Bank Plc [2019] EWCA Civ 344, per Flaux LJ at [80]

In brief…

  • Principles of contractual interpretation may be applied to determine express class identification for the purpose of the CRTPA 1999.
  • The same contractual term may satisfy section 1(1)(b) CRTPA 1999 and section 1(3).

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Natasha Dzameh
20th April 2019

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