Benefiting from the Contracts (Rights of Third Parties) Act
Can third parties that are not easily identifiable benefit from the Contracts (Rights of Third Parties) Act 1998?
Four investors (the Investors) paid money to Arck LLP (Arck) to invest in Paradise Beach, a property investment scheme in Cape Verde.
Arck, by way of a letter of instruction (LOI), instructed Yorkshire Bank (the Bank) to open a segregated client account for the scheme and to use the monies only on certain terms; which included not using the monies without a solicitors’ undertaking that the monies would be repaid. However, a segregated account was never opened; instead the money was paid into another account held by Arck and, without any undertaking being given, the money was paid out to Paradise Beach. Ultimately, Paradise Beach failed to repay the agreed return on the investments by the redemption date.
When the Investors later became aware of the existence of the LOI and the fact that their monies had been paid out without an undertaking, they sought to recoup their losses from the Bank by way of damages. This was on the basis that the LOI contained a contract between Arck and the Bank and therefore the Investors were third parties entitled to claim the benefit under the Act.
In particular, the Investors relied upon s1(1)(b) and s1(3) of the Act; that a third party can enforce a contractual term that purports to confer a benefit on them if they are identified in the contract by name or as a member of a class or description. Here the investors argued that reference to “a client account” in the LOI was sufficient to identify a class.
The Investors’ claim was unsuccessful in the High Court as the first instance judge determined that i) there had been no binding and unconditional contract (a condition precedent had not been satisfied); and ii) although the Bank would have been in breach of contract, there was insufficient evidence that the breach caused the Investors to lose their monies.
Nevertheless, the High Court did accept that if there had been a binding contract, then the Investors would have been entitled to the benefit of that contract on the basis of the LOI wording and (it was irrelevant that the Investors were not aware of the LOI at the time that it came into existence).
The Court of Appeal considered three questions.
- The Court of Appeal found that there was insufficient evidence to suggest that the LOI was subject to a condition precedent and therefore a binding contract did exist between the Bank and Arck.
- Looking at the construction of the LOI as a whole, the Court of Appeal accepted that reference to “a client account” was sufficient to identify a class of which the Investors were members and to confer an enforceable benefit on them. The Court went further, adding that there is a presumption of enforceability of third party rights under the Act and the burden is on the contracting parties to show that that they did not intend the third party to have the right to enforce the term; any doubts as to the parties’ intentions will be resolved in the third party’s favour.
The Court of Appeal found that the Investors had suffered a loss, that being payment of their monies without the proper undertaking. The Court clarified that it was not necessary for the Investors to demonstrate what would have been done with their monies if the breach had not occurred. As such, the Investors were entitled to damages.
Why is this important?
This case demonstrates that the broad scope of duties owed to third parties (even to those that are not identified either by name or within the master contractual document). The Court of Appeal adopted a flexible approach when determining classes identified in the contract and discarded the requirement for counterfactual evidence to be put forward to demonstrate the loss of the third parties.
Any practical tips?
When drafting contracts it is important that consideration is given to any potential obligations that may arise in respect of third parties. Care should be taken not to include wording that could unintentionally be interpreted to reference a particular class or third party description. The inclusion of an express term excluding third party rights should be considered in all relevant documents.