Trouble in paradise (beach): When can third parties enforce a contract term?

The 6 March 2019 judgment in Chudley & Others v Clydesdale Bank PLC is worth mentioning because it illuminates section 1(1)(b)of the Contracts (Rights of Third Parties) Act 1999. Mr Chudley et al. invested over GBP1.5m in a scheme to develop a golf course in at Paradise Beach, Cape Verde. The money was paid to an account of the developer, Arck LLP with Clydesdale named “Arck LLP – Segregated Client Account” and the related letter from Arck to Clydesdale setting it up said that Clydesdale should not release any monies paid into it until a specific contingency was met.  As you have probably already guessed, this was a fraud, the contingency was never met, and the money vanished.

Section 1 of the 1999 Act was central to the judgment:

Right of third party to enforce contractual term

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.

Section 1(1)(b) applies where the parties do not expressly contract to confer a legal right on the third party: there is a rebuttable presumption that third parties can if a contractual provision “purports to confer a benefit” on an expressly designated third party (Section 1(3)). The Law Commission had recommended that third parties should need an express right, but the 1999 Act was more accommodating. In this case, since the account was to be opened “for the sole purpose of the development of the Paradise Beach Resort”, the natural construction was that the persons intended to benefit from it were the investors who transferred money into it, and the name of the intended account, “Arck LLP – Segregated Client Account” was enough to identify Mr Chudley et al. “as a member of a class or as answering a particular description”. There was nothing in the letter to indicate that the investors should not be allowed to enforce it, and since the investors were the only persons who were interested in enforcing the terms of the letter, it would surprising if the contract were construed to mean that they could not. There was much argument about what had caused the Chudleys’ losses – was it Clydesdale’s paying the money away in breach or was it the fraud – and which party had the onus to prove (or disprove) causation?  The CA decided the Chudleys had made out their case and that Clydesdale was responsible for their loss.

So why do we care? Because the case is a reminder that the 1999 Act can apply without an express designation that it does. Finance contracts usually go the other way, e.g.”A person who is not a Party has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or enjoy the benefit of any term of this Agreement”, and this case shows why.