A brief summary of the principles, recent developments and practical tips relating to the Contracts (Rights of Third Parties) Act 1999.
- The Contract (Rights of Third Parties) Act 1999 gives powers to third parties in certain circumstances to enforce terms of a contract that confer a benefit upon them, either expressly or as a matter of contractual construction.
- For a right to be enforceable by a third party, that third party must be identified in the contract, though this can be as part of a defined group.
- Where a contract appears, as a matter of construction, to confer a benefit on a third party, the third party will not be able to enforce that right if it appears from the rest of the contract that the parties did not intend the third party to be able to do so.
- In addition, no enforceable right will arise as a matter of construction unless the conferral of the benefit on the third party was a purpose of the bargain between the parties to the contract, and not just incidental to it.
- The case of Bernard Chudley and Ors v Clydesdale Bank plc (trading as Yorkshire Bank)  EWHC 2177 (Comm) concerned a claim for damages arising out of a failed investment opportunity in the Cape Verde Islands.
- As part of that claim, the Claimants alleged that a reference in a letter of intent to a “client account”, when read together with other parts of the letter that set out its purpose and imposed various limitations upon what the parties could do with monies in the client account, conferred upon clearly-identified third parties (the “clients”, which included the Claimants) enforceable benefits in relation to the operation and safe-guarding of the client accounts.
- The Judge found that no contract had in fact come into existence and the claim therefore failed. However, he went on to consider the question of whether the claimants could enforce rights under the letter of intent on a hypothetical basis.
- He held that the purpose of the letter of intent was to provide a safeguard to third parties whose monies were deposited with the bank. Thus, the intention to confer a benefit upon a third party as part of the bargain was made out.
- The issue of whether the third parties had been sufficiently identified was more difficult, but on balance his view was that they were. Although the Court of Appeal’s decision in Avraamides v Colwill ruled out a process of implied identification of third parties, it was possible for a third party to be “expressly identified” by means of a process of construction.
What this means
- The 1999 Act has given rise to relatively little case law. The Judge’s remarks on the application of the 1999 Act in Chudley are, of course, obiter dicta, but they are carefully reasoned and are likely to be highly persuasive should a similar dispute arise. Those drafting contracts should take note of them.
- The significance of Chudley is that it is likely to have lowered the threshold for establishing that a contract has (i) expressly identified and (ii) conferred an enforceable benefit on a third party. Ordinarily, the parties’ intention to confer enforceable rights upon an identified third party should be self-evident on the face of the contract. In Chudley, it is questionable as to whether the parties actually intended, through their reference to “client accounts”, to grant any rights to any clients at all.
- Plainly, the obvious lesson from Chudley is to incorporate a clause excluding the application of the 1999 Act wherever it is not intended to confer a benefit on a third party.
- Should a need arise to grant a third party enforceable rights, then that can be done by means of a specific clause that is without prejudice to the general exclusion.