New York common law allows a third party to enforce contractual obligations made for its benefit, where there is clear evidence that the intention of the contracting parties was to permit the third party to enforce those rights. Bayerische Landesbank (BL) argued that it could, as an investor in a synthetic collateralised debt obligation (CDO), sue the portfolio manager for the loss of its investment (in this case, about 60 million bucks) – even though BL was not a party to the portfolio management agreement (PMA) which defined the manager’s role and duties on behalf of investors. That contract was between Aladdin Capital and the shell issuer of the notes purchased by investors: it stated in section 29 that no person apart from the issuer and the manager had any right, benefit or interest in the agreement, ‘except as otherwise specifically provided herein’. Goldman Sachs, the swap counterparty, was then specifically identified as an intended third-party beneficiary, but there was no mention of investors in the scheme. BL argued that ‘herein’ didn’t refer only to section 29 but to the agreement as a whole.

Rakoff J concluded that section 29 of the PMA did not on its own confer third-party rights on investors, but that ‘herein’ was indeed ambiguous. He preferred BL’s reading because other provisions of the PMA tended to suggest that investors were within the intended scope of the third-party rights. Investors could, for example, remove Aladdin as portfolio manager for breach of duty; it would be ‘odd’ if they could not also sue it for that breach. BL’s position was plausible even without looking beyond the four corners of the PMA but, given the ambiguity of ‘herein’ it was also appropriate to look at extrinsic evidence. Aladdin and Goldman Sachs had marketed the CDO investment to BL, representing that the portfolio would be managed conservatively and defensively on behalf of investors, which also suggested that BL was an intended thirdparty beneficiary of the PMA. Given that BL ultimately lost its entire investment in reliance on the representations that had been made to it, its claim that Aladdin had been grossly negligent in managing the portfolio was also plausible. Aladdin’s motion to dismiss BL’s claims was therefore dismissed.

Bayersiche Landesbank, New York Branch v Aladdin Capital Management LLC (2d Cir, 6 August 2012)