Developments in contract: Rights of third parties
A brief summary of the principles, recent developments and practical tips relating to the Contract (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 contractual provision to be enforceable by a third party;
- that third party must be expressly identified in the contract, by name, class or description (first limb), and
- that provision must confer a benefit on the third party (second limb).
- 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.
- In Chudley v Clydesdale Bank  EWCA Civ 344, the Court of Appeal considered an investor’s claim against a bank for damages arising out of a failed investment opportunity in the Cape Verde Islands. The investors successfully claimed that they were entitled to the benefit of a Letter of Intent (LOI) between the developer and the bank under the 1999 Act.
- The Court found that the LOI was a valid binding contract and went on to find that both limbs of the 1999 Act were satisfied. References in the LOI to a segregated “client account” in which the investors’ monies were to be held:
- was express identification of a class (investors in the specific project) including the Appellant, and
- was clearly intended to protect and benefit those investors by ensuring that their monies would be held by the bank subject to specific conditions.
- The Court reiterated that whether there is an express identification of a class will depend upon the construction of the contract as a whole, viewed against the factual matrix.
- Lack of knowledge of the existence of the contract at the time it was made or at any particular time does not affect a third party’s entitlement to a benefit under it, as the third party’s knowledge is not a requirement of the 1999 Act. Thus, the investors were entitled to their losses for breach of the contract, even though they were not aware of its existence at the time of their investment.
What it means
- The 1999 Act has given rise to relatively little case law. Therefore, those drafting contracts should take careful note of the Court’s findings on the application of the 1999 Act in Chudley.
- Ordinarily, the parties’ intention to confer enforceable rights upon third parties should be express and self-evident on the face of the contract. However, where a clause is incorporated for the benefit of a particular class of person (as the segregated accounts clause was in Chudley), that is likely to suffice to show that the parties intended to confer enforceable rights upon members of that class.
- The obvious lesson from Chudley, as clearly noted by the Court, 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.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.