On 6 March 2019, the Court of Appeal handed down judgment in Chudley & Ors v Clydesdale Bank PLC [2019] EWCA Civ 344. The decision provides helpful clarification as to how s.1(3) of the Contract (Rights of Third Parties) Act 1999 (the “Act”) is to be applied and confirms that a claimant under the Act is not required to plead and prove a counterfactual for a claim in breach of contract to be successful.

Background

The case concerned funds provided by the Claimants (and Appellants) to Yorkshire Bank (the “Bank”) towards what they believed to be the development of a Cape Verde resort to be known as Paradise Beach. The development company, Arck LLP, fraudulently withdrew the Claimants’ funds and its principals have since been prosecuted and convicted in criminal proceedings.

The Bank had signed a letter of instruction (“LOI”) from Arck LLP to confirm that the Bank would hold client money in an account to be called ‘Arck LLP – Segregated Client Account’ on certain terms, including in particular that a solicitor’s undertaking would be required for the release of funds ahead of 1 August 2010.

The Claimants later discovered that funds had been released by the Bank without the solicitor’s undertaking. They issued proceedings against the Bank for (inter alia) breach of the LOI under the Act.

First instance

At first instance in 2017 before Christopher Hancock QC sitting as a Deputy High Court Judge, the Claimants were unsuccessful. The Judge found that whilst the Claimants would have been entitled to claim the benefit of the LOI under the Act, their claim failed because (i) the LOI itself was not a contract to which binding rights under the Act could attach (because a condition precedent – outside of the LOI itself – to which he said the LOI was subject had not been satisfied) and (ii) the Claimants had failed to establish that they had suffered loss by evidencing what would have happened if the Bank had met its obligations (the counterfactual).

The Claimants appealed these two findings. The Bank in turn challenged the Judge’s finding that, if the LOI was binding, the Claimants were entitled to claim under the Act.

Court of Appeal

Flaux LJ, with whom Longmore and Moylan LJJ agreed, found in the Claimants’ favour on each of these three issues. 

He found there was nothing to support the existence of a condition precedent and accordingly the LOI was binding.

The Bank’s case under s.1(3) of the Act was that the Claimants were not identified by name, as a member of a class, or responsive to a particular description. The LOI only referred to the developer, the Bank and the solicitor who was to provide the undertaking. The Claimants said that the reference in the LOI to paying the funds into a segregated client account was sufficient identification, namely the developer’s clients, of which the Claimants formed part. Flaux LJ roundly rejected the Bank’s analysis, as had the Judge at first instance. He found that the correct approach was to construe the contract as a whole in accordance with the principles in “The Laemthong Glory” (No.2) [2005] 1 Lloyd’s Rep 688 at paragraph 48(ii). The reference to the segregated client account was therefore sufficient, in the context of the wider reference to the Paradise Beach resort, to identify the Claimants within the requirements of s.1(3) of the Act. Flaux LJ also noted that like the Judge at first instance, he could see no principled reason why the same term of the LOI could not also satisfy s.1(1)(b) of the Act, the requirement that the term purports to confer a benefit on the third party.

Notably, Flaux LJ took the opportunity to address criticism that the editors of Chitty on Contracts 32nd edition [18-097] (and the same paragraph in the 33rd edition) had levied at his first instance judgment in The Alexandros T on which the Claimants/Appellants had relied. There, they had concluded that: “s.1(1)(b) (intention to benefit the third party) and s.1(3) (express identification) are separate and cumulative requirements, so that reasoning which satisfies the first of these requirements cannot, of itself, satisfy the second.” Like the Judge at first instance, Flaux LJ disagreed with this analysis and said that it simply does not follow that the same term cannot satisfy both requirements.

As for loss, the Bank had argued successfully at first instance (consistent with case law relating to the SAAMCO principle) that, in order to succeed, the Claimants would have to prove what would have happened if the Bank had opened the relevant account and not paid moneys out of it in breach of the LOI. Flaux LJ rejected this analysis and held it was not necessary for them to show what would have happened to the funds had there not been a breach. He said that, in any event, if it had been necessary for the Claimants to demonstrate the counterfactual, that burden had been discharged.

A link to the Court of Appeal’s Judgment can be found here.