Excuse the rather contrived late-90’s pop reference, but anyway.
It is often said, with good cause, that the Contracts (Rights of Third Parties Act) 1999 (‘the Act’) is signally the most excluded statutory provision within contract. Within a construction context this is as true as ever with parties, in particular funders, insistent on receiving the benefit of collateral warranties opposed to relying on the Act.
The cause of this nervousness within the construction industry concerning Third Party Rights is probably two fold. Firstly, despite being in force for over a decade, the concept of Third Party Rights is still a relatively new one, particularly when compared to the well-trodden path of obtaining collateral warranties to provide a direct contractual link between parties that would otherwise fall foul of the concept of privity of contract. Secondly, the Act contains a potentially onerous requirement that in order to enforce rights under a contract to which they are not a party, the beneficiary (or class of beneficiaries) must be expressly identified. If this hurdle is not reached, then those rights cannot be enforced.
This second concern can leave a potential beneficiary at risk of having no rights of enforcement if there is an error in the drafting of a contract.
Facts and decision
The recent High Court case of Chudley v Clydesdale Bank PLC  EWHC 2117 (Comm) concerned a banking dispute. Under a Letter of Instruction, Clydesdale Bank was instructed to open a “Segregated Client Account”, but did not provide any other definition or identification of who the clients would be of the account.
The Claimants to the dispute sought to argue that the fact the account was referred to as a “Client” account was sufficient to identify that anyone paying into that account would be a client and therefore a class of beneficiary for the purposes of the Act. Perhaps surprisingly, given the lack of any other express provision identifying the class of beneficiaries, the Court agreed.
It should be noted however that the Court did not comment on a situation where a class of beneficiary could only be implied by the express terms. In other words, the Court considered that the fact that the account was referred to as a “Client” account was the express provision providing identification. Without the word “Client” it is likely that the class of beneficiaries could only be implied and the Court may therefore have taken a different view.
Nevertheless this decision provides further evidence that the Courts will increasingly look to provide a flexible approach to identifying beneficiary classes and to uphold Third Party Rights wherever possible.
It is unlikely however to produce a step-change approach in the construction industry which is inherently cautious. However it is an issue that will no doubt be revisited by the Courts on a regular basis, and if the current judicial trend continues, the perceived risks associated with Third Party Rights may begin to ebb away.
This post was written by Sean Garbutt. For further information, please contact:
Sean Garbutt, solicitor, Construction
T: 0121 212 7905