Have you considered excluding third party rights in all key project contracts, big or small?
An exploration of the Court of Appeal's broad interpretation in Chudley & Ors v Clydesdale Bank plc
The Court of Appeal found in Chudley & Ors v Clydesdale Bank plc  EWCA Civ 3441 that a letter of instruction from a customer to a bank could be enforced by a group of third party investors.
This is despite the fact that they were not named in the contract and they were not aware of the letter of instruction at the time they invested.
This case provides a rare example of judicial consideration of the Contracts (Rights of Third Parties) Act 1999 (the Act).
We explore the judgment and the practical considerations for upstream oil & gas contractors when drafting contracts, in light of this broad interpretation.
Arck LLP operated a property investment scheme in Cape Verde called Paradise Beach. The Claimants were persuaded to invest their money towards the development of Paradise Beach.
Yorkshire Bank (the Bank) had signed a letter of instruction from the developer to confirm that the Bank would hold the money in a “segregated client account” and would not release any money without a solicitor’s undertaking to confirm that financial arrangements were in place.
The Bank did not open the segregated account; it paid the money into the existing general account and subsequently allowed Arck to withdraw that money without any undertaking being provided.
The Claimants brought a claim against the Bank on the basis that the letter of instruction was a contract and that, under the Act, the Claimants were third party beneficiaries and, as such, permitted to enforce the terms directly.
The Court of Appeal's decision
The Court of Appeal considered two questions:
1. Was there a binding contract that the Claimants could take the benefit of?
The Court found that there was a binding contract and that the requirements of the Act had been met because:
- The reference to a 'client account' in the letter of instruction was express identification of the class. This fulfilled section 1(3) of the Act.
- The principle purpose of the letter of instruction was to protect investors and, in that context, the provision of the opening of a segregated client account is clearly intended to benefit those investors. This fulfilled section 1(1)(b) of the Act.
2. If so, did the Bank's breach of that contract lead to the Claimant's loss?
- The Court concluded that the answer was yes, if the Bank had not breached the contract, the Claimants would not have suffered the loss they did.
The Court of Appeal made it clear that determining whether the requirements of the Act have been met will be a process of construction of the contract as a whole.
The Court is seemingly willing to apply a broad interpretation when deciding whether a person falls within the Act.
Any upstream oil and gas contractor is familiar with the structure of the express exclusion of third party rights in its standard contracts or its major project contracts.
This decision reminds us that careful consideration should be given to the same exclusions in all project contracts, regardless of size, if there is indeed the potential for a third party group to make claim under it.
This assessment may not always happen as various supporting and modestly sized contracts are negotiated and agreed as a project progresses.
For further information on this topic, please contact the author of this briefing:
D +65 6411 5314 | M +65 9170 3100
Research conducted by Roxanne Langford, Trainee Solicitor.
- The judgment is available here.