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What you don’t know can help you – contracts and rights of third parties

Richard Farnhill

The Court of Appeal has found that a third party beneficiary under the Contracts (Rights of Third Parties) Act 1999 can enforce an agreement entered into for its benefit, even if it was unaware of that agreement at all relevant times prior to commencing proceedings under it (Chudley v Clydesdale Bank).

Arck LLP was incorporated by Mr Clay and Ms Clark to promote property development schemes. Arck and Clydesdale Bank had entered into a letter of instruction (LOI) that offered certain protections to investors in Arck’s developments. Mr Chudley and Mr Bean, despite being unaware of the LOI, did invest in one of Arck’s developments, called Paradise Beach. That name was not an omen; the investment was a disastrous failure. Mr Clay and Ms Clark were charged with (and subsequently convicted of) fraud and Arck collapsed. Mr Chudley and Mr Bean subsequently found out about the LOI and sought to enforce it against Clydesdale.

In determining that the LOI was a binding contract enforceable by Mr Chudley and Mr Bean the Court of Appeal considered whether there was any argument that a third party beneficiary under the 1999 Act needed to be aware of its rights. Their Lordships considered that this was unnecessary: “the appellants’ claim is not reliance based … but is for breach of contract and it is not a requirement of the 1999 Act that a third party who is entitled to the benefit of a contract was aware of the contract at the time it was made or at any particular time thereafter.” If that produced a “serendipitous” result for the appellants, so be it.

The case is a useful reminder of the potential breadth of the 1999 Act. It has always been the case under section 2(1) of the Act that if a third party beneficiary becomes aware of its rights the contracting parties may lose the right to vary or rescind their own agreement. What Chudley makes clear is that section 2 creates an additional layer of protection: in the absence of a clear exclusion of the 1999 Act, even in the absence of knowledge rights will arise. For the third party beneficiary, ignorance can still be bliss.