Third party rights in construction contracts: identification of beneficiaries

United Kingdom

A recent Commercial Court decision has provided some rare commentary on the identification of third party beneficiaries under the Contracts (Rights of Third Parties Act) 1999 (the “Act”). The case considered whether the Claimants were able, as third parties, to rely on the terms of a Letter of Instruction to the Defendant bank seeking to open a client account. Despite the banking context, the judgment appears to reflect a robust approach to the application of the Act which may assist in bolstering confidence over the use of third party rights in construction contracts.

Chudley v Clydesdale Bank Plc

The decision considers the Act’s requirement for third party beneficiaries or classes of beneficiary to be “expressly” identified before they can enforce rights under a contract to which they are not a party. In particular, it considers the scope for interpreting or inferring certain beneficiaries or classes of beneficiaries from broadly drafted contractual terms.

In this case, the clause in question was contained in a Letter of Instruction requesting the bank to open a “Segregated Client Account”, but did not otherwise refer to the clients who would pay funds into the account. The Claimants contended that the mere reference to a client account was sufficiently “express” to identify the clients paying in to that account as a class of third party beneficiary for the purposes of the Act.

The court accepted the Claimants’ case on this point. Even though a process of interpretation was required to identify the beneficiaries in question (i.e. beneficiaries were identified as those parties paying into the bank account), once followed, this process of interpretation identified a definite class of beneficiary. In this regard the court differentiated the Claimants’ position from cases where beneficiaries might only be capable of impliedly being identified by express terms.

Conclusion and implications

This decision provides further support for a robust approach to the requirements of the Act for identifying third party beneficiary classes. Broader implications for the construction market are likely if this judicial trend continues. In the long term, and with a little more judicial endorsement, we may see a trend towards automatic vesting of third party rights in general beneficiary classes – absent of a requirement to serve notice.

Whilst not yet upon us, it isn’t hard to picture the benefit this would bring to Employer clients (think sub-contractor warranties…) – but also the relative uncertainty it may cause for contractors and consultants.

In the shorter term, this decision provides another example of the court upholding third party rights where possible – potentially giving more comfort to beneficiaries who are reluctant to accept third party rights over collateral warranties.

References: Chudley v Clydesdale Bank Plc [2017] EWHC 2177 (Comm) (unreported)