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Clydesdale Bank, financial fraud and Paradise Beach: A case to be aware of

The granting of third-party rights under construction contracts has become an increasingly popular practice in the UK construction industry. A recent case involving a Yorkshire bank, financial fraud and Paradise Beach might just add weight to that trend.

In a recent judgment, the commercial court has provided us with some rare commentary on the identification of third-party beneficiaries under the Contracts (Rights of Third Parties) Act 1999 (the act).

In its approach, the High Court continued a recent judicial trend to willingly identify third-party beneficiaries under the act – something which, despite the banking context, may well give further confidence in the use of third-party rights in construction contracts.

Facts of the case

The case of Chudley v Clydesdale Bank Plc was heard in the commercial court, and was mostly concerned with various allegations of financial fraud for a proposed development at Paradise Beach, Cape Verde.

The claimants were bringing a claim to try to recover money paid into the wrong bank account.

As one of its various heads of claim, the claimants were seeking to rely on a letter of instruction sent by a solicitor to the defendant bank, which requested a “segregated client account” be opened. The intention was for the claimants’ money to be paid into this segregated account.

The letter of instruction itself gave clear details of the segregated bank account, but did not name the claimants who were to pay into that account.

Unfortunately, money paid by the claimants towards the Paradise Beach development was never paid into the segregated account. Instead, this was paid into the bank’s general account.

The bank was later found guilty of fraud and the claimants were left with the prospect of losing their money as a consequence.

The decision

To try to recover their money, the claimants sought to rely on the terms of the solicitors’ letter of instruction to the bank, despite not being a party to it. 

They argued the letter of instruction conferred a benefit on them as third parties, and that the letter identified them as beneficiaries that could rely on its terms.

A key requirement of the Construction Act is that any third-party beneficiaries must be “expressly” identified in a contractbefore they can enforce any rights under it. This was a problem for the claimants, as none had been expressly named in the letter of instruction.

Despite this, the claimants argued that the reference to a specific bank account was sufficiently “express” to identify a definite class of beneficiary. The account details were expressly set out in the letter, so a simple process of interpretation could be used to identify definite beneficiaries. In this case, the third-party beneficiaries would be any person paying in to the account.

The court saw value in this argument and found that, although a process of interpretation was required to identify the beneficiaries, this was sufficiently “express” for the purposes of the Act. 

Impact on contracts

This decision provides further support for a flexible approach to the requirements of the act for identifying third-party beneficiary classes - and follows a recent trend in the High Court for doing so.

In the broader construction market, judgments like these may reinforce confidence in the act’s ability to vest rights in identified classes of beneficiary, and the courts’ willingness to see that this is done.

A continuation of this trend may see the classes of beneficiary traditionally suspicious of third-party rights (such as funders) more readily taking comfort from these and seeing these as a market norm. They may also perhaps step away from the perceived comfort of collateral warranties in some situations.

In the future, we may even see the market getting more comfortable with the automatic vesting of third-party rights without the need for notice, as the judiciary continues to be robust with its application of the act.

For employers and developers, there can be a lot of benefit in offering third-party rights, including control over the process and a smaller administrative burden.

And with a little more robust judicial application of the act, the view of these as a market norm may well be bolstered.

David Barton is a partner and Joe Bennett is an associate at CMS

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