Chudley & Ors v Clydesdale Bank Plc (t/a Yorkshire Bank)

An apparently binding and unconditional written commercial agreement is effective unless the party alleging an extrinsic condition precedent proves both that the writing was incomplete and that the parties agreed the condition.

Under the Contracts (Rights of Third Parties) Act 1999, express identification of a third party by class or description is determined by construing the whole contract. Construction may identify an express class, although implication cannot. One contractual term may both identify the third party and purport to confer the relevant benefit.

A third party need not know of the contract to enforce it. Where a bank breaches a contractual obligation to safeguard third-party funds, payment out contrary to the agreed safeguard may constitute the loss. A contention that the funds would later have been lost anyway is for the bank to plead and prove.

The appellants invested £1.59 million in a property development promoted by Arck LLP. Arck and the respondent bank had signed a letter instructing the bank to open a segregated client account and restrict withdrawals unless supported by a specified solicitor’s undertaking. The account was never opened, and the investors’ money was paid from another account without the undertaking.

The Commercial Court, in [2017] EWHC 2177 (Comm), dismissed the claim. It held that the letter was not a binding contract and that the investors had not proved that any breach caused their loss. It would otherwise have held that they could enforce the agreement under the Contracts (Rights of Third Parties) Act 1999.

The investors appealed on formation and causation. By a respondent’s notice, the bank challenged the conclusion on third-party rights. The central issues were whether the letter was binding, whether the investors could enforce it, and whether the bank’s breaches caused their loss.

1. Appeal allowed and judgment entered for the appellants. The letter of instruction was a valid and binding contract between Arck and the bank. It was expressed as an irrevocable and unconditional instruction, was signed for both parties, and appeared on its face to be contractual.

   A party alleging that such a written contract was subject to an extrinsic condition precedent bears the burden of proving the condition. It must prove both that the written document did not contain the entire agreement and that the parties agreed the condition before contractual effect would arise. The bank neither pleaded nor identified the alleged condition, or when and how it had been agreed. Evidence about ordinary account-opening procedures was equally consistent with the bank having breached an unconditional obligation. The deputy judge’s finding of a condition was unsupported by sufficient evidence: per Flaux LJ at [72]–[76], with whom Moylan and Longmore LJJ agreed.

2. The appellants could enforce the contract under section 1 of the Contracts (Rights of Third Parties) Act 1999. Whether section 1(3) expressly identifies a third party by class or description is determined by construing the contract as a whole against the admissible factual matrix. Although identification cannot be supplied by implication, construction established that the reference to an Arck segregated client account identified Arck’s clients investing in the Paradise Beach development. The appellants belonged to that class.

   The arrangement purported to benefit those investors by safeguarding their money and preventing its release without the specified undertaking. There was no principled reason why the same contractual term could not satisfy both the benefit requirement in section 1(1)(b) and the identification requirement in section 1(3). The requirements are cumulative, but need not be satisfied by separate terms. The bank did not establish under section 1(2) that the parties intended the protective term to be unenforceable by investors. A qualifying third party’s prior knowledge of the contract is not required: per Flaux LJ at [77]–[80]. Longmore LJ gave concurring reasons at [88]–[94].

3. The bank breached the contract by failing to open the segregated account and by paying out the investors’ money without the required undertaking. The resulting loss was the unauthorised payment in 2009. The appellants did not have to prove what would subsequently have happened to the money. Authorities concerning the scope of a professional adviser’s duty under the SAAMCO principle did not govern this contractual safeguarding obligation. Any contention that the money would later have been legitimately paid out and lost was for the bank to plead and prove.

   In any event, the evidence established on the balance of probabilities that compliance would have kept the money in the account, exposed the project’s difficulties, and led the appellants to demand repayment. The bank could not rely upon payment into the wrong account when its own breach caused that situation: per Flaux LJ at [81]–[85].

1. Court of Appeal (Civil Division): In [2019] EWCA Civ 344, allowed the investors’ appeal, rejected the bank’s respondent’s notice on third-party enforcement, and entered judgment for the investors.
2. Commercial Court: In [2017] EWHC 2177 (Comm), Christopher Hancock QC, sitting as a deputy High Court judge, dismissed the investors’ claims. He found no binding contract and no proved causation, although he would have held that the investors could enforce the agreement under the Contracts (Rights of Third Parties) Act 1999.