Zvi Dekel v Re Capital Administrators Ltd & Anor

A shareholder cannot recover personal damages for loss which merely reflects loss suffered by the company, even where the shareholder’s right to sue arises under the Contracts (Rights of Third Parties) Act 1999. The statutory remedies available to a third party do not displace the rule against reflective loss.

Whether an investor has “provided finance” under a contractual third-party rights clause depends on objective contractual interpretation. A shareholder who subscribes for shares in an investment company does not thereby provide finance directly for the underlying project where the company itself provides or arranges that finance.

The claimant invested £4 million in shares in Clerkenwell Lifestyle Ltd, a British Virgin Islands company established to develop property in London. The company entered into a management agreement with GMG Real Estate Ltd. The agreement permitted specified third parties, including persons who had provided finance in connection with the project, to enforce its provisions under section 1(1) of the Contracts (Rights of Third Parties) Act 1999.

The claimant alleged that the defendants had breached the management agreement and claimed the return that his investment would have produced. The defendants applied under CPR 3.4 and Part 24 to strike out the claim or obtain summary judgment. The issues were whether the claimant qualified under clause 20.1.2, whether the rule against reflective loss barred the claim, and whether RE Capital had become bound by the agreement.

1. The claim was struck out and summary judgment was granted for the defendants. The reflective loss issue independently disposed of the claim.

2. The claimant’s loss was suffered in his capacity as a shareholder. The subscription agreement, investment memorandum and articles treated his investment as a shareholding carrying rights to dividends and surplus assets. Any return he would have received if the project had succeeded would have been derived through the company. It therefore reflected loss suffered by the company and was barred by the rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2), as approved and explained in Marex Financial Ltd v Sevilleja.

3. Sections 1(1) and 1(5) of the Contracts (Rights of Third Parties) Act 1999 did not avoid that result. Section 4 protected the promisee’s pre-existing contractual rights, but provided no equivalent protection for a third party whose right arose only under section 1. The reasoning in Broadcasting Investment Group Ltd v Smith was therefore distinguishable.

4. Alternatively, clause 20.1.2 did not extend to the claimant. Objectively construed, “provided finance” referred to finance provided directly for the property or project. The claimant had subscribed for shares in the company, which then financed or arranged finance for the project. The commercial difficulties of allowing all shareholders overlapping personal claims supported the defendants’ construction.

5. The court also held that the claimant had no real prospect of establishing that he could enforce the agreement under section 1 of the 1999 Act. However, RE Capital itself had a real prospect of showing at trial that the 2021 arrangements amounted to a novation, having regard to the transfer of contractual obligations, consent, and the contemporaneous transfer of the management shares. That issue did not prevent disposal of the claimant’s claim.