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Beware of allowing third party rights in your contracts.

Under the Contracts (Rights of Third Parties) Act 1999, a third party can enforce a contract term if it expressly says that the third party may enforce it or if it purports to confer a benefit on a third party. The third party must be expressly identified in the contract either by name; as a member of a class of persons; or as answering a particular description.

In Chudley v Clydesdale Bank Plc [2019] EWCA Civ 344, the Court of Appeal found that a “letter of instruction” created rights for third party investors under the 1999 Act even though the investors were (i) unaware of the letter at the time they invested; and (ii) not named in the letter, which simply referred to a “Segregated Client Account”.

The Court found that the reference to a client account was an express identification of the class (clients of the investment company who were investing in the scheme), and the investors were within that class. The same contractual term also purported to confer a benefit on the third parties. The purpose of the letter was to protect investors and the provision for the opening of a segregated client account was clearly intended to benefit those investors by ensuring that their monies were held separately by the bank.

Takeaway Point: Consider third parties carefully. Unless you want to confer rights on specific third parties, your lawyers should include a clause to expressly exclude third-party rights (even if you may not think it necessary). Even if the contract does purport to confer a benefit on a third party, an exclusion clause will show that the parties did not intend the term to be enforceable, meaning that the third party will not have enforcement rights under the 1999 Act.

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