The duties of a Bank to non-customers: who has the right?

On 6 March 2019, the Court of Appeal handed down judgment in Chudley & Ors v Clydesdale Bank PLC (T/A Yorkshire Bank) [2019] EWCA Civ 344.  The decision looks at the scope of duties owed by banks to non-customers and more generally it illustrates how easy it is to inadvertently grant rights to third parties under the Contracts (Rights of Third Parties) Act 1999 (the “Act”).

For those of you who are unfamiliar with the Act, the Act gives a third party (i.e. a person who is not a signatory to a contract made between other persons) a right to enforce a term of the contract where the contract expressly provides that he may or where the contract purports to confer a benefit on the third party.

What does this judgment mean?

This judgment suggests a broad interpretation of the Act and could set an unwelcome precedent from the perspective of financial institutions in the context of letters of instructions and other commitments addressed to or made with their customers.  There are few examples of the courts considering the application of the Act, and, while each case will turn on its particular facts, the Court of Appeal holding that the term “client account” is sufficient to expressly identify a class shows how easy it could be to grant rights to third parties without meaning to.  If possible, and to promote certainty, consider excluding the Act in its entirety except, where necessary, in favour of specific and identifiable third parties.

Facts of the case

The case related to a failed property investment scheme in Cape Verde called Paradise Beach which was operated by Arck LLP (“Arck”). 

Arck and Yorkshire Bank (the “Bank”) entered into a letter of instruction which provided that the Bank would open an account called “Arck LLP – Segregated Client Account” for the sole purpose of the development of the Paradise Beach resort.  The Bank would hold monies in that account until 1 August 2010 subject to the exception that monies could be withdrawn on receipt of a solicitor’s undertaking that the money would be repaid.  In fact no separate client account was opened and the funds paid to Arck by four of its investors (the “Investors”) were paid into a pre-existing account held at the Bank.  Those funds were then advanced by Arck to Paradise Beach for the development. 

Paradise Breach failed to repay the monies advanced by Arck with the agreed “turn” on the redemption date.  These funds had been released despite the fact that no solicitor’s undertaking was obtained.  Arck went into liquidation and its principals were later prosecuted and convicted in separate criminal proceedings.

The Investors (who were not customers of the Bank) became aware of the letter of instruction and sought to recoup their losses on the basis that there was a contract between Arck and the Bank upon which they were entitled to claim rights under the Act.

Court of Appeal decision

The Investors appealed against a previous decision which dismissed their claim for damages against the Bank for breach of contract arising from the failed investment company.

The Court of Appeal found in favour of the Investors for the following reasons:

• There was a binding contract as the letter of instruction was expressed to be irrevocable and unconditional.  Where a condition precedent is not contained in a written document, the party would have to provide evidence that the letter of instruction did not contain the entire agreement between the parties and that they had agreed that there would be a condition precedent that had to be fulfilled before the contract came into effect.  There was no evidence to conclude that the letter of instruction was subject to any pre-condition.
• Construing the letter of instruction as a whole, its reference to a “client account” was an express identification of class (in compliance with s.1(3) of the Act), i.e. the clients of Arck who were investing in the scheme and the Investors were in that class.  There was no reason why the same contractual term could not also satisfy the requirement  (in s.1(1)(b) of the Act) that the term purported to confer a benefit on the third party – there was no requirement to mention the Investors by name.  It was held that the principal purpose of the letter of instruction was to protect the Investors by holding funds in a separate client account (whether or not that account was ever opened).  For the purposes of the Act, it did not matter whether or not the Investors were aware of the contract at the time it was made or at any particular time thereafter.
• The loss suffered by the Investors was as a result of the Bank’s breach as it has paid monies out of that account without the solicitor’s undertaking in place.