Factual and Procedural Background
The appellants, including the first appellant and the estate of the fourth appellant, were former business partners who, together with their spouses, made an unsuccessful investment in a development project in the Cape Verde Islands. Their claim was brought against a respondent bank based on an alleged contract contained in a letter of instruction (LOI) dated 20 November 2008 between Arck LLP and the bank, under which the appellants claimed to be beneficiaries pursuant to the Contracts (Rights of Third Parties) Act 1999.
The trial judge, sitting in the Commercial Court, dismissed the appellants' claim, finding that there was no binding contract between Arck LLP and the bank as contained in the LOI. Additionally, even if a contract existed and was breached by the bank, the judge held that the breach did not cause the appellants' loss. The appeal concerns two principal issues: whether there was a binding contract (the "no contract" issue) and if so, whether the breach caused the appellants' loss (the "no loss" issue).
In summary, Arck LLP was incorporated to promote property development schemes and introduced a project known as the Santiago Golf Resort (SGR) to the bank. An account was opened at the bank in June 2007 titled 'Arck LLP Segregated Client Account' ("074 Account"), but despite letters of instruction to open segregated client accounts for various projects, including the Paradise Beach project (the subject of the LOI in issue), no segregated accounts were ever opened. Instead, investor monies were paid into the 074 Account.
The appellants invested substantial sums into the 074 Account in March 2009 after being introduced to the Paradise Beach project. The monies were paid out by the bank on the direction of Arck LLP without the required solicitor's undertaking (OM letter of undertaking). Subsequent disclosures revealed fraud and misuse of funds related to the development project. Various proceedings followed, including claims against the bank and others, with the present claim being dismissed at trial.
The appeal arises from the judgment dismissing the appellants' claims, focusing on the existence of a binding contract, third-party beneficiary status under the 1999 Act, and causation of loss.
Legal Issues Presented
- Whether the judge erred in concluding that the Paradise Beach LOI was not a concluded and unconditional contract.
- Whether the judge erred in concluding that, if the LOI was a binding contract, the appellants were entitled to the benefit under the Contracts (Rights of Third Parties) Act 1999.
- Whether the judge erred in concluding that the appellants had not established on the balance of probabilities that the bank's breach of contract caused their claimed loss.
Arguments of the Parties
Appellants' Arguments
- The LOI was an irrevocable and unconditional written contract, and the judge erred in finding it subject to an unidentified pre-condition without evidential foundation.
- The burden was on the bank to prove any such condition precedent, which it failed to do, and the bank had abandoned its initial denial of contract.
- The bank breached the contract by failing to open the segregated client account, failing to hold the appellants' monies in accordance with the LOI, and allowing payments without the OM letter of undertaking.
- The appellants were entitled to enforce the contract under the 1999 Act as third-party beneficiaries, with the class of beneficiaries expressly identified by construction of the LOI.
- The appellants' loss was the wrongful payment out of their monies without the OM undertaking; it was not necessary for them to prove what would have happened to the monies if the breach had not occurred.
- The burden of proving that the appellants would have lost their money anyway lay with the bank, which had not pleaded or proven this.
- Even if the bank had the burden, the appellants submitted that the monies would have remained in the account, and the appellants would have demanded repayment before the relevant date, preventing the loss.
Respondent Bank's Arguments
- The judge was entitled to find that the LOI was subject to a pre-condition (though unidentified) because the procedural steps necessary to open the segregated account were never completed.
- The absence of any complaint by Arck about the failure to open the account supported the inference that the contract was conditional.
- The reference to "client" in the LOI was insufficient to expressly identify a class of third-party beneficiaries under section 1(3) of the 1999 Act; the only express identification was "such persons as Arck LLP may direct."
- The appellants were not within the class intended to benefit because their monies were paid into the 074 Account, not the segregated account contemplated by the LOI.
- The appellants could not rely on the LOI to claim benefit without an account being opened as required.
- The appellants bore the burden of proving causation of loss, including that but for the breach they would have recovered their monies.
- The appellants had no evidence that they would have paid monies into the segregated account or taken steps to recover the monies before the relevant date.
- The appellants did not have a contract with Arck to enforce repayment, and their claim against the bank was not foreseeable or contemplated at the relevant time.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| So v HSBC Bank Plc [2007] EWHC 2819 (Comm) |
Establishing that a letter of instruction may not be a binding contract if objectively there is no intention to be legally bound. |
The judge relied on this case to support the proposition that if neither party intended to be legally bound, no contract arises. |
| Avraamides v Colwill [2006] EWCA Civ 1533 |
Interpretation of express identification of third-party beneficiaries under the Contracts (Rights of Third Parties) Act 1999. |
The judge considered this case in assessing whether the appellants were expressly identified as beneficiaries and distinguished it on the basis of a more limited class in the present case. |
| The Laemthong Glory (No. 2) [2005] EWCA Civ 519 |
Clarification that express identification of a class of third-party beneficiaries may be achieved by construction of the contract. |
The judge applied this authority to hold that express identification can be by construction and that the appellants were within the identified class. |
| Gillespie Brothers v Cheney Eggar [1896] 2 QB 59 |
Presumption that a written contract contains all terms but allows for antecedent express stipulations to continue. |
Appellants relied on this to argue that the LOI was the full contract and that no pre-condition was evidenced. |
| Barbudev v Eurocom Cable Management [2012] EWCA Civ 548 |
Principles on intention to create legal relations and contract construction in commercial agreements. |
Appellants relied on this for the heavy burden on the party denying intention to create legal relations and the preference for business common sense in construction. |
| RTS Flexible Systems Limited v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14 |
Objective approach to intention to create legal relations and contract formation. |
Referenced in Barbudev and relied on for the objective test of contract formation. |
| BPE v Hughes-Holland [2017] UKSC 21 |
Principles on causation and burden of proof in loss claims, including the SAAMCO principle. |
The judge applied this case to require the appellants to prove the counterfactual causation, but the appellate court found it not applicable to the contract claim here. |
| Manchester Building Society v Grant Thornton [2019] EWCA Civ 40 |
Requirement for claimants to prove counterfactual loss in negligence claims. |
The bank relied on this case to argue the appellants must prove causation, but the court distinguished it as a negligence case not applicable here. |
| London Drugs Ltd v Kuehne & Nagel International Ltd [1992] 3 S.C.R. 299 |
Common law approach to implied third-party beneficiaries. |
Referenced in discussion but distinguished as not directly applicable to the statutory framework of the 1999 Act. |
Court's Reasoning and Analysis
The court analysed whether the LOI constituted a binding contract between Arck LLP and the bank. It held that the LOI was expressed as an irrevocable and unconditional instruction and, on its face, was a binding contract signed by both parties. The burden lay on the bank to prove that the contract was subject to a condition precedent preventing it from being binding. The bank failed to identify or plead any such condition precedent, and the evidence was insufficient to establish one on the balance of probabilities.
The judge below had inferred a pre-condition due to the absence of account opening procedures being completed, but the appellate court found this inference unsupported given the lack of evidence and the bank's failure to plead the condition.
Regarding the Contracts (Rights of Third Parties) Act 1999, the court concluded that the appellants were expressly identified as a class of beneficiaries by construction of the LOI, which referred to a "client account" for the Paradise Beach project. The court rejected the argument that express identification could not be achieved by construction and held that the same contractual term could satisfy both the requirement of conferring a benefit and express identification.
On causation and loss, the court disagreed with the trial judge's application of the SAAMCO principle and the requirement that the appellants prove the counterfactual of what would have happened if the breach had not occurred. The appellants' loss was the wrongful payment out of their monies without the solicitor's undertaking. The burden to prove that the appellants would have lost their money anyway was on the bank, which had not pleaded or proved this.
The court found it more probable than not that if the bank had not breached the contract, the monies would have remained in the segregated account and the appellants would have demanded repayment once the project failed to progress, thus avoiding or mitigating their loss. The bank's argument that the appellants invested via the 074 Account and not the segregated account was rejected as an impermissible attempt to benefit from its own breach.
Holding and Implications
The court ALLOWED THE APPEAL and ordered that judgment be entered for the appellants.
The holding establishes that the LOI was a valid, binding contract between Arck LLP and the bank, and that the appellants were entitled as third-party beneficiaries under the Contracts (Rights of Third Parties) Act 1999. The bank breached this contract by failing to open the segregated account and by paying out monies without the required solicitor's undertaking, and this breach caused the appellants' loss.
The direct effect is that the appellants are entitled to damages for the breach of contract by the bank. The decision clarifies the application of the 1999 Act in identifying third-party beneficiaries by construction and confirms that the burden of proving causation lies with the party alleging no causation, particularly where the breach is of a contractual obligation. No new precedent beyond the application of established principles was set.