Scope of Bank’s duties to non-customers - Chudley & Ors v Clydesdale Bank PLC [2019] EWCA Civ 344 - Christopher Jay

Wed, 06 March, 2019

On 6th March 2019, the Court of Appeal handed down judgment in Chudley & OrsClydesdale Bank PLC [2019] EWCA Civ 344.  The decision is of particular interest in relation to the scope of a bank’s duties to non-customers.  More generally: it provides a useful illustration of how s. 1(3) Contracts (Rights of Third Parties) Act 1999 is to be applied; and welcome clarification that a claimant is not required to plead and prove a “counterfactual” for a claim in breach of contract to succeed.

Christopher Jay (led by Stephen Cogley QC of XXIV Old Buildings) represented the successful appellants (“the investors”).

The Facts:

The case concerned a failed property investment scheme in Cape Verde called Paradise Beach.  The scheme was operated by an entity called Arck LLP.  Arck has since gone into liquidation and its principals have been prosecuted and convicted in separate criminal proceedings.

Arck held an account described as “Arck LLP - Segregated Client Account” with Yorkshire Bank (“the Bank”).  In the course of Arck’s relationship with the Bank, a senior partner of the Bank had been requested to sign various “letters of instruction” from Arck to the Bank, each of which stated that the Bank was to open an account and hold client moneys there on certain terms.

The Chudley case concerned the last of these letters of instruction (the Paradise Beach letter of instruction, or “PB LoI”).  The PB LoI 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, and that it would hold moneys in that account until 1st August 2010 subject to one exception:

“Sums may be withdrawn from the Account and paid to such persons as Arck LLP may direct before 1 August 2010 on receipt by the Bank of an unconditional undertaking from Jose Limon Cavaco, the solicitor acting on behalf of Oliveira, Martins, Esteves e Associados Sociedade De Advogados, the lawyer for Paradise Beach Aldeamento Turistico Algodoeiro SA confirming that such withdrawn sums will forthwith be applied towards project costs and repaid before 1st August 2010.”

The investors made investments into the scheme via Arck’s pre-existing account, and these moneys were then advanced by Arck to Paradise Beach for the development.  However, Paradise Beach failed to repay the investments with the agreed “turn” on the redemption date.

The investors later discovered that the moneys had been released from Arck’s bank account without the prior provision of the Oliveira Martins LoU.

The First Instance Decision:

The investors brought proceedings against the Bank for (amongst other things) breach of the PB LoI under the Contracts (Rights of Third Parties) Act 1999.  The case was heard by Christopher Hancock QC, sitting as a Deputy High Court Judge, over 8 days in 2017.

The Judge found that the investors had not seen the PB LoI at any relevant time (and had only come to discover its existence afterward the redemption date).  However, he rightly concluded that this, in itself, did not preclude a claim by the investors under the Contracts (Rights of Third Parties) Act 1999.

However, he determined that the investors’ contractual claim failed for two reasons:

First, he held that the contract was subject to a condition precedent (a “precondition”) not to be found in the agreement itself (albeit one that he could not identify) that had not been satisfied.  Accordingly, he found that there was no binding contract to which rights under the 1999 Act could attach.

Secondly, he found that, even if there was a binding contract, the investors had not established that they had suffered loss, because he held that there was insufficient evidence of what would have happened if the Bank had complied with its obligations.

The Court of Appeal’s Decision:

The investors appealed the Judge’s relevant two findings above.  Additionally, by a Respondent’s Notice, the Bank sought to challenge the Judge’s finding that, if the PB LoI was binding, the investors were entitled to claim under the 1999 Act.

Flaux LJ, with whom Longmore and Moylan LJJ agreed, found in favour of the investors in relation to each of these points:

Condition Precedent

One of the oddities of the case was that neither party had alleged that the PB LoI was subject to a condition precedent not included in the document itself.  Accordingly, there had been no evidence in relation to what the relevant “condition” might be.

Flaux LJ noted that ‘I suppose it is theoretically possible for a contract to be subject to a pre-condition but for the party relying upon it not to be able to inform the court what its terms were or how and when it was agreed, but it would seem inherently unlikely that such a case would succeed on the balance of probabilities… The judge seems to have lost sight of this.’

Flaux LJ analysed the evidence and determined that there was nothing to support the existence of such a condition precedent over other possibilities (such as breach).  He held that, in concluding that the PB LoI was subject to a condition precedent and therefore not binding, the judge made a finding that was unsupported by the evidence and he erred in law.

Contracts (Rights of Third Parties) Act 1999

The Bank’s main argument under this heading was that there was no express identification of the investors by name, as a member of a class, or as answering a particular description in the PB LoI (s. 1(3) of the 1999 Act).  The Bank contended that, to the extent that there was any identification, it could only be ascertained by a process of implication (which was inconsistent with the language of the Act).  In this regard, it relied on the case of Avraamides -v.- Bathroom Trading Company [2007] 2 Lloyd’s Rep 76, in which Waller LJ had held that s. 1(3) ‘simply does not allow a process of construction or implication.’

Flaux LJ comprehensively rejected this analysis, as had the Judge at first instance.  The Court of Appeal confirmed that the correct approach is to construe the contract as a whole in accordance with the principles described in “The Laemthong Glory” (No. 2) [2005] 1 Lloyd’s Rep 688.

On the facts, the PB LoI specifically related to a “client account”.  This was held to be sufficient identification of a class, bearing in mind the specific reference to the Paradise Beach project in the agreement.  Flaux LJ noted that ‘The principal purpose of the LOI would seem to be to protect investors and, in that context, the provision for the opening of a segregated client account is clearly intended to benefit those investors by ensuring that their monies are held by the bank in a segregated client account subject to specific conditions.’

Loss and Damage

The Bank successfully argued at first instance (by reference to cases involving the SAAMCO principle) that, in order to succeed with their claim, the investors had to prove the “counterfactual” (i.e. what would have happened if the Bank had opened the relevant account and the Bank had not paid moneys out of it?).

The Court of Appeal rejected this analysis.  As Flaux LJ explained, ‘the loss suffered by the appellants as a consequence of the bank’s breach was the payment out of their monies in 2009 without any OM undertaking.  Contrary to the judge’s view, it is not a necessary part of the appellants’ claim that they demonstrate what would have happened to the monies if there had not been a breach.’

In any event, the Court of Appeal held that, if the counterfactual had fallen within the scope of their burden of proof, that burden had been discharged.

Download a copy of the judgment here

Christopher Jay

Chris has a broad international commercial practice that encompasses dry shipping, shipbuilding, commodities, energy, banking, cross-border insolvency and insurance.

He is typically instructed as junior counsel in respect of particularly complex or high value disputes, and prides himself on finding innovative solutions to difficult problems, and on providing a user-friendly and client-focussed service.  Chris also regularly accepts instructions as sole counsel in all areas of his practice, and has represented clients in the High Court and arbitration.

> view Chris's full profile