Novel use of the Contracts (Rights of Third Parties) Act 1999 in a finance transaction

Author

Annie Harvey

Senior Knowledge Lawyer

London

Novel use of the Contracts (Rights of Third Parties) Act 1999 in a finance transaction

Briefing

Introduction

The long-established rules on privity of contract evolved with respect contracts made on or after 11 May 2000 to permit entities who were not parties to a contract to enforce such contract where it was made for their benefit. The Contracts (Rights of Third Parties) Act 1999 (Third Party Rights Act) generally permits any contract made after that date to confer a benefit on a non-party which will be enforceable by such entity, provided an express provision is included which permits the third party to do so, and that the term confers a benefit on such third party. The recent case of HNW Lending Ltd v Lawrence [2025] EWHC 908 (Ch) considered the application of the Third Party Rights Act in the context of a finance transaction and extended the situations in which such enforcement may take place, with the Court deciding that it was not necessary that the relevant term conferred a benefit on the third party, merely that the contract expressly provided that the third party could enforce the term. This case and the implications for finance transactions are examined in this article.

Third party rights in finance transactions

A number of the key documents involved in a finance transaction will contain a third party rights clause which prohibits an entity that is not a party to the relevant document from enforcing or enjoying the benefit of any term of the document. Where a third party is expressly permitted to enforce and enjoy the benefit of a clause/clauses conferring rights on it, this will be expressly stated in the third party rights clause. This can be seen in security documents, where typically a secured party that is not party to the document (where the security is granted to a security trustee in a syndicated transaction) will generally be given the right to enforce and enjoy the benefit of any clause conferring rights on it, subject to the Third Party Rights Act. Further, in a facility agreement or an intercreditor agreement, an appointed receiver will typically be given the right to enforce and enjoy the benefit of certain clauses.

Relevant facts

Ms Lawrence, a property investor with a portfolio of residential properties in London and Surrey (the Borrower), entered into a loan agreement arranged by HNW, an FCA authorised peer-to-peer lender trading in arranging loans from lenders to businesses (HNW) with undisclosed lenders. Discussions in relation to the advancement of the loan began in late 2018 and after months of negotiations, the parties agreed a loan of £1,520,000 secured by charges against a number of properties including a first charge (the Charge) registered against a property in Epsom (the Property), the terms of which were set out in a loan agreement (the Loan Agreement).

In terms of drafting, HNW was not a party to the Loan Agreement and did not receive a benefit under it, but was specified as the 'Security Agent', on behalf of an unspecified lender who gave permission to the Security Agent to enter into and administer the loan on behalf of the Borrower. The Loan Agreement itself was entered into between Ms Lawrence and the undisclosed lender who was identified by the number '1' and described as "a person … who lends money through HNW Lending Limited who has granted permission for 'HNW Lending Limited to act as their Security Agent in entering into and administering this loan to the Borrower" (the Lender).

HNW argued that Ms Lawrence failed to make all of the interest payments under the Loan Agreement and, the term having expired, that Ms Lawrence failed to repay the balance of the monies loaned. HNW sought possession of the Property and payment of £3,535,965.82 (to cover sums due which included further advances made to Ms Lawrence after entry into the Loan Agreement) plus further interest pursuant to the Loan Agreement.

Ms Lawrence denied that she had agreed to the terms of Loan Agreement and contended that the Loan Agreement and further advances were agreed to by her as a result of duress and/or undue influence, plus that on the correct construction of the Loan Agreement and the Charge, HNW did not have title to sue. She counterclaimed an unspecified amount by way of damages in respect of loss and damage which she claimed to have suffered as a result of HNW's unlawful conduct.

Discussion of Third Party Rights issue

There were various allegations made by the Borrower in the course of this case including duress, undue influence, fraudulent and negligent misrepresentations but this article focuses on the dispute around whether or not HNW had standing to bring the claim. Ms Lawrence argued HNW had no enforceable rights against Ms Lawrence under the Charge and the Loan Agreement.

Relevant clauses from the Loan Agreement

Clauses 2 and 4 of the Loan Agreement dealing with the making of the loan and its repayment were made between the Lender and the Borrower. Clause 13 set out the basis on which HNW was appointed as 'Security Agent' and includes its appointment as security agent in respect of the finance documents, and its holding on trust of the security entered into in connection with the loan.

The clause dealing with third party rights; Clause 26.7 provided: "the Borrower and Lender agree that, while HNW Lending Limited is not a party to this Loan Agreement, HNW Lending Limited may take the benefit of and specifically enforce each express term of this Loan Agreement and any term implied under it pursuant to the Contracts (Rights of Third Parties) Act 1999."

Relevant legislation

Section 1 of the Contracts (Rights of Third Parties) Act required consideration by the Court to determine the issues raised. Section 1 provides as follows:

1. Right of third party to enforce contractual term

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a 'third party') may in his own right enforce a term of the contract if
(a) the contract expressly provides that he may
(b) subject to subsection (2), the term purports to confer a benefit on him.
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.
(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.
(4) This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract.
(5) For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly).

Consideration by the Court of relevant issues

The Borrower relied on a 2024 Central London County Court judgment, also involving HNW and with a similar fact pattern ie HNW sought possession of a residential property in reliance on a first charge and loan agreement on materially the same terms as the Loan Agreement (including the same clause 26.7 addressing third party rights) and the Charge (HNW v Mark). HHJ Dight held in this case that the security agent was not a contracting party and that no obligations were owed by the borrower to it, nor was the security agent expressed to benefit from the loan agreement – and on that basis there was nothing to enforce under the Third Party Rights Act. HHJ Dight further found, in respect of the charge, that it could not be enforced by HNW on the basis that the covenant to pay was not given to HNW.

It was submitted by the Judge in the High Court (Mr Andrew Lenon KC) that the analysis by the County Court of clause 26.7 was wrong on the basis that it failed to give due weight to section 1(1)(a) of the Third Party Rights Act. The High Court considered that clause 26.7 appeared to have been drafted with the Third Party Rights Act in mind and with the intention of conferring on HNW equivalent rights to those of the Lender, enabling HNW to enforce obligations owed to and benefitting the Lender. The paucity of case law on the scope of section 1(1) of the Third Party Rights Act was however specifically acknowledged by the Court and it was further expressly noted that the example given by Chitty of a situation where a third party may enforce a term of a contract pursuant to s 1(1)(a) of the Third Party Rights Act was 'materially different' from what the parties seemed to have intended in the present case. Chitty gives an example of how the clause might work where one contracting party (A) promises to the other (B) to pay £1000 to a third party (C). The contract then provides that C can enforce the term containing this provision. The term enforced by C consists of a term benefitting C rather than an obligation owed to and benefitting A or B. In the present case, there was no promise made by Ms Lawrence to the Lender to pay anything to or otherwise benefit HNW so it was markedly different to Chitty's example.

The views expressed by the Judge were:

that s 1(1)(a) is not limited to the enforcement by a third party of a term purporting to benefit the third party, (since this type of term is specifically addressed in s 1(1)(b)), and it is sufficient that the contract expressly provides that the third party may enforce the term. Clause 26.7 did that in relation to all of the express and implied terms of the Loan Agreement.
as an alternative, clause 26.7 was effective pursuant to s 1(1)(b) to confer on HNW the benefit of the covenants and rights of enforcement owed to the Lender because that is also what Clause 26.7 purports to do. Clause 26.7 expressly provided: "HNW Lending Limited may take the benefit of and specifically enforce each expressed term of this loan agreement and any term implied under it".
HNW was entitled to enforce the repayment provisions in the Loan Agreement and was therefore entitled to enforce the liabilities and obligations which were secured by the Charge.

Construing clause 26.7 as legally effective also accorded with the principle of giving effect to parties' contractual provisions that the courts should endeavour to uphold. It was determined that HNW did have title to sue on the Loan Agreement and the Charge and the claim should not be struck out.

What next?

This case concerned a peer-to-peer lending arrangement, with the drafting of the documentation, and parties to it being specific to that type of arrangement with an undisclosed lender, and not typical of the approach taken in more standard syndicated lending documentation. It does however represent an important development in how a third party rights clause included in a peer-to-peer lending arrangement may be approached and enforced going forward.

Legal uncertainty however remains as this is an area that was expressly acknowledged by the Court not to be heavily populated with case law. On that basis, permission was given to the Borrower to appeal to the Court of Appeal on the third party rights issue and to stay enforcement of HNW's claim pending that. It remains to be seen if this will therefore be revisited!