Business Law specialist Frank Scott-Ashe examines a recent High Court decision providing welcome guidance on contractual third party rights clauses.Contact our Team on 01225 462871 or complete the Contact Form below. |
Third party rights clauses
The recent High Court decision in HNW Lending Ltd v Lawrence [2025] (“Lending v Lawrence”) provides welcome guidance on third party rights clauses under the Contracts (Rights of Third Parties) Act 1999, specifically, Sections 1(1)(a) and (b):
1(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, or
(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.
Summary
Historically, only parties to a contract had the right to sue or be sued under that contract. However, this rule, known as privity of contract, has evolved for contracts made on or after 11 May 2000 to allow those not party to a contract to enforce it provided an express provision is included permitting them to do so.
In Lending v Lawrence, the Court was asked to consider the application of Section 1(1)(a) in the context of a finance transaction. In his judgment, Andrew Lenon KC, sitting as a Judge of the High Court, expanded the situations in which such third party enforcement may occur, ruling that it was not necessary for the relevant term to confer a benefit on the third party, only that the contract explicitly stated that the third party could enforce the term.
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The facts
Ms Lawrence was a property investor with a portfolio of residential properties in London and Surrey. She entered into a loan agreement arranged by HNW, an FCA-authorised lender that facilitates loans from undisclosed lenders to businesses.
Discussions on the facility began in late 2018. After several months of negotiations, a loan of £1,520,000 was approved, secured by charges on several properties, including a first charge (“the Charge”) registered against a property in Epsom (“the Property”), with the terms detailed in a loan agreement (“the Loan Agreement”).
HNW was not a party to the Loan Agreement and did not receive a benefit under it. However, it was designated as the ‘Security Agent’ on behalf of an unspecified lender, who authorised the Security Agent to enter into and administer the loan on behalf of Ms Lawrence. The Loan Agreement itself was entered into between Ms Lawrence and the undisclosed lender identified only 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”).
The arguments
HNW argued that Ms Lawrence failed to make all the interest payments under the Loan Agreement and, the term having expired, that Ms Lawrence had failed to repay the remaining balance. HNW sought possession of the Property and payment of £3,535,965.82 (covering sums due, including additional advances made to Ms Lawrence after entering into the Loan Agreement) plus further interest payable under the Loan Agreement.
Ms Lawrence denied agreeing to the terms of the Loan Agreement, asserting that the Loan Agreement and further advances were made under duress and/or undue influence. She also argued that, based on the correct interpretation of the Loan Agreement and the Charge, HNW did not have the right to sue. Additionally, she counterclaimed an unspecified amount as damages for loss and damage she alleged to have suffered due to HNW’s unlawful conduct.
The focus of this article is solely on Ms Lawrence’s argument that HNW did not have standing to bring the claim. Ms Lawrence argued that HNW had no enforceable rights against her under the Charge and the Loan Agreement.
The judgment
Among the Judge’s findings were:
- that Section 1(1)(a) is not limited to a situation where a third party seeks enforcement of a term intended to benefit the third party, as this type of term is explicitly addressed in Section 1(1)(b). It is sufficient that the contract clearly states that the third party has the right to enforce the term. In this case, a clause of the Loan Agreement (“the Clause”) did so in relation to all express and implied terms.
- as an alternative, the Clause was effective under 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 the Clause clearly purports to do. The Clause explicitly stated: “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 Loan Agreement’s repayment provisions and, therefore, to pursue the liabilities and obligations secured by the Charge.
Interpreting the Clause as legally effective also accorded with the principle of giving effect to parties’ contractual provisions that the courts should aim to uphold. It was concluded that HNW did indeed have the right to sue on the Loan Agreement and the Charge, and the claim should not be struck out.
Third party rights clauses: Comment
This case marks an important advancement in the way a third party rights clause may be approached and enforced in the future. However, uncertainty remains as the Court recognised the dearth of case law in this area. Accordingly, Ms Lawrence was granted permission to appeal to the Court of Appeal on the issue of third-party rights and to stay enforcement of HNW’s claim pending an appeal. It remains to be seen whether this matter will be reconsidered.