Third Party Rights - Welcome Guidance from the High Court

SUMMARY

There is a “a dearth of case law” on s1(1) of the Contracts (Rights of Third Parties) Act 1999 (Act), as observed by Lenon KC, the judge in the case of HNW Lending Ltd v Lawrence [2025] EWHC 908 (Ch). Whilst an accurate assessment, the judge would have been well within his rights to add (but didn’t) that the dearth of caselaw extends to the entire Act, not just s1(1). This is surprising given the rising prevalence of reliance on the Act in commercial contracts (and perhaps most frequently, construction contracts) since its introduction in 1999. Therefore this case is particularly welcome and in this Insight, Kevin Henderson takes a look at what we can learn from it.

Facts

The defendant in the case, Ms. Lawrence, entered into a loan agreement with a lender, for whom HNW, the claimant in the case, acted as the security agent for the lender. The purpose of the loan agreement was to fund Ms. Lawrence’s development of a property. The property was separately charged by way of legal mortgage as a continuing security to the lender under the loan agreement. Whilst HNW was not a party to the loan agreement, the loan agreement contained the following provision purporting to grant HNW third party rights to enforce the terms of the loan agreement:

“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.”

The charge separately provided that it was made between Ms. Lawrence as borrower and HNW as “acting as security agent for the Lender as defined in the Loan Agreement”.

When Ms. Lawrence defaulted on her loan repayments, HNW sought to enforce the loan agreement to gain possession of the property and payment of the amounts allegedly owed under the registered charge. In the present case, Ms. Lawrence submitted an application requiring the Court to consider (among other things) a strike out application on the basis that HNW lacked standing to file the claim, as HNW was only the lender's security agent and was not itself a party to the loan agreement, and therefore had no enforceable rights under it.

Issues before the Court

The key issue before the Court, for the purposes of this article, was: could HNW, as third party, enforce the loan agreement under the Act? Specifically, the Court considered whether the contract expressly allowed such enforcement under section 1(1)(a) of the Act, even if no direct benefit was conferred.

For ease of reference, the relevant parts of s1(1) of the Act are set out below:

“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—
   1. the contract expressly provides that he may, or
   2. 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)…”

Judgment

The Court held that loan agreement had been drafted with the intention of permitting HNW, as the security agent for the lender, to enforce the terms. It was confirmed that a third party is able to enforce a contract term if the contract expressly provides it may under s. 1(1)(a) of the Act, or if it seeks to confer a benefit on the third party, under s. 1(1)(b).

The judge found that the Act had been considered when the relevant provision in the loan agreement granting HNW third party rights pursuant to the Act was prepared, and with the clear intention that the security agent would be able to enforce the terms of the loan agreement in the same way as the lender.

It was further held that s. 1(1)(a) of the Act is not limited to a third party being able to seek enforcement of a term purporting to benefit it, as s. 1(1)(b) already allows for a third party to enforce a contract term that expressly confers that third party the benefit of the provision.

In reaching this decision, Lenon KC distinguished a previous County Court decision (a judgment dated 7 August 2024 of his Honour Judge Dight CBE in proceedings in the Central London County Court, brought by HNW against Derek Keith Mark) regarding a case with similar facts, also involving a loan agreement with the same third party rights wording. HHJ Dight had decided in those proceedings that HNW could not enforce the contract terms, as HNW was not a party to that loan agreement nor were they expressed to benefit from the loan agreement.

Commentary

This judgment affirms that, if expressly permitted in the contractual arrangements, security agents can have the right to enforce the terms of a loan agreement through the Act. This case will therefore be of key interest to the growing peer-to-peer lending market and other modern loan setups that use intermediaries to arrange loans.

Whilst this case pertained to the enforcement of a loan agreement in respect of a development, those assisting developers (and/or their funders) in preparing construction contracts will also take confidence from this decision that an express clause granting enforcement rights is sufficient, even in the absence of a clause clearly conferring a benefit on a third party.

Construction projects often involve a range of third parties with an interest in that project, be it funders, future tenants/purchasers, and even the original employer (for example, where all project parties directly engaged by the employer are novated to a contractor, as is common in a traditional design and build procurement). The decision reduces the risk that enforcement rights could be challenged merely because a third party’s benefit in the relevant contract isn’t obvious or direct.

This decision may add weight to the argument for construction contracts opting to use third party rights provisions (drafted carefully) to extend the ability to enforce the contract terms to third parties as a viable alternative to a collateral warranty mechanism. Those who may have considered the potential uncertainty of third party rights by notice, versus the administrative burden of arranging, agreeing and completing a collateral warranty will want to take notice of this decision.

Finally, this case acts as yet another reminder that:

• clear and unambiguous drafting is essential for contracts to function properly, especially in relation to outlining the rights of third parties, in order to avoid potential disputes; and
• the courts should endeavour, whenever possible, to give effect to the parties' contractual provisions rather than treating any part of them as otiose.

However, as a health warning for the end of this article, this matter may not yet be settled – recognising the lack of case law on the subject and noting the current decision is in direct contrast with the previous County Court decision of HHJ Dight, Ms. Lawrence was given permission to appeal the decision. We therefore may see this matter deliberated before the Court of Appeal in due course. Watch this space for further developments.

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