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Monday, October 8, 2007

Third Party Beneficiaries: Classic Hypo, Different Ansewr

Uk_flag_3 The English case of Avraamides v Colwill, [2006] EWCA Civ 1533, decided last year by the Court of Appeal, concerned an old chestnut in the context of third-party contractual rights:  If I buy a business and promise to pay off its liabilities, can its creditors claim as third party beneficiaries?  (Note that, however hackneyed this question may be in the U.S. context, it's new in England, where our anti-privity legislation only dates from 1999).

Put briefly, in Avraamides, A signs up Corporation B to reconstruct his bathroom; B botches the work and is liable to AB then sells the business to C, C agreeing (1) "to settle the current liabilities of the company" and (2) "to complete outstanding customer orders taking into account any deposits paid by customers as at 31 March 2003, and to pay in the normal course of time any liabilities properly incurred by the company as at 31 March 2003."  B being judgment-proof, A sues C as third-party beneficiary.

Held, the suit fails -- not on the basis of any sophisticated analysis, but simply on the basis of the wording of our anti-privity legislation (i.e. the Contracts (Rights of Third Parties) Act 1999).  This says in ยง 1(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.

Here, says the court, there's no express naming of the third party, and the word "express" means you can't infer who it might be from the wording or intent of the contract as a whole.

This shows the problems of legislating in a nation of strict-constructionists.  Had C agreed to "pay the current creditors of the company," A would presumably have won.  As it is, C must be thanking his lucky stars his lawyers chose to say "settle the current liabilities of the company," even though no doubt the lawyers thought it made no odds which way they put it.

[Andrew Tettenborn (Exteter) sent this quite a while back, but it somehow got lost, perhaps while Frank Snyder was laid up.  We though it was still an interesting case even though it's not really "recent."]

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