The claimant company entered into an alleged oral agreement with the defendant for the transfer of shares in two broadcasting technology companies to a joint venture vehicle (“the holding company”), in which the claimant was to be a 39% shareholder and the defendant a director. The defendant owned almost all the shares in the two broadcasting companies and accordingly he had nearly total control of them. Under the terms of the alleged agreement, the defendant would procure the incorporation of the holding company. Once a loan of £150,000 which had been made by the claimant to one of the broadcasting companies had been repaid, the claimant would transfer the loan to the holding company in order to capitalise it (“the capitalisation condition”). Within a reasonable time of that transfer, the defendant would procure the transfer of the two broadcasting companies to the holding company. The holding company was incorporated and the capitalisation condition fulfilled, but the claimant alleged that in breach of the agreement, the shares in the holding company were never transferred. Subsequently, the holding company went into creditors' voluntary liquidation. The claimant brought a claim seeking to enforce the agreement, pleading it had “suffered loss by reason of the consequent diminution in the value of its shareholding in [the holding company] and loss of dividend income from [the holding company]”. The defendant applied to strike out the claim on the basis that, by virtue of section 1(1)(b) of the Contract (Rights of Third Parties) Act 1999, the holding company acquired its own claim against the defendant because the agreement purported to confer a benefit on it. Where the shareholder and the company had concurrent claims, the shareholder’s claim was barred by the rule against reflective loss. It was common ground that (i) the holding company acquired a right to enforce the agreement by virtue of section 1(1)(b); and (ii) the claimant was a contractual promisee under the agreement. The judge ordered the claim to be struck out, holding inter alia that the right of the promisee to enforce a contract which was preserved by section 4 of the 1999 Act could only be a right which was “subject to generally applicable legal principles, including (where applicable) the rule against reflective loss”. The claimant appealed on the ground that the judge had erred in holding that the promisee’s cause of action preserved by section 4 was subject to the rule against reflective loss. The judge’s conclusions were contrary to the terms of section 4 and the holding company’s acquisition of rights under section 1 could not affect the claimant’s right as a contractual promisee under the agreement, to enforce it. The effect of the judge’s reasoning was to cause section 1 to negate the claimant’s contractual rights entirely in a manner which was impermissible by statute. The defendant cross-appealed, seeking to uphold the judge’s order on the additional ground that on the facts pleaded by the claimant, the holding company would have a cause of action against the defendant for breach of his fiduciary duties as a director of the holding company. Accordingly, the rule against reflective loss applied to that claim, making the claimant’s appeal in relation to section 4 otiose.
On the claimant’s appeal and the defendant’s cross appeal—
Held, appeal allowed. (1) The right conferred on a third party under section 1 of the Contract (Rights of Third Parties) Act 1999 was additional to any right the contractual promisee had to enforce the contract. Section 4 made clear that the rights created in section 1 were not intended to affect what already existed. They took nothing away. The real question, therefore, was whether the rule against reflective loss “affected” the claimant’s right to enforce the agreement rather than section 1. If section 1 was the proximate cause of the claimant’s rights being extinguished, section 4 prevented such an outcome. If the rule against reflective loss was the proximate cause and it stood alone from the rights granted to the holding company under section 1 of the 1999 Act, the rights were extinguished and section 4 provided no protection to the claimant as promisee. It was quite clear that it was the rights created under section 1 which enabled the defendant to seek to invoke the rule against reflective loss which in turn would have the effect of destroying the claimant’s right to enforce the agreement. It was section 1, therefore, which affected the right of the promisee and was prevented from doing so by the clear terms of section 4. It would be entirely artificial to treat the rule against reflective loss as if it were independent of the right in the holding company which existed as a result of section 1 and caused the rule to apply. The acquisition by the holding company of a right under section 1 could not affect the claimant’s right as contractual promisee. As a matter of proper construction, “affect” had to include something which would destroy the right which section 4 sought to protect. If one separated the application of the rule against reflective loss from the right created by section 1, which enabled it to be applied, section 1 not only affected the claimant’s rights to enforce the agreement but negated them entirely. That was impermissible as a matter of statute. It was clear, therefore, that the inroad into the principle of privity of contract created by section 1 was not intended to derogate from any right vested in the promisee or a third party. It followed that the claim was expressly protected by section 4 of the 1999 Act and accordingly, the judge had been wrong to strike it out (paras 47–51, 54).
(2) Cross-appeal dismissed. The holding company obtained a cause of action in relation to breaches of the agreement, and therefore, any breach of the personal obligation on the defendant, as soon as it was incorporated, by virtue of section 1. Any hypothetical fiduciary duty on the defendant would necessarily depend upon the existence of the holding company’s right to enforce the agreement pursuant to the 1999 Act and would have no existence independent of the agreement and the rights under section 1. Accordingly, section 4 would operate in respect of the hypothetical fiduciary duty claim in just the same way as it did in relation to the holding company’s direct claim to enforce the agreement. Although fiduciary duties were owed by a director of a company to that company, in the present case, the alleged content and breach of those duties were entirely parasitic upon the agreement and the right of the holding company to enforce it pursuant to the 1999 Act. Accordingly, even if the claim were made out, it would not engage the rule against reflective loss because it too was reliant upon section 1 and subject to section 4. Accordingly, the rule against reflective loss was not engaged either in relation to the direct claim to enforce the agreement or the hypothetical fiduciary duty claim and that claim was not another basis for upholding the judge’s decision (paras 59, 61, 64, 65, 66).
Dan McCourt Fritz (instructed by Withers LLP) for the claimants.
Joseph Sullivan and Maya Chilaeva (instructed by Gowling WLG (UK) LLP) for the defendants.