The Contracts (Rights of Third Parties) Act 1999 applies to contractual terms that purport to confer a benefit on third parties that are specifically named or described in a contract. The litigation in The Prudential Assurance Co Ltd v Ayres [2008] EWCA Civ 52; [2008] PLSCS 32 concerned an agreement between a landlord and incoming tenants that limited the landlord’s ability to recover sums due under the lease to the partnership assets of the incoming tenants, to the exclusion of the personal assets of the individual partners.
The landlord issued proceedings to recover arrears of rent and other sums from the previous tenant under the terms of an authorised guarantee agreement (AGA) given on the assignment of the lease. The High Court ruled that the previous tenant was entitled to take advantage of the non-recourse agreement between the landlord and the incoming tenants, even though the previous tenant was not a party to that agreement. This was because the non-recourse agreement restricted the landlord’s rights of recovery against the incoming tenants or “any previous tenant under the lease”.
The Court of Appeal has overturned that decision. Their lordships held that the previous tenant was not entitled to take advantage of the non-recourse provision, and that it was liable to account to the landlord for the arrears of rent that had accumulated since the assignment of the lease.
The court ruled that the decision in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 1 EGLR 57; [1997] 24 EG 122 was not merely the leading authority on the construction of contractual notices. It was also authority for the proposition that commercial documents of all kinds should be construed in accordance with the way in which language is used in everyday life, so as to give effect to the parties’ intentions.
The landlord persuaded the court that it would flout business common sense to deprive it of the benefit of the covenants in the AGA in the very circumstances in which they were most needed. The AGA was fundamental to the transaction as a whole, and no landlord would be prepared to render an AGA substantially worthless in this way. Consequently, in order to give effect to the parties’ intentions, the non-recourse agreement had to be construed not simply in accordance with its natural meaning but against the background of the transaction as a whole.
Their lordships accepted that their interpretation did violence to the language of the non-recourse agreement, but agreed that there was no evidence to suggest that the parties had intended the agreement to affect the relationship between the landlord and the previous tenant. The assignment of the lease involved a series of interlocking documents between several parties. The non-recourse agreement had been made between the landlord and the incoming tenants only and was expressed to be supplemental to the lease alone. This was a powerful indication that the parties did not intend it to affect the position of any other party to the transaction. The Contracts (Rights of Third Parties) Act 1999 did not therefore apply.
Allyson Colby is a property law consultant
