High Court permits third party to enforce lender's rights under loan agreement
In HNW Lending Ltd v Lawrence [2025] EWHC 908 (Ch), the High Court found that a non-party to a contract could enforce the contract under the Contracts (Rights of Third Parties) Act 1999 (the Act) even where the contract did not confer a benefit on the non-party. It was sufficient that the contract expressly provided that the non-party was entitled to enforce the contractual right in question.
The decision is an important reminder that if parties wish to exclude the enforcement of a contract by a third party, third party rights should be expressly excluded when drafting the contract.
Background
The case involved a claim for possession of a property by HNW, a peer-to-peer lender, in reliance on a loan agreement and charge against the property. Under the loan agreement, £1.5 million had been advanced by the lender to Ms Lawrence. The loan agreement had been arranged by HNW, who was referred to in the loan agreement as a ‘Security Agent’. However, HNW was not a party to the loan agreement and Ms Lawrence’s obligation to pay under the charge was to the lender.
Clause 26.7 of the loan agreement stated:
“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.”
After Ms Lawrence had failed to make repayments under the loan agreement, HNW claimed for possession of the property and repayment of the amounts due. Ms Lawrence denied that HNW had standing to sue on the basis that it had no enforceable rights under the loan agreement and charge. She also brought a counterclaim, arguing that she had not agreed to the terms of the loan agreement which was entered into under duress and/or undue influence.
Ms Lawrence applied to strike out HNW’s claim and HNW applied to strike out Ms Lawrence’s counterclaim.
In support of her application for strike out, Ms Lawrence relied upon an earlier County Court decision also involving HNW but a different borrower in which the circumstances were similar and the terms of the loan agreement were materially the same as the terms of her agreement. The County Court had concluded that HNW did not have standing to sue because HNW had no free-standing cause of action to bring the claim for possession or for repayment of the loan. This was on the basis that:
- HNW was not a party to the loan agreement, and the loan agreement specifically provided that HNW acted merely as a security agent for the peer-to-peer lender, therefore HNW had no enforceable rights of its own. The loan agreement did not impose any obligations on the borrower to the security agent (the borrower’s obligations were all owed to the lender) and the security agent was not expressed to benefit from the loan agreement; and
- the borrower’s covenant to pay under the charge was not given to HNW.
Decision
The High Court did not agree with the County Court’s analysis above. Instead, the High Court concluded that clause 26.7 of the loan agreement appeared to have been drafted with the Act in mind and with the intention of conferring on HNW equivalent rights to those of the lender, therefore HNW could enforce obligations owed to the lender.
The Act provides:
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—
(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.
The Court noted that there is little case law on the scope of s.1(1)(a) of the Act. The example given in a leading textbook on how the section may apply concerns a contract term where A promises to B to pay a sum of money to a third party, C, and the contract goes on to state that C is entitled to enforce the term containing this promise. In such an example, the term enforced by C consists of a term benefitting C, rather than an obligation owed to and benefiting one of the contracting parties. In contrast, in the current case, there was no promise made by Ms Lawrence to the lender to pay anything to, or otherwise benefit, HNW. The Court held that s.(1)(1)(a) of the Act is not limited to the enforcement by a third party of a term purporting to benefit the third party; it is enough that the contract expressly provides that the third party may enforce the term.
On that basis, as clause 26.7 of the loan agreement expressly provided that the third party, HNW, could enforce the relevant contract rights, it could do so. Alternatively, clause 26.7 also satisfied s.(1)(1)(b) of the Act as the wording of the loan agreement either expressly or purportedly conferred a benefit on HNW by stating it “may take the benefit of and specifically enforce each expressed term of this loan agreement and any term implied under it pursuant to the [Act]”.
The Court noted that its approach to the construction of clause 26.7 was consistent with the principle to endeavour to give effect to contractual provisions where possible, rather than treating any part of them as otiose.
The Court also struck out Ms Lawrence’s counterclaim as the allegations were not made out.
Key takeaways
The decision will be particularly relevant to parties in the peer-to-peer lending sector. It clarifies that, subject to the terms of the agreement, third parties may be able to enforce a loan agreement under the Act even when not a party to the agreement and despite the agreement not conferring a benefit on them.
The decision also illustrates how the Act and third party rights can be interpreted widely and is a reminder that this issue should be considered at the drafting stage. Parties to contracts should carefully consider whether third parties should have enforcement rights and include express wording to the contrary if they are not intended.
Given the different approach adopted by the High Court compared to the County Court in interpreting substantially the same contracts and legislative provisions of the Act, Ms Lawrence was given permission to appeal, and the Court ordered a stay of enforcement of HNW’s claim. It remains to be seen whether there will be any further developments on this issue.
With thanks to Eleanor Clotworthy for her assistance in drafting this post.