Avraamides v Colwill

Mr Avraamides and his wife (the respondents) brought an action against two individuals, Mark Colwill and Stephen Martin (the appellants), seeking to hold them personally liable for failures in the refurbishment of two bathrooms. His Honour Judge Levy QC ordered to be tried a preliminary issue in the following terms:-

“Did the Claimants contract with the Defendants for the installation of their bathrooms and/or did the Defendants owe a concurrent duty of care in tort to the Claimants in respect of the installation of their bathrooms?”

That preliminary issue came on for trial before His Honour Judge Dean QC. The respondents were represented by counsel (not Mr Mills who represented them on this appeal), and the appellants were in person. Judge Dean decided that the respondents’ contract for refurbishment of the bathrooms was with a company Bathroom Trading Company (Putney) Limited. He further decided that all the work of refurbishment including that carried out by an individual Phil Durham was the responsibility of that company. That, on his findings, would have been determinative of the preliminary issue as ordered.

However in the pleadings, albeit only in their reply, the respondents had referred to the existence of an agreement in these terms:-

“In view of the defendant’s assertion that BTC purchased the assets and the goodwill of the business from BTC Ltd on 1 April 2003 it will be averred that in the alternative that as a matter of fact the defendants as partners of BTC also assumed the liabilities of BTC Ltd on 1 April 2003. These liabilities included any liability of BTC Ltd to the claimants which was pre-existing at 1 April.”

The full terms of the agreement (the transfer agreement) were short and provided as follows:-

(1) “The Purchasers agree to buy the assets, and to settle the current liabilities of the company at the value of Net Assets as determined in the final accounts for the year ended 31 March 2003.

Any tax liability on the company arising from the transaction to be settled by the purchaser.

The purchasers (sic) undertakes 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. The Colwill loan account after adjustment to be transferred on by the partnership.” [I have inserted numbers for convenience.]

During the course of counsel’s opening before Judge Dean counsel also referred to this agreement, and it was the judge that posed the question whether counsel was relying on the Contracts (Rights of Third Parties) Act 1999 . At that stage the suggestion was not apparently taken up by counsel. However in the course of his closing submissions, counsel did take up the suggestion that in the alternative to the case they had been running, if the company was the appropriate contracting party by virtue of the transfer agreement, the respondents were entitled to succeed under the 1999 Act .

The relevant provisions of the Act relied on by the respondents were the following:-

“(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 –

the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

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 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.

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.

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).

Where a term of a contract excludes or limits liability in relation to any matter references in this Act to the third party enforcing the term shall be construed as references to his availing himself of the exclusion or limitation.

“the promisor” means the party to the contract against whom the term is enforceable by the third party, and

The judge, albeit he took the view that there was no adequate pleading of the point, allowed the point to be taken, and decided that the respondents were third parties on whom the transfer agreement, by its third paragraph, had purported to confer a benefit. He found the Act applied and gave judgment on the preliminary issue in favour of the respondents. He also granted permission to appeal.

The question whether the 1999 Act applies is the critical issue on this appeal but, before turning to that, there are various points to get out of the way.

First a notice of appeal had been put in by Mr Colwill alone and it seemed at the outset of the appeal that Mr Hartman appeared for Mr Colwill alone. He was troubled about the position of Mr Martin as was Mr Mills. In the result we adjourned so that Mr Hartman could take instructions from Mr Martin. Instructions were taken and Mr Martin was content to be joined so as to be able to take the benefit of any appeal if it was successful and share the responsibility for costs if it failed. We thus ordered his joinder.

Second, Mr Hartman had a submission as to the way the 1999 Act point had arisen and as to the fairness of the trial in that regard. If there was force in that argument, as prima facie it seemed to us there might be, in that the preliminary issue did not seem to cover the point and it seemed doubtful whether much opportunity had been given to the appellants to deal with the point, the result of the point succeeding could mean a further hearing and further expense. Provided Mr Harman had now had time to consider the point and provided no evidence could be called which might assist his clients, it seemed sensible to deal with the real issue – whether the Act applied and indeed Mr Hartman asked us to deal with the real point if we could.

I should add that Mr Mills would have wished to argue that the judge was not right in suggesting that the point was not pleaded but he, too, was content to argue the real point, so long as he was allowed to reserve the right to argue the pleading if it became relevant to any issue as to costs. He also, without prejudice to that argument, agreed to produce a draft pleading for which permission to amend could be given, and a draft of an amendment to the preliminary issue so that too could be amended. I should perhaps say, though this is not the place to elaborate on the point, that it is not satisfactory where the court takes the view that a point has not been pleaded, not to insist on an amendment being placed before it, so that proper consideration can be given as to whether an amendment is fair at that stage, and/or the cost consequences. It is the more unsatisfactory not to consider whether some amendment to the preliminary issue is necessary, and to consider whether it is fair to allow an amendment and, again, possible cost consequences.

Against the above background, I turn to the real point on the appeal – the question whether the respondents are third parties who are entitled to enforce the transfer agreement under the 1999 Act . It will be noted that the transfer agreement is between the shareholders of the company and the appellants. Mr Mills submitted that the agreement clearly evidenced an agreement between the company and the appellants and that it should be on that basis that the court should proceed. Mr Hartman was prepared to approach the matter on that basis.

Both counsel recognised that the third paragraph was the critical paragraph, as did the judge. It is only that paragraph which could be said to confer a benefit on third parties. The issues are accordingly one of construction of that paragraph and the relevant provisions of the 1999 Act . Mr Mills in his skeleton puts the issues in this way in my view accurately:-

“(1) whether any term in Agreement “purports to confer a benefit” on the Claimants with s.1(1) (b) of the 1999 Act ; and if so

whether s.1(1) (b) is disapplied by section 1(2) because on a proper construction of the Agreement it appears that the parties did not intend the term to be enforceable by the Claimants;

whether the Claimants are expressly identified in the contract as a member of a class or as answering a particular description within the meaning of s.1(3) ;

whether the Claimants failed to plead, properly or at all, any claim in reliance of the 1999 Act .”

Both parties recognised that the liabilities under paragraph 1 of the Agreement and the liabilities under paragraph 3 had to be different. But since the liability which the judge had found to exist had at all times been denied by the company they also recognised at least during the course of argument, the force of the point that what the appellants would have paid for under paragraph 1 would be unlikely to have taken account of the liability to the appellants. Further, Mr Hartman for the appellants recognised the strength of the argument that the words in the third paragraph “and to pay in the normal course of trade any liabilities properly incurred by the company as at 31 st March 2003” could be said to benefit those to whom the liabilities had been “properly” incurred, and would include any liabilities “properly” incurred but not taken into account under paragraph 1. He attempted to argue that there was a distinction between liabilities incurred and liabilities “properly” incurred and that the liability to the respondents was a liability improperly incurred.

I would accept that there may be a distinction between liabilities incurred and those “properly” incurred, but I did not follow the argument that there was anything “improper” in the incurring of the liabilities to the respondents.

Mr Mills, possibly with an eye on the provision which requires “express” identification of the third party to which I will come, in his written submissions argued that the liabilities properly incurred as at 31 st March 2003 were simply liabilities to customers. His argument was that the third paragraph must be read as one, and that thus the obligation was to complete orders outstanding for “customers”, and to pay liabilities properly incurred to “customers”. He suggested that the order of the appellants had not been completed as at 31 st March 2003 and that thus the obligation was to complete the order and pay the liabilities properly incurred. Whether factually he was right as to whether the order had been completed as to which there would seem to be considerable doubt, in my view there is nothing in the third paragraph which limits “liabilities properly incurred” to liabilities to customers. On any natural reading liabilities to suppliers or for telephone bills or whatever would seem to come within the compass of liabilities properly incurred.

That brings me to the provision and the main plank of Mr Hartman’s argument. It is a provision which creates most difficulty for Mr Mills, and one which I am not sure the judge fully faced up to. By section 1(3) of the 1999 Act “The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description…”. The second part of the third paragraph simply does not identify any third party or class of third parties.

The temptation in the circumstances of a case such as this, to find a route which renders the appellants liable, is great. They have taken over the assets of the company and agreed with the company to meet liabilities. The remedy of the respondents if the 1999 Act does not apply seems to be to pursue the company which, according to the evidence, now has no assets, with the possibility of persuading the liquidator of the company to then pursue the appellants for failing to discharge the liabilities which under the transfer agreement they have agreed to do. Why not save the appellants that exercise by use of the 1999 Act ?

The answer I am afraid is that section 1(3) , by use of the word “express”, simply does not allow a process of construction or implication. I considered whether it would be possible for Mr Mills to rely on the fact that “customers” are identified in the contract as beneficiaries of the first part of paragraph 3, even if liabilities in the second part includes persons other than customers. Could he submit that even though others are included within the liabilities under the second part, “customers” as a class are identified and that is sufficient. The difficulty is that the section is concerned with the benefit conferred on a third party, and with the identification of that person. The benefit from the obligation to pay liabilities properly incurred would benefit third parties but of a large number of unidentified classes.

I should add that, although both parties have fought the appeal on the basis that the written agreement evidences an agreement between the company and the appellants, the fact is that the written contract is between the appellants and the shareholders, and when one adds that point to the failure to identify, I am actually doubtful whether it can be said that this agreement, on its true construction, was one under which it was intended that any persons with rights against the company were to be able to enforce them directly against the appellants.

With some reluctance therefore I would allow the appeal.

I agree. As a result, although there is no obligation in law for the present appellants to meet the claims advanced by the respondents, given the goodwill that the appellants were clearly anxious to maintain when they assumed responsibility for the business that had been Bathroom Trading Company (Putney) Limited, they might feel it appropriate to maintain the offers made during the course of the litigation in connection with the undoubted difficulties which this refurbishment caused. That is, however, entirely a matter for them.