Broadcasting Investment Group v Smith [2021] EWCA Civ 912

BIG sought to enforce an oral agreement requiring transfer of shares to a joint venture company (SS Plc). The defendant argued BIG's claim was barred by the reflective loss rule in Prudential. The Court of Appeal held section 4 of the Contracts (Rights of Third Parties) Act 1999 preserved BIG's rights as promisee, preventing the Prudential rule from barring their claim.

Facts

The appellants (Broadcasting Investment Group Limited (‘BIG’), Visual Investment International Limited (‘VIIL’) and Mr Kenneth Burgess) sought to enforce an alleged oral agreement made in October 2012 (the ‘Agreement’). The Agreement required Mr Smith to procure the transfer of shares in two broadcasting technology companies (SS Ltd and TVP) to a joint venture holding company, Streaming Investments PLC (‘SS Plc’), which was to be incorporated after the Agreement. BIG became a shareholder in SS Plc upon its incorporation. The shares in SS Ltd and TVP were never transferred, and SS Plc subsequently entered creditors’ voluntary liquidation in 2015. The liquidator declined to pursue any claims SS Plc might have.

The Claims

BIG claimed specific performance of the Agreement and damages for breach, alleging loss through diminution in the value of its shareholding in SS Plc. Mr Smith applied to strike out the claims, arguing they were barred by the rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, as SS Plc had its own right to enforce the Agreement under section 1 of the Contract (Rights of Third Parties) Act 1999.

Issues

The key legal issues were:

• Whether the rule in Prudential barred BIG’s claim where SS Plc acquired enforcement rights under section 1 of the 1999 Act
• The effect of section 4 of the 1999 Act, which provides that section 1 ‘does not affect any right of the promisee to enforce any term of the contract’
• Whether the Prudential rule applied to claims for specific performance
• Whether the Prudential rule applied to indirect shareholders (the ‘Russian doll’ argument)

Judgment

The Court of Appeal (Lady Justice Asplin giving the leading judgment, with Lord Justice Coulson and Lord Justice Arnold agreeing) allowed the appeal and held that BIG’s claims were not barred by the rule in Prudential.

Section 4 of the 1999 Act

Asplin LJ held that the statutory right conferred on SS Plc by section 1 of the 1999 Act could not be used to engage the Prudential rule so as to destroy BIG’s rights as contractual promisee. Section 4 expressly preserved the promisee’s rights:

“It seems to me that it is quite clear that it is the rights created under section 1 which enable Mr Smith to seek to invoke the rule in Prudential which in turn would have the effect of destroying BIG’s right to enforce the Agreement. The possibility would not arise without the operation of section 1. It is section 1, therefore, which affects the right of the promisee and is prevented from doing so by the clear terms of section 4 of the 1999 Act.”

Asplin LJ emphasised that treating the Prudential rule as independent of the section 1 right would defeat the purpose of section 4:

“It seems to me that such an approach is contrary to section 4 and defeats the purpose of that section. The rule in Prudential can only come into play, if at all, as a result of the statutory right which is vested in SS Plc under section 1 of the 1999 Act. That right is conferred purely by statute and is subject to the terms and limitations imposed by statute.”

Alternative Fiduciary Duty Argument

Mr Smith sought to uphold the strike-out on the alternative ground that SS Plc would have had a claim against him for breach of fiduciary duties as director. The Court rejected this argument, holding that any such fiduciary duty claim was entirely parasitic upon the Agreement and the rights under section 1, and therefore also subject to section 4.

Other Issues

Given the conclusion on Ground 1, the Court did not find it necessary to determine whether the Prudential rule applied to claims for specific performance, nor to resolve the ‘Russian doll’ argument regarding indirect shareholders, though Arnold LJ noted it was ‘well arguable that the rule in Prudential can apply to indirect shareholders in appropriate circumstances.’

Implications

This decision clarifies the relationship between the Contract (Rights of Third Parties) Act 1999 and the reflective loss rule in Prudential as explained in Marex Financial Ltd v Sevilleja [2020] 3 WLR 255. Where a third party acquires enforcement rights under section 1 of the 1999 Act, that statutory right cannot be used to bar the original promisee’s claim under the Prudential rule. Section 4 operates to preserve the promisee’s contractual rights against being affected by the operation of section 1. The case reinforces that the 1999 Act created only a limited incursion into the privity rule and was not intended to derogate from any rights vested in the promisee.

Verdict: Appeal allowed. BIG’s claims under the Agreement were not barred by the rule in Prudential. Section 4 of the Contract (Rights of Third Parties) Act 1999 preserved BIG’s rights as contractual promisee, preventing the rights created under section 1 from engaging the Prudential rule to destroy those rights.

Source: Broadcasting Investment Group v Smith [2021] EWCA Civ 912