High Court Considers Interaction Between The Reflective Loss Principle And The Contracts (Rights Of Third Parties) Act 1999

The High Court has allowed an application for strike out and/or reverse summary judgment of a claim brought by an investor in a property redevelopment project, on the basis that it was barred by the rule against the recovery of reflective loss: Dekel v RE Capital Administrators Ltd & Anor [2025] EWHC 2976 (Ch).

The claimant invested in the project in exchange for participating shares in a BVI investment vehicle. When the project failed, the claimant brought a personal claim against the defendant property management companies, alleging breach of the management agreement for failure to perform services with reasonable skill and care. Although the claimant investor was not a party to the management agreement, they argued that a clause of the agreement conferred a right, pursuant to the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act), to enforce its terms.

The court found, as a matter of contractual interpretation, that the management agreement did not confer such a personal right. In any event, because the claimant was a shareholder in the investment vehicle, the court held that any loss suffered was reflective of the loss suffered by the investment vehicle itself. Accordingly, following the principle in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch20, and as approved by the Supreme Court in Sevilleja v Marex Financial Ltd [2020] UKSC 31 (see our blog post), the claim was barred.

This decision suggests that the reflective loss rule will apply to a claimant seeking to rely on s.1 of the 1999 Act, where it is not a party to the relevant contract and it brings the claim in its capacity as a shareholder of a promisee. The court distinguished the decision in Broadcasting Investment Group Limited v Smith [2021] EWCA Civ 912, where the Court of Appeal found that s.4 of the 1999 Act preserved a shareholder's right to enforce a contract, notwithstanding the reflective loss rule, where the shareholder was also the promisee under the relevant contract in his own right. In the court's view, s.4 of the 1999 Act only protects the rights of a promisee (ie a contracting party). In contrast, the present claimant was not a party to the contract, and there is no equivalent provision protecting the rights of a non-party relying on s.1 of the 1999 Act.

As a practical point, a shareholder in the position of the claimant in the present case should not be left without a remedy as a result of the reflective loss rule, as they have the option to bring a derivative claim to enforce the company's rights. In parallel proceedings, this is precisely what the claimant has sought to do. He is currently waiting for permission from the High Court in the BVI to bring a derivative action in the name of the BVI investment vehicle in the UK.

We consider the decision in further detail below.

Background

The claimant invested £4 million in exchange for participating shares in a BVI investment vehicle, for a property redevelopment project in London. By a management agreement, the investment vehicle appointed a third party (GMG Real Estate) to manage the project. Clause 20.1.2 of the management agreement (the third party clause) provided that pursuant to the 1999 Act any party that had provided finance and/or refinance in connection with the redevelopment project was entitled to enforce for its benefit any of the provisions of the management agreement.

The property redevelopment failed and the claimant lost his investment. He brought a claim against GMG Real Estate (and its successor) alleging that, in breach of the terms of the management agreement, they had failed to perform the services required of them with reasonable care and skill. The claimant relied on the third party clause on the basis that, as a party who had provided finance in connection with the redevelopment project, he had a right pursuant to the 1999 Act to enforce provisions of the management agreement.

The defendants applied for strike out and/or summary judgment, primarily on the basis that:

1. As a matter of true construction of the third party clause, the claimant was not entitled to enforce the terms of the management agreement pursuant to s.1(1) of the 1999 Act because the claimant did not, in subscribing for shares in the investment vehicle, provide finance or refinance in connection with the redevelopment project.
2. In any event, as the claimant was a shareholder in the investment vehicle, the rule against reflective loss applied.

Decision

The court found that the proceedings should be struck out and/or that summary judgment should be granted in favour of the defendants.

The reflective loss issue

The court referred to the Supreme Court's decision in Marex,where the majority approved the application of the rule against reflective loss in respect of claims brought by shareholders, whilst disapproving the extension of the rule to other categories of claimant (such as creditors). In Marex Lord Reed distinguished between:

In the present case, the court was satisfied that the rule against reflective loss applied so as to bar a personal claim by the claimant. Contrary to the claimant's submissions, the court did not consider that the alleged loss was suffered by the claimant as a creditor rather than as ashareholder. In particular:

• The claimant plainly subscribed for shares and the relevant subscription agreement expressly provided that the claimant's capital contribution could not be withdrawn from the investment vehicle except by way of redemption of his participating shares.
• The investment vehicle's Memorandum and Articles of Association expressly provided that each participating share should confer on the shareholder a right to an equal share in any dividend paid by the investment vehicle and the right to an equal share in the distribution of surplus assets of the investment vehicle.
• Assuming the defendants breached the management agreement, the loss suffered by the claimant was the loss of the return he would have received on the payment of dividends and distributions (had the redevelopment project been successful).

On this basis, the court found it was clear that any loss suffered by the claimant was genuinely reflective of any loss suffered by the investment vehicle.

Effect of the 1999 Act on the rule against reflective loss

The claimant submitted that the effect of s.1 of the 1999 Act was to confer upon him a separate and distinct cause of action to that of the investment vehicle to enforce the terms of the management agreement. However, the court did not consider that the provisions of the 1999 Act assisted the claimant in avoiding the rule against reflective loss.

In particular, the claimant relied on the Court of Appeal's decision in Broadcasting Investment Group. In this case, the shareholder was the promisee (and therefore a party to the relevant contract), and it was the company (which was not a contracting party) that was seeking to enforce the terms of the contract pursuant to s.1 of the 1999 Act – in other words, the opposite scenario to the present case. The Court of Appeal accepted that the rule against the recovery of reflective loss prima facie applied, preventing the promisee/shareholder's right to enforce the contract. This was arguably contrary to s.4 of the 1999 Act, which provides that s.1 "does not affect any right of the promisee to enforce any term of the contract". The critical question for the Court of Appeal was whether the claimant's right to enforce the agreement was extinguished by: (a) the rule against reflective loss (which would not engage s.4); or (b) s.1 of the 1999 Act (which would engage s.4). The Court of Appeal held that s.1 was the "proximate cause", and therefore s.4 operated to prevent such an outcome, so that the claimant was entitled to enforce the contract notwithstanding the rule against reflective loss.

In the present case, the court distinguished the decision in Broadcasting Investment Group. In the court's view, s.4 only protected the rights of a promisee (contracting party), whereas the claimant in the present case was not party to the contract, and there was no equivalent position protecting the right of a non-party relying on s.1 of the 1999 Act. Further, in contrast to Broadcasting Investment Group, the "proximate cause" of the claimant's lost right to enforce the management agreement was clearly the rule against reflective loss, rather than s.1 of the 1999 Act (which was, in fact, the provision conferring the right to sue on the claimant).

The claimant also relied on s.1(5) of the 1999 Act, which provides:

The court did not consider that s.1(5) of the 1999 Act assisted the claimant. This provision provides for a party relying upon s.1 of the 1999 Act to be treated, for the purposes of enforcement of the contract, in the same way as an actual party to the contract. However, the court found that had the claimant been a party to the management agreement, then the same difficulty in respect of reflective loss would still have arisen.

The claimant's reliance on the third party clause

Even if it was wrong in respect of the reflective loss issue, the court concluded that the claimant did not "provide finance" in connection with the redevelopment project, so as to fall within the third party clause. Consequently, the claimant could not rely upon s.1 of the 1999 Act so as to enforce the terms of the management agreement in his own right, in any event.

Accordingly, the court held that the defendants were entitled to strike out/summary judgment and dismissed the claim.

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