Dekel v RE Capital: Reflective loss bars shareholder's third-party contract claim

The High Court has struck out a claim by a shareholder seeking to enforce a management agreement under the Contracts (Rights of Third Parties) Act 1999, finding that the reflective loss principle barred recovery and that the claimant had not "provided finance" within the meaning of the relevant contractual clause.

Zvi Dekel invested £4 million by subscribing for participating shares in Clerkenwell Lifestyle Ltd (BVI), a company established to fund a property development project in Clerkenwell, London. CLL BVI entered into a management agreement with GMG Real Estate (later RE Capital) for the project's management.

Clause 20.1.2 of the management agreement purported to grant enforcement rights under the 1999 Act to parties who "has provided finance and/or refinance… in connection with the Property". When the project failed, Mr Dekel claimed damages for breach of the management agreement, asserting he fell within this provision.

The reflective loss principle

Mr Justice Cawson held that even if Mr Dekel could rely on the 1999 Act, his claim was barred by the rule against recovering reflective loss, as established in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) and recently affirmed by the Supreme Court in Marex Financial Ltd v Sevilleja.

The court rejected Mr Dekel's argument that he should be treated as a creditor rather than a shareholder. The documentation clearly established his investment as an equity stake: he subscribed for participating shares, was registered as a member, and his returns were tied to dividends and distributions dependent on the company's fortunes. Any loss he suffered was therefore reflective of CLL BVI's loss.

The court also dismissed arguments based on section 1(5) of the 1999 Act, which grants third parties remedies as if they were parties to the contract. Mr Justice Cawson held that even had Mr Dekel been an actual party to the management agreement, the reflective loss principle would still apply, as he remained a shareholder claiming losses suffered in that capacity.

Contractual interpretation

Addressing the alternative ground for dismissal, the court found that Mr Dekel did not fall within clause 20.1.2 as someone who had "provided finance". The judge held that this phrase denoted direct finance to the project, not indirect funding through share subscription in an intermediary company.

Mr Justice Cawson emphasised that "providing finance" meant something more specific than simply providing money that enables another party to provide finance directly. The structure of the investment—where CLL BVI used shareholder funds to subscribe for shares in CLL UK and make loans to CAF6—meant Mr Dekel had invested in CLL BVI, whilst CLL BVI procured the actual project finance.

Commercial common sense supported this interpretation. Allowing individual shareholders to enforce the management agreement independently would create practical difficulties inconsistent with the parties' objective intentions and the established principles underlying Foss v Harbottle.

Implications

The decision reinforces the robustness of the reflective loss principle, even where shareholders acquire contractual enforcement rights through the 1999 Act. It clarifies that the nature of the loss, rather than the mechanism for claiming it, determines whether the rule applies. The judgement also provides guidance on interpreting "finance" provisions in third-party rights clauses, distinguishing between direct financing and equity investment in funding vehicles.

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