Introduction
The Contracts Act 1999 represents a significant alteration to the common law principle of privity, which dictates that only parties to a contract can enforce its terms or be bound by them. This legislation introduced a mechanism by which a third party, not directly involved in the formation of a contract, can obtain the right to enforce certain provisions. The Act's core principle is that a contract may explicitly provide a third party with the right to enforce a term, subject to specific conditions. These rights exist when the contract expressly identifies the third party by name, class, or description, or where the contract purports to confer a benefit on the third party. The Act's technical implementation includes stipulations that detail the circumstances under which these third-party rights may arise and how they can be restricted or eliminated by the contracting parties. This introduction establishes a structured overview of the Act, which aims to address historical limitations in contractual enforcement.
Third-Party Beneficiary Rights Under the Contracts Act 1999
The primary effect of the Contracts Act 1999 is to grant rights to third parties who are not direct parties to a contract. According to section 1(1), a third party may enforce a term of a contract if the contract explicitly provides for it, or if the contract purports to confer a benefit upon them. This latter provision requires that the benefit conferred on the third party is not merely an incidental effect of the contract, but is a purpose of the contractual agreement. In Dolphin Maritime Aviation v Sveriges [2009] EWHC 716, the court clarified that a contract does not “purport to confer a benefit” simply because a third party’s position improves through its performance. Rather, benefiting the third party must be one of the explicit purposes of the agreement, not a mere incidental consequence.
Furthermore, section 1(3) states that the third party must be expressly identified in the contract by name, class, or description. This section does not allow a third party to enforce a contract merely by implication. A case relevant to this is Avraamides v Colwill [2006] EWCA Civ 1533, where a claim was dismissed by the Court of Appeal because it held that the contract did not mention a third party by name or class. The court ruled that the Act required the express naming of a third party, rather than reliance on inference or implication.
Rebutting the Presumption of Third-Party Rights
While the Act provides a mechanism for third-party enforcement, it also includes provisions that allow contracting parties to avoid this outcome. Section 1(2) allows the contracting parties to exclude third-party enforcement if it appears on a proper construction of the contract that this was not their intention. This clause addresses situations where the conferring of benefits on a third party is present in a contract, but that the contract does not intend for those benefits to be enforceable by the third party directly. The courts have interpreted that if a contract is neutral on this matter, section 1(2) does not override section 1(1)(b), meaning that a neutral position will result in an enforceable right by the third party. In Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Rep 38, the court held that section 1(2) only applies if the contract expressly provides that parties did not intend third-party enforcement, creating a rebuttable presumption of enforceability. The High Court ruled in favor of the broker, stating that the contract contained no intention that rebutted a right of enforcement from the broker, thereby succeeding in a claim for a commission under the 1999 Act. These cases demonstrate that the Act establishes a presumption in favor of third-party rights unless explicitly excluded.
Furthermore, Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No. 2) [2005] EWCA Civ 519 examined the issue of chain contracts. In this case, it was held that a chain of contracts does not necessarily rebut an intention to benefit a third party, and that whether that presumption is rebutted depends on the particular industry and commercial background. The Court of Appeal stated that the commercial background in the construction industry means that contracts are unlikely to cut across parties, but this position does not mean that a chain of contracts in any industry will rebut a claim for third-party enforceability. The case established that there is no tradition of chain letters of indemnity.
Contract Modification and Third-Party Rights
The Contracts Act 1999 addresses the possibility of a contract being modified or revoked after conferring rights to a third party. Section 2 of the Act outlines that a contracting party cannot alter or revoke an agreement that contains third-party rights if it has been communicated to the third party or the third party has relied upon it. This creates a condition whereby the contracting parties must obtain consent from the third party before altering or terminating a contract where the third party’s rights are implicated. The limitation under section 2 aims to protect the third party’s ability to enforce contractual rights when those rights have been made clear and the third party is acting upon the conferred benefit. The effect of this section demonstrates the limitations imposed on contractual autonomy following the conferment of third party rights. This means that parties to the contract are no longer free to alter their arrangement where a third party’s contractual rights are implicated.
Good Faith and Implied Terms
Though not directly a part of the Contracts Act 1999, the concept of good faith in contractual relations has come to the forefront of contract law and is essential when applying contract principles under common law. In Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), the court implied a term of good faith into a distribution contract. While the general view is that good faith is not recognized in English contract law, Leggatt J argued that it should be recognized especially in relational contracts, such as franchise and distributorship agreements. This case highlights how courts may imply a duty of good faith in the performance of contracts, particularly when long-term relationships are involved. The implication of such terms has the potential to affect the operation of the 1999 Act by providing greater protection to all parties under the contract, and not just those named within the contract. The ruling establishes that the content of good faith is based on objective principle, determined by asking if reasonable and honest people would regard the specific conduct as commercially acceptable, which is a broad test that can address an array of contractual situations.
Interaction with EU Law and Other Acts
The Contracts Act 1999 is part of a larger legal structure, including both national and EU law. One important area to consider is how the Act interacts with EU directives, especially those impacting consumer rights. Cases like C-212/04 Adeneler [2006] ECR I-6057 and Case C-268/06 Impact [2008] ECR I-2483 illustrate the indirect effect of EU directives on domestic legislation. The rulings of the European Court of Justice (ECJ) demonstrate that Member States must implement EU directives by the stipulated deadline and not act against their goals during the implementation period, though they are not required to apply the implementing legislation with retrospective effect. This impacts all areas of legislation. In contract law, these rulings may require national courts to interpret domestic law in accordance with a directive once the transposition period has expired.
Further to these rulings, the Consumer Rights Act 2015 (CRA), though not directly tied to third party rights, has consolidated and clarified consumer rights, including those concerning unfair contract terms. The CRA brings together the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. The Act introduces new consumer rights and remedies, particularly in respect of digital content, and clarifies standards for goods and services. Specifically, the Act provides that a term in a consumer contract is unfair and therefore void if it goes against the requirements of good faith by causing a significant imbalance in the rights of the parties. This consolidation seeks to achieve a coherent approach, reducing anomalies and overlapping provisions regarding consumer protection.
Conclusion
The Contracts Act 1999 has fundamentally altered English contract law by introducing third-party rights of enforcement, challenging the rigid common law doctrine of privity. By creating mechanisms for expressly conferred rights, the Act allows for a more efficient means of implementing complex contractual arrangements, albeit that it is only available under defined circumstances. This is furthered by the ruling in Nisshin Shipping, whereby it establishes a rebuttable presumption of enforcement for third party rights, thereby shifting the burden of proof onto those wishing to deny a third party right to enforcement. Cases such as Dolphin Maritime, however, underscore the necessity of explicit intent to benefit a third party for enforcement rights to arise. The Act’s interactions with EU law, as seen in cases like Adeneler and Impact, demonstrate the need to align national legislation with broader European legal frameworks. The introduction of the Consumer Rights Act 2015 and the principle of good faith in cases such as Yam Seng further show a developing legal landscape that seeks to balance contractual autonomy with fairness and protection for all involved, not merely those who are direct parties to the contract. These interactions highlight the dynamic nature of contract law and the increasing influence of both statutory and common law developments.
