Introduction
The Contracts (Rights of Third Parties) Act 1999 represents a significant modification to the doctrine of privity of contract within English law. This legislation allows, under specific conditions, a person who is not a direct party to a contract to enforce its terms. The core principle is that a third party may acquire rights under a contract if the contract expressly states this or if it confers a benefit to the third party unless it appears that the contracting parties did not intend that the third party to have a right to enforcement. The technical framework involves sections stipulating the criteria for third-party enforceability and also outlining defenses available to the promisor. This Act establishes clear requirements for identifying a third party entitled to benefits and addresses the practical implications of these rights, such as the remedies available. The language and structures used in the legislation are quite formal, reflecting the legal nature of its content.
Key Provisions of the Act
The Contracts (Rights of Third Parties) Act 1999 is primarily articulated in Sections 1-9. Section 1 sets out the core conditions under which a third party may enforce a term of a contract. The enforceability of third-party rights is determined by two principal routes: firstly, where the contract expressly provides that the third party may enforce a term (Section 1(1)(a)); or secondly, where the contract confers a benefit on the third party (Section 1(1)(b)). The key provision within Section 1(1)(b) is that the third party can enforce the term unless it appears from the contract that the parties did not intend the term to be enforceable by the third party. This means that where a contract confers a benefit, it creates a presumption in favour of third party rights. In Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Rep 38, it was affirmed that s 1(1)(b) creates a rebuttable presumption of enforceability by third parties unless evidence is provided that shows the parties did not intend to provide a right to a third party. The exclusion of third party enforcement is dealt with in section 1(2) which states that section 1(1)(b) does not apply if the contract dictates that the parties did not intend the term to be enforceable by the third party. This is an important point because it confirms that the parties to a contract have the power to opt out of the third-party rights created by section 1(1)(b).
Section 1(3) provides the third party must be expressly identified in the contract by name, class, or description, and this requirement was confirmed in Avraamides v Colwill [2006] EWCA Civ 1533. This provision does not require that the third party be already in existence at the time the contract is formed, so long as they can be identified as and when they exist. Section 2 addresses the issue of contract variations; where parties to a contract try to alter or rescind the contract before the third party has relied on it. As a general principle, the contracting parties can vary a contract, however section 2 states, the parties cannot rescind or alter the contract where a third party has relied on it, without their consent. This section does not define the term “reliance,” meaning a broad definition would apply in common law. Sections 3-5 go on to address available defences and enforcement mechanisms. Section 3 allows the promisor (party making the promise) to rely on any defence they would have had if they had been sued directly by the promisee (other party to the contract). In the absence of an express agreement to the contrary, the promisor can set off any debt owed to them by the promisee against any claim brought by a third party. Section 4 provides that the third party is able to claim all available remedies for breach of contract. Sections 6 to 9 deal with other miscellaneous issues related to the act.
Identifying the Third Party
Section 1(3) stipulates that the third party must be expressly identified in the contract by name, as a member of a class, or by description. This clause is key to ensuring the Act is effective but is at the same time flexible. As explained in Avraamides v Colwill, the third party must be referred to with sufficient clarity within the contract itself. Reliance on inferences or implied terms is not sufficient. The third party’s identity does not have to be known at the time the contract is formed, provided they fit a clear description. A typical example of this is an insurance contract which may provide benefits for an individual who is not alive at the time the insurance contract was agreed. The express identification requirement is there to offer certainty, by ensuring that a third party is not inadvertently given rights without the original contracting parties having anticipated this. This is why using terms such as “any third party” is insufficient to establish third party enforceability. Where the Act applies, it automatically confers upon the third party a right to enforce terms of the contract. This contrasts with situations where a contract simply imposes a duty upon one party to confer a benefit on the other, meaning the third party has no direct right to claim against the promisor. Therefore, it is an important distinction that the act creates a right of action rather than a duty for one of the parties to create a right of action for the third party.
Limits to Third-Party Enforcement
Despite expanding rights, the Act does not create unlimited third-party enforcement options. Firstly, the Act only applies to contracts entered into on or after May 11, 2000. Secondly, section 1(2) allows contracting parties to explicitly exclude third-party rights. If a contract clearly indicates that parties did not intend for a third party to be able to enforce the benefit, then section 1(1)(b) is not applicable. This means that even if the third party has obtained a benefit, they will not be able to enforce it if the contract stipulates that they are unable to do so. This limitation maintains the contractual freedom of the initial parties by allowing them to define the scope of their obligations and avoid creating accidental beneficiaries with enforcement rights.
Further, the Act does not alter the fact that a third party will not acquire a right to the enforcement of contract where that was not the intention of the contracting parties. The key question is always whether the contracting parties intended for the third party to have a right of enforcement, and this has been highlighted in many cases. In Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening (The Swedish Club) [2009] EWHC 716 (Comm), the court held that simply because payment was to be made to the third party first, this did not confer a benefit to the third party that was enforceable under the Act. The Act does not confer an automatic right to enforce the agreement on the third party, such as an agency agreement where a third party simply delivers goods on behalf of a buyer or seller. In the case of an indemnity, the nature of an indemnity agreement is that the party making the indemnity will pay back the other if that other should be found liable for something. Therefore, where the indemnity agreement does not stipulate that a third party can enforce the promise of indemnity, then the third party will not have the right to claim against the promisor. This was illustrated in Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) [2005] EWCA Civ 519, where it was stated that each case must be considered on its own merits as the Act does not automatically mean a third party is able to enforce any benefit they may receive.
In order to fully understand the complexity of third party rights, the decision of Alfred McAlpine Construction Ltd v Panatown Ltd [2001] AC 518 must be reviewed. This case involved the scope of the Albazero exception in the law of privity, which allowed a contracting party to recover damages on behalf of a third party. In Panatown, the House of Lords held that because the third party had its own direct rights against the contract breaker, through a duty of care deed, the initial contracting party was restricted to nominal damages. The case is important to understanding the law on third party rights, as the courts were clear in stating that whilst an initial contracting party can claim for damages to its own loss, this does not extend to losses suffered by the third party. The decision in Panatown did not relate to the Contracts (Rights of Third Parties) Act 1999, but it does indicate the complexity of contractual relations and third-party rights.
Impact on Contract Law
The Contracts (Rights of Third Parties) Act 1999 significantly altered the landscape of English contract law by introducing an exception to the long-standing doctrine of privity. The Act provides a clear framework for understanding the nature of contractual intention and clarifies the circumstances under which third parties can obtain enforceable rights. It allows commercial and personal agreements to be more flexible in their effect, enabling contractual provisions that benefit persons who are not directly party to the contract. The Act, however, contains measures to ensure that the parties to a contract can still maintain a level of control over their contractual arrangements and prevent unexpected liabilities from falling on parties which they never intended to be contractually bound. In this way, the Act operates as a clear example of how English law has adopted a more nuanced and practical approach to third party rights in modern contract law.
Conclusion
The Contracts (Rights of Third Parties) Act 1999 introduces a carefully considered mechanism for third-party rights in contract law. It allows enforcement rights where the contract expressly states or confers a benefit to a third party, subject to the contract’s intent and express exclusions. Cases such as Nisshin Shipping Co Ltd v Cleaves & Co Ltd, Avraamides v Colwill, Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening (The Swedish Club), Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) and Alfred McAlpine Construction Ltd v Panatown Ltd illustrate the Act's complexities and limits, emphasizing the importance of clear contractual drafting and intent. This legislation provides a balanced framework that acknowledges the complexities of modern commercial and personal contracts, whilst also trying to avoid unexpected third party liability.
