Contracts (Rights of Third Parties) Act 1999: Third‑Party Ri...

Introduction

The Contracts (Rights of Third Parties) Act 1999 reshaped the common law rule of privity by allowing some people who are not parties to a contract to enforce terms that benefit them. In practice, this affects a wide range of agreements, from construction and supply contracts to group company licences and shipping terms. The Act tells you when a third party can sue, how they must be identified, when the original parties can change or cancel those rights, and what defences the promisor can raise.

This guide explains the main provisions, key cases, and practical drafting steps so you can use the Act with clarity and avoid surprises.

What You’ll Learn

• When a non-party can enforce a contract term under section 1
• The difference between an express right to enforce and a clause that benefits a third party
• How to identify a third party by name, class, or description (section 1(3))
• When consent is needed to vary or cancel third‑party rights (section 2)
• Which defences, set‑offs, and counterclaims are available to the promisor (section 3)
• How the promisee’s rights continue and how double recovery is avoided (sections 4–5)
• Key cases: Chudley v Clydesdale Bank, Nisshin Shipping v Cleaves, and Avraamides v Colwill
• Practical drafting: no‑third‑party‑rights clauses, class descriptions, notices of assent, and dispute resolution
• Typical uses in construction, insurance, software, and logistics

Core Concepts

Who can enforce and when (section 1)

There are two main routes for a third party to enforce a term:

• Section 1(1)(a): the contract expressly says the third party may enforce a particular term. This is the cleanest route and removes doubt.
• Section 1(1)(b): the term purports to confer a benefit on the third party. Here, there is a presumption that the third party can enforce, but it is displaced if the contract shows the parties did not intend the third party to have that right (section 1(2)).

Key points:

• The test is objective: would a reasonable person see the term as meant to benefit the third party and be enforceable by them?
• The third party gets the same remedies as if they had been a party (section 1(5)), but they are also subject to relevant terms, including limits of liability and dispute resolution clauses.

Tip: If you do not want any third party to enforce your contract, include a clear “no third‑party rights” clause.

How to identify the third party (section 1(3))

A third party must be expressly identified in the contract:

• By name (e.g., “Jane Smith”)
• As a member of a class (e.g., “any Group Company”, defined in the contract)
• By description (e.g., “the broker named in clause 10”)

Further points:

• The third party does not need to exist when the contract is made (useful for future group companies or assignees).
• The identification must be specific enough for a court to see who was intended. Vague terms may fail.

Cases:

• Avraamides v Colwill [2006] EWCA Civ 1533: references to “customers” and “liabilities” in a business sale agreement were too imprecise. The homeowners could not enforce.
• Chudley v Clydesdale Bank plc [2019] EWCA Civ 344: “clients” described in a letter of instruction were sufficiently identified by description for the Act to apply.

Varying or ending rights (section 2)

Original parties can vary or cancel a third party’s rights until those rights “crystallise”. After that point, they need the third party’s consent unless the contract sets a different procedure.

Rights crystallise when:

• The third party assents to the term, and that assent is communicated to the promisor; or
• The third party has relied on the term, and the promisor knows (or should reasonably expect) that reliance.

Contracting options:

• You can require the third party’s consent, allow variation without consent, or appoint someone (e.g., the employer under a building contract) to give consent on the third party’s behalf.
• The court can dispense with consent in certain cases, such as where the third party cannot be found, or it is just to do so.

Communication of assent:

• No special form is needed; words or conduct can suffice, but the promisor must receive the communication. See Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm).

Defences, set‑off, and double recovery (sections 3–5)

• Section 3: The promisor may rely on any defence, set‑off, or counterclaim that would have been available if sued by the promisee, and on any exclusion or limitation relevant to the term. Third parties cannot take the benefit while avoiding the burdens that go with it.
• Section 4: The promisee’s right to enforce remains intact even if the third party can sue.
• Section 5: Courts guard against double liability. Money recovered by the promisee can reduce the third party’s claim (and vice versa), and set‑off mechanisms can be used to prevent overpayment.

Dispute resolution:

• If the term relied on is subject to an arbitration or jurisdiction clause, the third party is usually bound by it when enforcing that term (section 1(5), read with the contract wording).

How the Act fits with other law and exclusions (sections 6–7)

• The Act sits alongside other routes that can benefit non‑parties, such as agency, collateral contracts, assignment, and trusts. Those routes remain available (section 7).
• Some contracts and terms are excluded from the Act’s scope (see section 6), including bills of exchange and many contracts for the carriage of goods by sea, which already have specialist regimes.

Tip: Always check for statutory or sector‑specific rules that might supplement or displace the 1999 Act in your context.

Key Examples or Case Studies

Chudley v Clydesdale Bank plc [2019] EWCA Civ 344

• Facts: Investors claimed against a bank under a letter of instruction that referred to “clients” of an investment scheme.
• Held: The Court of Appeal allowed a claim under the 1999 Act. The investors were sufficiently identified by description, and the term purported to confer a benefit.
• Practical point: A description can be enough. You do not always need to list names, provided the class or description is clear.

Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm)

• Facts: Shipbrokers sought commissions under charterparties that contained an arbitration clause. The owners said only the charterers could enforce.
• Held: The brokers could enforce under section 1(1)(b), and assent under section 2 can be communicated by words or conduct; no set form is required. The arbitration clause applied to their claim.
• Practical point: If a term benefits a broker or agent, expect the Act to apply unless the contract excludes it. Dispute clauses are likely to bind the third party.

Avraamides v Colwill [2006] EWCA Civ 1533

• Facts: Homeowners tried to enforce bathroom refurbishment obligations under a business sale agreement that mentioned “customers” and “liabilities”.
• Held: The claim failed. The homeowners were not expressly identified by name, class, or description as required by section 1(3).
• Practical point: Use precise identification. Generic labels may not pass the section 1(3) test.

Beswick v Beswick [1968] AC 58 (HL) (context case)

• Facts: A nephew promised his uncle to pay an annuity to the uncle’s widow. At common law, the widow could not enforce due to privity.
• Today: The widow would be able to enforce under section 1(1)(a) if the contract expressly said so, or under section 1(1)(b) if the term was clearly for her benefit and not excluded.
• Practical point: The Act avoids the need for legal workarounds in many family and commercial promises.

Practical Applications

Drafting

• Decide early: include a no‑third‑party‑rights clause if you want to avoid non‑party claims.
• If you do want a third party to benefit:
  • Identify them clearly (name, defined class, or exact description).
  • State whether they may enforce and which terms they can enforce.
  • Build in your preferred variation process: require third‑party consent, appoint a nominee to consent, or allow variation without consent up to a point.
  • Make clear that liability caps, exclusions, time bars, and dispute clauses apply to any third‑party claim.
• Align notices: specify addresses and methods for any third‑party assent or notices under section 2.

Transactions and contracts where the Act is common

• Construction: allow purchasers, tenants, funders, or consultants to enforce design obligations without separate collateral warranties.
• Supply and software: give rights to group companies to use licences and enforce service levels.
• Insurance and indemnities: permit named additional insureds or affiliates to enforce clauses.
• Logistics and shipping: use the Act alongside or instead of Himalaya clauses to cover subcontractors, while checking any statutory exclusions.

Claims and risk checks

• Does the contract include a no‑third‑party‑rights clause? If yes, the Act will not apply unless a term carves out a specific right.
• If not excluded, is the claimant identified under section 1(3), and does a term expressly allow enforcement or confer a benefit?
• Have the original parties tried to vary or cancel the term? If so, did the right crystallise by assent or reliance, triggering section 2 protections?
• What defences, set‑offs, limits, or time bars apply? Section 3 lets the promisor use the same armoury they would have against the promisee.
• Is there a risk of double recovery between promisee and third party? Sections 4–5 manage this, but it needs active case handling.
• Do arbitration or jurisdiction clauses apply to the third party’s claim? Usually yes, if they relate to the term enforced.

Summary Checklist

• Privity reform: a third party can sue if the contract says so (s1(1)(a)) or if a term benefits them (s1(1)(b)), unless excluded (s1(2)).
• Identification: name, class, or description required (s1(3)). Precision matters.
• Remedies and burdens: third party gets the benefit and carries relevant limits and dispute terms (s1(5)).
• Variation/rescission: consent may be needed once the third party has assented (communicated) or relied (s2).
• Defences: promisor can raise any defence, set‑off, or counterclaim available against the promisee and rely on exclusions/limits (s3).
• Parallel rights: promisee can still sue; the court prevents double recovery (s4–s5).
• Other routes and exclusions: agency, trusts, collateral contracts, and assignment remain; some contracts are outside the Act (s6–s7).
• Drafting: decide whether to exclude the Act; if not, identify third parties clearly and set a variation and notice framework.

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