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

Introduction

The Contracts (Rights of Third Parties) Act 1999 (often shortened to the 1999 Act) reformed the common law rule of privity, which traditionally meant only the contracting parties could enforce a promise. The Act allows a third party to enforce a contract term in defined situations, while giving drafting control to contracting parties who wish to include or exclude such rights.

At its core, a third party may enforce a term if:

• the contract says they can; or
• the term is intended to benefit them and the contract does not show otherwise.

The third party must be identified by name, class, or description. The parties can also agree procedures for varying or cancelling rights, but once the third party has assented or relied, section 2 limits the parties’ freedom to change the deal without consent.

This guide sets out the main rules, key cases, and practical drafting steps so you can use the 1999 Act with confidence.

What You’ll Learn

• When a third party can enforce under section 1(1)(a) and section 1(1)(b)
• The identification requirement in section 1(3)
• How section 1(2) lets parties exclude or limit third-party enforcement
• When consent is needed to vary or cancel under section 2
• What the leading cases say: Nisshin, Avraamides, Dolphin Maritime, Laemthong
• Practical drafting tips to grant or exclude rights, and manage variation and dispute clauses
• How good faith debates (Yam Seng) and consumer law (CRA 2015) link to this area

Core Concepts

When can a third party enforce?

There are two gateways to enforcement under section 1:

• Section 1(1)(a): the contract expressly provides that a named third party (or a defined class) may enforce a term.
• Section 1(1)(b): the term purports to confer a benefit on a third party, and the contract does not show that the parties intended otherwise.

Key points:

• Section 1(3) identification: the third party must be expressly identified by name, class, or description. They do not need to exist when the contract is made (e.g., future group companies).
• More than incidental: a benefit that simply arises as a side effect is not enough. The benefit must be part of the agreement’s purpose.
• Remedies: under section 1(5), a third party has the same remedies for breach as if they were a party (e.g., damages, injunction, specific performance), subject to the contract’s limits and defences.

Practical test for section 1(1)(b):

• Ask whether the term is meant to benefit the third party, not merely improve their position incidentally.
• Check the contract for any wording that shows the parties did not intend third-party enforcement. If it is silent or neutral, courts may find enforcement is allowed.

Excluding or limiting third-party rights (section 1(2))

Section 1(2) allows the parties to prevent third-party enforcement if, on proper construction, the contract shows that was the intention. The cleanest way to do this is a standard “no third party rights” clause, for example:

• “No term of this agreement is enforceable by a person who is not a party to it under the Contracts (Rights of Third Parties) Act 1999.”

Points to remember:

• Courts will not imply an exclusion. Silence usually helps a third party, not the promisor, unless other terms point clearly the other way.
• Industry context can matter, especially where there are chains of contracts. However, there is no blanket rule that a chain structure always rules out third-party rights.

Varying or cancelling third-party rights (section 2)

Once a third party has rights, the contracting parties cannot vary or rescind the relevant term in a way that affects those rights if:

• the third party has communicated assent to the term to the promisor; or
• the promisor is aware the third party has relied on the term, or such reliance was reasonably foreseeable and the third party has relied.

Good practice:

• Build in a variation mechanism: state whether third-party consent is needed, who can give it (e.g., a parent company or trustee), and how consent is to be given.
• Consider a notice process for assent or reliance.
• Remember the court may dispense with consent if, for instance, the third party cannot be found or unreasonably withholds consent.

Defences, limits, and dispute clauses

• Defences and set-off: the promisor may rely on any defence, set-off, or counterclaim that would have been available if the third party were a contracting party, or that arises from the contract and is relevant to the term.
• Limitations and exclusions: third-party enforcement remains subject to relevant exclusions, caps, conditions precedent, and time limits in the contract.
• Jurisdiction and arbitration: align jurisdiction and arbitration clauses so any third party who can enforce a term is also bound by the same forum and procedural rules. The Act supports extending arbitration provisions where the enforceable term is subject to them.

Links with good faith and consumer law

• Good faith (Yam Seng): English law does not impose a general duty of good faith, but courts may imply such a duty in “relational” contracts (e.g., distribution, franchise). Where implied, it can shape how performance and variation are judged, including conduct towards a named third-party beneficiary.
• Consumer Rights Act 2015: third-party enforcement sits alongside controls on unfair terms in consumer contracts. If a term is unfair, it is not binding. That may affect whether a third party can rely on or be affected by it.
• EU-derived interpretative duties: domestic courts may interpret UK legislation consistently with retained EU law where relevant, but the 1999 Act’s third-party mechanism is primarily a domestic reform.

Key Examples or Case Studies

• Dolphin Maritime & Aviation v Sveriges [2009] EWHC 716 (Comm)

  • Context: Claim that a term “purported to confer a benefit” on a broker.
  • Held: A mere improvement in a third party’s position is not enough. The contract must be intended, in purpose and language, to benefit the third party.
  • Use in practice: Be explicit if a clause is meant to benefit a non-party; avoid vague references that could be classed as incidental only.

• Avraamides v Colwill [2006] EWCA Civ 1533

  • Context: Attempt to enforce where the contract did not identify the third party by name, class, or description.
  • Held: Claim failed. Section 1(3) requires express identification; inference is not enough.
  • Use in practice: If you want someone to enforce, identify them clearly. If you do not, include a no-rights clause.

• Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Rep 38

  • Context: Brokers sought commission under charterparties with no express exclusion of the Act.
  • Held: In the absence of wording showing a contrary intention, there is a presumption that a third party named as beneficiary can enforce. Section 1(2) does not defeat enforcement unless the contract points clearly against it.
  • Use in practice: Neutral drafting can result in enforceable rights. If third-party enforcement is not wanted, say so.

• Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) (No. 2) [2005] EWCA Civ 519

  • Context: Whether a chain of contracts meant third-party enforcement was not intended.
  • Held: No automatic rule. Commercial context matters, but the presence of a chain does not itself defeat third-party rights.
  • Use in practice: Assess industry custom and the full contractual matrix. Draft expressly for or against third-party enforcement to avoid uncertainty.

• Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)

  • Context: Implied duty of good faith in a distributorship.
  • Held: A duty of good faith may be implied in certain long-term agreements.
  • Use in practice: Conduct towards named beneficiaries should be consistent with good faith where such a duty is implied, particularly during performance and variation.

Practical Applications

Drafting to give rights to a third party:

• State expressly that a named person (or class) can enforce a specific clause under the 1999 Act.
• Identify the third party by name, class, or description; include future entities if needed.
• Tie the right to the contract’s limits, conditions precedent, and time bars.
• Ensure jurisdiction and arbitration clauses also bind the third party where appropriate.

Drafting to exclude rights:

• Include a clear “no third party rights” clause covering the whole contract, or specify exceptions.
• In supply chains, use consistent exclusions across all linked contracts unless a deliberate carve-out is required.

Managing variation and rescission:

• Add a section 2 mechanism: specify whether third-party consent is required, who can give it, and how assent or reliance is to be notified.
• Consider appointing an agent or trustee to give or withhold consent on the third party’s behalf.
• Build in a court-dispensing fallback by referencing the statutory power where consent cannot reasonably be obtained.

Transaction checklists:

• Finance and securitisation: identify beneficiaries (e.g., security trustee, hedging banks) and grant enforcement rights where needed; align dispute resolution and limitation clauses.
• Construction and projects: decide whether collateral warranties or express third-party rights are preferable; document identified classes (e.g., purchasers, funders, tenants) with clear clause mapping.
• Technology and outsourcing: where service credits or IP indemnities are intended to benefit group companies or clients, state this and regulate consent for changes.

Litigation and enforcement:

• Verify the gateway: section 1(1)(a) express right or section 1(1)(b) benefit.
• Check section 1(3) identification and whether the contract excludes rights under section 1(2).
• Assess remedies and defences: apply exclusions, caps, notice provisions, and jurisdiction/arbitration clauses.
• Evidence reliance or assent for section 2, and consider court dispensation if consent cannot be obtained.

Compliance and consumers:

• Review consumer-facing terms for fairness under the CRA 2015. An unfair term will not bind, which can affect both parties and third-party beneficiaries.
• Keep records of notices to third parties and any reliance, to manage later variation safely.

Summary Checklist

• Identify whether third-party enforcement is intended and say so in the contract
• If relying on section 1(1)(b), ensure the benefit is clear and not incidental
• Satisfy section 1(3): name the third party, or define class/description precisely
• Use section 1(2) wording to exclude rights where needed
• Align remedies, time limits, exclusions, and dispute clauses with any third-party right
• Include a section 2 mechanism for variation/rescission and consent
• Keep evidence of assent or reliance if third-party rights are expected to crystallise
• In chains of contracts, draft consistently across all agreements
• For consumer contracts, check CRA 2015 fairness alongside any third-party terms

Quick Reference