Third-Party Rights under the Contracts (Rights of Third Part...

Introduction

The Contracts (Rights of Third Parties) Act 1999 changes the traditional rule of privity by allowing a non-party to enforce a contract in defined circumstances. In short, a third party can sue if the contract says they can, or if a term benefits them and the parties intended that benefit to be enforceable.

The Act sets clear criteria for who qualifies as a third party, how and when rights arise, and what defences and remedies apply. It also preserves party control: the original parties can opt out, and they can limit variation once a third party’s position has crystallised through assent or reliance. This guide explains the main rules, the limits, and the leading cases you should know when drafting, negotiating, or litigating under English law.

Note: The Act applies to contracts made on or after 11 May 2000.

What You'll Learn

• The two routes to third‑party enforcement under section 1(1)(a) and section 1(1)(b)
• How and when parties can exclude third‑party rights under section 1(2)
• The identification requirement in section 1(3) and why clarity matters
• When variation or rescission needs third‑party consent under section 2
• What defences and set‑off the promisor can rely on under section 3
• The remedies a third party can obtain under section 4 and how double recovery is avoided under section 5
• Practical drafting points, including sample wording and risk checks
• Key case law: Nisshin Shipping v Cleaves, Avraamides v Colwill, Dolphin Maritime v The Swedish Club, Laemthong Glory, and Panatown

Core Concepts

Routes to enforcement under section 1

There are two main gateways:

1. Express right to enforce (section 1(1)(a))

   • If the contract states that a named or described third party may enforce a term, that is enough (subject to the identification requirement in section 1(3) and any limits in the contract).

2. Benefit conferred with presumed enforceability (section 1(1)(b))

   • Where a term purports to confer a benefit on a third party, the third party may enforce it unless, on a proper reading of the contract, the parties did not intend it to be enforceable by the third party.
   • This creates a presumption that can be rebutted by the contract’s wording. Nisshin Shipping Co Ltd v Cleaves & Co Ltd confirmed that section 1(1)(b) sets a rebuttable presumption of enforceability.

Opt‑out (section 1(2))

• The parties can state that a third party may not enforce, which disapplies the benefit route in section 1(1)(b). A short clause such as “No third party shall have any right to enforce any term of this contract under the Contracts (Rights of Third Parties) Act 1999” is commonly used.

Key point on intention

• Even under the benefit route, everything turns on the parties’ intention shown in the contract. Benefits that are incidental or administrative will not usually create third‑party rights.

Identifying the third party: section 1(3)

For either route to apply, the third party must be expressly identified in the contract by:

• Name, or
• A class, or
• A description.

They do not need to exist when the contract is made, provided they can later be identified. Avraamides v Colwill shows the courts require clear identification within the four corners of the contract; general phrases like “any third party” are not enough. Practical examples include:

• Insurance covering “the insured’s spouse and children” (class/description)
• Construction agreements granting rights to “any purchaser or tenant of the property” (class)
• A named broker entitled to commission (name)

The identification requirement is about certainty. If the parties want rights to be enforceable, they must say who is to benefit, and how.

Varying or rescinding the contract: section 2

As a starting point, the original parties can vary or rescind their contract. However, once a third party’s position has crystallised, their consent is needed to alter or remove their right to enforce, unless the contract expressly allows variation without consent.

Crystallisation generally occurs where:

• The third party has assented to the term and the promisor has notice of that assent; or
• The third party has relied on the term, and the promisor knew of the reliance or it was reasonably foreseeable.

Assent and reliance are practical, factual questions. “Reliance” is not defined in the Act, so ordinary principles apply. The safest course is to manage this in drafting:

• If you want freedom to vary: include an express term permitting variation without third‑party consent (and set out any conditions).
• If you want to fix the terms once a third party is on the scene: require their consent after notification, or once they have assented or relied.

Courts have powers to dispense with consent in limited situations (for example, if a third party cannot be found), but clear drafting avoids uncertainty.

Defences, remedies and double recovery: sections 3 to 5

Defences and set‑off (section 3)

• The promisor can rely on any defence, set‑off, or counterclaim that would have been available if the promisee had sued, and on any relevant contract term (for example, exclusions, limits, or notice requirements), unless the contract states otherwise.
• If the contract gives the third party more favourable treatment or removes certain defences by its terms, that will apply.

Remedies (section 4)

• A third party can claim the usual remedies for breach of contract, including damages and (where appropriate) specific performance or an injunction.

Avoiding double recovery (section 5)

• Where both the promisee and the third party might sue, the Act prevents the promisor from being liable twice for the same loss. The court will manage recovery so that the promisor’s total liability is not increased.

Other provisions (sections 6–9)

• The Act contains further provisions, including specific exclusions, saving provisions and interpretive rules. Always check whether any listed exclusions apply to your contract type.

Key Examples or Case Studies

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

• Context: A broker sought to enforce commission clauses in charterparties.
• Held: Section 1(1)(b) creates a presumption that the broker could enforce the clauses as a third party where a benefit was conferred, unless the contract showed a contrary intention.
• Practical point: Draft clearly if you intend to exclude third‑party enforcement of a benefit.

Avraamides v Colwill [2006] EWCA Civ 1533

• Context: A customer tried to enforce terms after a bathroom refurbishment business changed hands.
• Held: The third party was not sufficiently identified in the contract. References outside the contract could not fill the gap.
• Practical point: Identification must be clear in the contract itself by name, class, or description.

Dolphin Maritime & Aviation Services Ltd v The Swedish Club [2009] EWHC 716 (Comm)

• Context: A claims consultant argued that payment arrangements in an agreement gave it enforceable rights.
• Held: A payment to a third party did not, by itself, amount to an enforceable benefit under the Act. Intention matters.
• Practical point: Administrative or payment routing arrangements do not automatically create rights under section 1(1)(b).

Laemthong International Lines Co Ltd v Artis (The Laemthong Glory) [2005] EWCA Civ 519

• Context: A third party attempted to enforce an indemnity.
• Held: No right arose because the contract did not show an intention to allow third‑party enforcement. Each case depends on the contract terms.
• Practical point: If you want a third party to enforce an indemnity, say so expressly and identify the beneficiary.

Alfred McAlpine Construction Ltd v Panatown Ltd [2001] AC 518

• Context: Before the 1999 Act fully took hold, the House of Lords considered whether a promisee could recover losses suffered by a third party under the Albazero exception.
• Held: Where the third party had its own direct rights (for example, under a duty of care deed), the promisee was generally limited to nominal damages.
• Practical point: Panatown shows why third‑party rights and collateral warranties are used to give the correct party a direct claim.

Practical Applications

Drafting to include or exclude third‑party rights

• Decide early: Do you want third parties to enforce? If not, add an opt‑out clause expressly excluding the Act.
• If you do want enforcement:
  • Identify the third party by name, class, or description.
  • State clearly that the relevant term is enforceable by the third party under section 1(1)(a).
  • Consider limits (caps, exclusions, notice requirements) and make them expressly applicable to the third party.
• Manage variation:
  • If flexibility is needed, add a clause allowing variation or rescission without third‑party consent.
  • If certainty is needed, require third‑party consent once the party has been notified, assented, or relied.

Common clause examples

• Opt‑out: “No term of this contract is enforceable by any person who is not a party to it under the Contracts (Rights of Third Parties) Act 1999.”
• Express grant: “The Purchaser’s successors in title and any tenant of the Property may enforce clause X under the Contracts (Rights of Third Parties) Act 1999.”

Transactional checkpoints

• Due diligence: Review existing contracts for express third‑party rights, opt‑outs, and identification wording.
• Insurance and construction: Check whether rights are granted to residents, tenants, funders, or purchasers, and whether variation needs their consent.
• Finance and brokerage: Commission or payment clauses for agents or brokers may confer benefits; confirm whether the contract intends enforcement rights.

Problem‑solving and disputes

• Step 1: Confirm date and governing law; the Act applies to contracts from 11 May 2000.
• Step 2: Identify the route: express term (section 1(1)(a) or benefit (section 1(1)(b).
• Step 3: Check identification: name, class, or description under section 1(3).
• Step 4: Read the whole contract for intention and any opt‑out under section 1(2).
• Step 5: Consider whether rights have crystallised under section 2 through assent or reliance.
• Step 6: Assess available defences, set‑off, caps, exclusions, and notice provisions under section 3.
• Step 7: Choose remedies and consider double recovery controls under sections 4 and 5.
• Step 8: If the Act does not help, consider other routes (assignment, collateral warranty, or a claim by the promisee).

Limits to keep in view

• The Act does not give third‑party rights automatically. Intention shown in the contract controls.
• Payment directions or incidental benefits usually are not enough for enforcement.
• Parties remain free to opt out and to shape how and when third‑party consent is needed for variation.

Summary Checklist

• Two routes to enforcement: express term or conferred benefit
• Clear opt‑out wording blocks the benefit route
• Identify the third party by name, class, or description in the contract
• Intention is assessed from the contract as a whole
• Variation or rescission may need third‑party consent once there is assent or reliance
• Promisor can use defences and set‑off available against the promisee, unless the contract says otherwise
• Third party can seek the usual contract remedies; courts prevent double recovery
• Contracts made on or after 11 May 2000 only
• Key cases: Nisshin Shipping, Avraamides, Dolphin Maritime, Laemthong Glory, Panatown
• Always address third‑party rights expressly in drafting to avoid uncertainty

Quick Reference