Act Overview
Background and purpose of the Act The Contracts (Rights of Third Parties) Act 1999 (the Act) modifies the general rule of privity of contract that only parties to a contract can sue on it. The Act allows third parties to take action under a contract to which they are not a party and thereby to acquire rights directly under that contract. Lord Justice Scarman, in his 1984 speech to the Society of Conservative Lawyers, said shortly before the Act was first proposed: "I would begin with a consideration of the general doctrine of Privity. I do not think that the doctrine has served its purpose. It is not, I suggest, suited to the conditions of modern life." (Parliamentary Debates, House of Lords, 11 July 1994, Volume 555, Column 1180.) The Act was read for the first time in parliament on 4 November 1998. It received royal assent on 27 July 1999 and came into force on 11 May 2000. Lord Justice Beldam had earlier proposed the changes which consideration the "Code Commission ", led by Lord Justice Beldam, were instructed by the UK Government to examine and report on the common law rules of contract. Among other limitations which the Code Commission identified in their 1982 report were the difficulties caused by the strict application of the doctrine of privity of contract. Lord Justice Beldam said in his 1982 report: "It is a denial of political liberty for A to make a contract purporting to affect the rights of B when B has no means of obtaining a remedy against [(third-party)] A for breach of any such obligation . " (Commercial Contracts; Report of the Committee on Consumer Contracts, Financial Services and other Issues, 1982, Cmnd 8176, para 32). The reason why third parties before the Act had no right to bring an action on a contract was best illustrated by the case of Beswick -v- Beswick and others [1967] 2 All ER 1191. Mrs Beswick was named as a party to an agreement of sale but was not a party to the transfer of shares in the right company. The agreement gave her the additional benefit of a right to sue for specific performance of the agreement, should the seller default in making the required payment. The House of Lords found that Mrs Beswick had no interest in the cause of action because she was not a party to the share sale agreement and was thus not entitled to sue. In short, Mrs Beswick could neither sue the Third Party (the Buyer) nor could she sue the First Party (the Seller) because the contract expressly benefitted the Buyer, but left out the Seller obligation to pay. However, in granting Mrs Beswick a right to sue the buyer of her husband’s shares, the House of Lords said that if the agreement had made it clear that Mrs Beswick had granted the right to sue, it would have achieved the opposite result. The Act requires that for a third party to be able to sue on a contract, the contract must expressly confer a benefit on them or otherwise if the contract must not prevent the third party bringing a claim. Furthermore, the third party must be expressly identified in the contract but need not be named. The Act also clarifies that the benefit given can essentially be a right to sue on a contact, the same as Mrs Beswick in the case above.
Key Statutory Provisions
The Act provides a mechanism whereby a party may, in certain circumstances, bring a claim against a contracting party despite lacking the privity of contract to do so. Normally, only a contracting party has the ability to bring a claim for damages or variations under that contract. Section 1 of the Act provides a third party with the right to enforce a contractual term if both of the following requirements are met:
(1) the third-party must be expressly identified in the contract by name, as a member of a class or as answering a particular description. The act does not confine this requirement to a situation where the third-party is named in the contract. However, it is important to note that there is no requirement to identify the beneficiary of the right in the contract.
(2) the contract must expressly confer a right to enforce the term on the third-party. This can be any form of wording such as "a person who is not a party to this agreement has no right to rely upon or to enforce or to insist upon enforcement of the provisions of this Agreement strictly under the Contracts (Rights of Third Parties) Act 1999" the "benefit of the Contracts (Rights of Third Parties) Act 1999" or "Contract (Rights of Third Parties) Act".
Section 1(2) of the Act allows parties to specify that the rights being conferred by the contract to the third-parties may be revoked by the contract but regardless of the parties’ intentions there can be no contractual right to revoke the conferred rights where the right to enforce the contract has been exercised by the third-party.
The Act has also provided guidance regarding the circumstances in which a non-contracting party may also provide consideration in the form of a promise to perform an obligation or donation in exchange for the right to the benefits of the contract. Normally, consideration is not a requirement to bring a claim for a breach of the contract but where a non-contracting party asks for a variation of the contract then consideration may be required from the non-contracting party to the party seeking the variation. The act provides guidance and ease to these situations by adding the provision that consideration by a non-contracting party is not a requirement where the parties have given express permission for the third-party to vary or enforce the term.
There are other exceptions to the Act itself, which are provided in section 3 and sub-section 1. Primarily that there cannot be a right of action under the Act where the contract is "excluded" or has been declared as an exception (with regards to type of contract) under the exclusion of "mainstream" commercial contracts by the Lord Chancellor or the Secretary of State for Business, Energy and Industrial Strategy.
However as previously outlined, the Act cannot be interpreted as limiting the common law and other provisions and claims might still be brought under common law and claims or other statutory provisions.
Rights of Third Parties Provided
The rights that are granted to a third party pursuant to the Act are rights in the nature of benefits or remedies. They are not rights in the nature of obligations, and for this reason they do not operate as conditions or warranties.
A third party, however, cannot enforce a right against the promisor which is subject to a condition precedent, or that the promisor has a right to relieve himself from.
The benefits or remedies are in essence similar to the requirements of a contractual right: the third party can sue directly in contracts rather than needing a contractual chain to back up his right.
Effect on Contractual Parties
The Act has important implications for contracting parties. Where a party to a contract wishes to exclude the operation of the Act or exclude the rights of any third party, express reference will need to be made to that in the contract and there will also need to be express provision stating that the third party has no rights under it.
It is not sufficient for parties to provide in a contract that the Act is excluded, or to provide that third parties shall not have any benefit or rights under a contract.
Parties need to consider how they wish a third party, where expressly identified in the contract, to be able to exercise the rights that they have. If they wish to confer such rights to a third party, they would be well advised to expressly provide for the circumstances in which these rights are exercisable.
Issues may also arise with regard to third party rights that arise as a result of particular circumstances or events, as opposed to those which exist purely as a result of having been expressly named. An example of this would include where the third party is acting as a guarantor, or where the third party’s rights might have arisen as a result of the fact that they are an employee of one of contracting parties or their associates. In such scenarios it is difficult to definitively comment on whether the Act would have an impact, and the preferred approach would therefore be to act on the basis that the Act would apply to parties that could potentially be affected.
Insofar as the Act applies, it would be preferable, in the absence of express rights of access, for third parties to be required to obtain the consent of the contracting parties in order to exercise any rights arising under a contract.
In certain circumstances where a party becomes aware of a contract by association (i.e. a contract that benefits them as a result of the fact that they are a subsidiary of a party to a contract), the Act will allow them to invoke the contract. If the intention had been that the contract should not benefit such persons, explicit reference should be made in the contract to that fact.
Finally, the Act seems to indicate that the priority of a debt owed to one contracting party may not necessarily subsist in the right of any debt owed by another contracting party who has conferred rights on a third party unless such right has been expressly protected in the contract.
All of these issues need to be considered carefully by parties when entering into contracts.
Cases Interpreting the Act
The Act has been subject to judicial consideration in a number of cases which have provided interesting jurisprudential commentary.
In Argosh Ltd v Biffa Waste Services Ltd (2004) the Court of Appeal supported the view that for a third party to be able to enforce a contract containing provisions in its favour, the contractual term must be the "contractual glue" without which the promise or other act would not exist. This was endorsed by Lord Justice Jonathan Parker in Jotun Paints and Chemicals Sales LLC and another v Lcobo Sdn Bhd and another (2009). He further stated that there was no basis for excluding "the notion … that the parties to a contract can give to a promise made by one of them to or for the benefit of a third party the force of a sort of estoppel binding the promisor not to refuse to perform the promise if he is substituted for the promisee".
Further support for that view comes from Lord Justice Collins in Leisure (Norburys) Ltd v Cameron Finishes Ltd (2011) where he opined that the Act permitted the enforcement of a contractual right by a third party, but only where that right created an obligation on the acting party . This is in line with the wording of s1(1) of the Act.
It was also established by the Court of Appeal in the same case that the purpose and intent of the Act was to enable the enforcement of specific contractual rights by third parties so that it would be necessary for parties to clauses conferring rights on third parties contained in contracts "to be far more precise than previous ones … such as ‘any member of the public’ on whom [particular] services is provided, or ‘any other person’ on whom the [particular] services is provided will be entitled to the benefits of this contract’".
The Act had previously been considered by the UK House of Lords in the case of Alfred McAlpine Construction Ltd v Panatown Ltd (2001) where Lord Hoffmann stated that the Act was intended to extend to promises of the performance of an act in respect of land, but could not apply to a duty to protect another’s right to call upon a contractor to perform an act in respect of land.
These judicial interpretations help demonstrate how the Act is applied and understood in practice.
Critique and Comments
While the Act presents various advantages, it has also faced criticism from a number of practitioners, and some industry commentators have called for reform. In 2007 it was suggested that parties had become on occasion "over-reliant" on the Act potentially to the detriment of negotiation. For example, there was an increasing tendency of parties to house-keep by the simple expedient of requiring third party consents as opposed to dealing with matters through negotiation. Such an approach may have also led to more protracted negotiations.
Another criticism is the view that the Act is ineffective in relation to binding non-contracting parties when it comes to the amendment of a contract by the relevant parties to that contract. A situation may arise where a third party has acquired a right under an existing contract, and yet the parties to the contract decide, post-acquisition of that right, to vary or release their rights and obligations under the contract. In those circumstances, the current position under the Act is that the third party’s right will be preserved and continues notwithstanding the variation or release. The underlying principle of the broad interpretation of the Act is that a third party has acquired a right in respect of the benefit conferred by the contract and this right should not be nullified by the action of the original parties who will always retain their right to change the obligations and terms of their own contract with each other. However, there are fears that this approach diminishes the freedom of contract, which could hamper the practice of commercial parties entering contracts, when it is no longer possible for their remediation in circumstances where amendments are required. As a result, it has been suggested that possible reform might include introducing a provision which would allow that such a right would be extinguished or suspended.
One area of contention has been how the Act should be interpreted in the context of an "agent". This issue was considered by the Court of Appeal in the Gramsci Shipping Corp v Nepcoal Industries Ltd case – specifically to whether the ship owners are entitled to claim commission from the charterers based on the charter party agreement they had entered. The Court of Appeal held that a sub-agent under a charter party could enforce rights under that contract against the charterers, including a right to receive certain commissions for the work they did, even though they were not the contracting party with the charterers. The case highlights that the Act can only be applied as far as the third party is concerned and has not been interpreted beyond the assumptions that informed its application to the traditional agency relationship.
How to Apply the Act in Practice
The provisions of the Act were designed to address the pragmatic situation where, under a contract, a person other than the contracting parties is intended to be a beneficiary. It is important to bear in mind that only disputes relating to the substantive rights of third parties are covered by the provisions of the Act; procedural or technical issues arising in relation to such rights will not be justiciable under this Act. Generally the construction of a contract will determine whether or not a third party has a right to enforce such contractual provisions as in Brandeaux Advisors Ltd & Anor v Government of Antigua, 2005. However, it has also been held that contractual arbitration clauses can be subject to the provisions of the Act. In Jivraj v Hashwani, 2010, it was held that an unenforceable contractual arbitration clause which prevented a third party from seeking to enforce an arbitration agreement conflicted with the provision of s.1(1) of the Act 1999 and that the third party therefore could assert its rights by bringing proceedings in the name of the original claimant. An example of when the Act may be particularly useful is when seeking to enforce a clause in a series of sale agreements between a buyer and seller such as non-compete or non-solicitation provisions. The Act would apply to give a third party under those agreements a right to enforce the obligations contained within such provisions. Equally, in relation to security documents, the Act allows the third party to pursue a claim directly against the debtor to enforce the provisions of a guarantee. From the lender’s perspective, this allows it to avoid time consuming and costly litigation with the borrower. From a buyer’s perspective, the Act allows them to require the seller to comply with the provisions of a commercial contract and to prevent adverse action by the seller to the detriment of shareholders. The Act provides for such rights to be assigned as part of a larger transaction for the sale of shares making the enforcement of indemnities, warranties and the like more straightforward.
Conclusion and Next Era
As examined in this article, the areas of application of the Contracts (Rights of Third Parties) Act 1999 are broad and growing. While most commonly applied to protect the interests of the third-party beneficiaries who are within the class categories specified, it is quite regularly applied to wider commercial situations, including as a mechanism by which future rights can be assigned to financial institutions as part of enabling agreement negotiations. The provisions are also frequently applied in the context of reclassifying potential tortious liabilities as contractual under the act , so that a claimant is not forced to choose between bringing a claim for economic loss under the tort law and having to satisfy the constraints of the tortious cause of action.
The act will continue to be used by contracting parties. There is no sign from Brexit or the current political climate in the UK at the time of writing that the act is on the agenda to be amended or repealed (although ongoing political uncertainty may ultimately dictate that legislative changes will be required to clarify the status of UK laws post-Brexit). Accordingly, this act will continue to keep lawyers on their toes when drafting and interpreting contracts.