by Raffi Varoujian

Created on: July 26, 2011   Last Updated: July 27, 2011

The Law before the Act

Prior to the introduction of the Contracts (Rights of Third Parties) Act (the Act) in 1999, the English common law doctrine of privity prevented a third party that was not a signatory to a contract from being able to benefit from its terms. This principle was confirmed in a landmark case in the House of Lords in 1915 called Dunlop Tyres v Selfridge. This principle made it difficult for businesses to enter into contracts that gave  third parties a benefit without drawing up a separate contract with the relevant third party.

Rights under the Act

The common law principle and the case law around it had long since been considered unsatisfactory. Parliament finally passed the Act in 1999 to address the issue by: (a) giving third parties rights in contracts they are not party to; (b) making sure that the parties to the contract can't alter terms giving third parties such rights; (c) setting out how the party giving the promise in the contract can defend against a claim from a third party; and (d) setting out a number of exceptions to which the Act will not apply.

How it applies

A third party can only enforce a the relevant terms of a contract if the contract specifically states that they have the right to, or the term in the contract "purports to confer a benefit" to that party. An example of a third party benefit is where a landlord enters into a contract with a builder to repair a rental property. The landlord's tenant(s) would enjoy a benefit (i.e. an improvement to the property) under the contract.

In addition, the third party must be identified in the contract, either: (a) by name; (b) as a member of a specific class; or (c) answering a particular description, but does not need to be in existence when the contract is entered into. The third party can claim any remedy that would have been available to it had it been a party to the agreement. There are a number of table exceptions to the Act which can be found in Section 6.

Contracting Out

The wording in Section 1(2) of the Act allows parties to contract out of the third party obligations, either by including an express clause (which generally appears in the boilerplate section, or if it is implied on a reading of the contract, that the parties did not intend to confer a right on third parties to benefit from the contract terms. A clause would obviously be more certain and clear, as reliance on an implied term is subject to interpretation.

Impact

Despite the optimism that greeted its arrival, in practice, the Act has had minimal effect, as clauses excluding its operation have become a standard part of the boilerplate clauses in commercial contracts. As such, it applies by exception rather than by rule. The knock-on effect is that there have been very few cases in the courts to help polish its rough edges, especially on the meaning of the vague phrase "purports to confer a benefit".

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