Contract law is based upon the fundamental common law doctrine of privity of contract. Privity of contract provides that a contract cannot confer rights or impose obligations upon any person except the parties to that contract. The Contract (Rights of Third Parties) act 1999 provides an important exception to this rule. The Act may give rights to a third party where the purpose of a contract was to grant them such rights. As such, a third party who is not party to a contract may then enforce the contract on his own terms. There are two situations where this applies.
1) Term Containing Express Provision
A third party may enforce the terms of a contract if the contract expressly provides that he may. An example would be where party A contracts with party B that he will pay party C and the contract contains a term that party C may enforce the promise against party A. No further requirement is necessary under the Act. Within this framework C can sue A without having to make B a party to the proceedings. However, the court may include party B if it is necessary to resolve all matters under dispute.
The Act may also operate in relation to other clauses contained in a contract such as exemptions from or limitations of liability under the contract. A simple application of this would be where party C is a subcontractor of party B.
Common law mechanisms may achieve similar outcomes to the Act in relation to both causes of action and limitation of liability, and in practice these will require consideration.
2) Term Purporting to Confer a Benefit on a Third Party
If a contract contains a term that purports to confer a benefit on party C, then he may enforce that term. However, the Act limits the scope of any such term if on proper construction of the contract it does not appear that the contracting parties, A and B, intended the term to be enforceable by C.
Discerning the intention of the parties starts with a rebuttable presumption. Supposing a term does have the effect of conferring a benefit on C, the Act presumes that parties A and B intended it to do so. To claim otherwise, A must prove that neither it nor party B intended to confer a benefit on C. Alternatively, the contract may contain express provision excluding such benefit from being conferred on C.
Contractual issues involving third parties can be complex; if you need contractual advice Rollingsons has lawyers experienced in company law matters. For more information please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by phone on 0207 611 4848
