Rights of third parties

[edit] The Contracts (Rights of Third Parties) Act

The Contracts (Rights of Third Parties) Act 1999 enables third party rights to be created by a contract. This is seen by some to offer an alternative to collateral warranties.

Section 1(1) of the Act provides:

'Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if –

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.'

It is to be noted that the right created is to enforce a term of a contract, not the whole contract itself. For example, if a building contract contains a term that the contractor is required to use materials of good quality, then that term might be the subject of a third party enforcement right, subject to the other requirements for the existence of the right being met.

There are two categories of potential third parties given this new right.

• The first category, where the contract expressly confers the right, would permit, for example, the express selection of certain terms of the contract and make them enforceable by named third parties.
• The second category is where the term of the contract 'purports to confer a benefit' on the third party, but this is subject to the provisions of section 1(2) of the Act which states, 'Subsection 1(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.’

In enforcing a term of the contract, the third party has available to them any remedy that would have been available in an action for breach of contract as if they had been a party to the contract.

[edit] Who are the relevant third parties?

The Act sets out that a third party must be expressly identified:

• In the contract by name,
• As a member of a class, or,
• As answering a particular description, but need not be in existence when the contract is entered into.

It is clear that members of a class or answering to a particular description could create very wide categories of third parties in construction. For example, these categories could include purchasers (not limited to a first purchaser) and tenants (not limited to the first tenant or first assignee), even though the names of those parties were not known at the date of contract and even though they were not in existence at the date of contract.

This possible wide ranging category of beneficiaries is a factor in a tendency in the construction field to exclude third party rights by an express term of the contract.

[edit] Variation and rescission of the contract

The Act goes some way, once a third party right to enforce a term has arisen, to prevent the contracting parties agreeing to rescind or vary the contract in such a way as to extinguish or alter the rights of a third party, unless the third party consents in certain circumstances. Those circumstances are:

• Where the third party has communicated his assent to the term to the promisor
• The promisor is aware that the third party has relied on the term, or
• The promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

Clearly this provision requires careful consideration of the drafting of the contract from the outset. The use of clauses permitting the varying of the contract by the contracting parties without the consent of any third party might be considered but may well fall foul of this section of the Act. A safer alternative might be a contract provision that where a third party's consent is required under section 2 of the Act, then such third party shall not unreasonably withhold or delay his consent.

Another point arises in relation to variations and changes to the work under construction contracts, which is a common provision in construction contracts. Is that kind of provision caught by section 2 of the Act? The answer appears to be that such a variation is a variation in the work and not a variation to the contract. As such, it would appear that it is not subjected to the rules in section 2 of the Act.

[edit] Defences available to a promisor

The Act, subject to any express terms of the contract, reserves to the promisor, in any enforcement of a contract term by a third party, the same defences and/or set-off rights that the promisor would have had available to them if the proceedings had been brought by the promisee. This provision may come as a surprise to third parties who might otherwise have thought they had a clear run at a third party claim, without the risk of being met by such defences and set-off claims by the promisor.

[edit] Protection of promisor from double liability

At the same time, there is protection of the promisor from double liability. If the promisee has already recovered a sum in respect of the third party's loss in respect of the relevant contract term, then the third party's damages are reduced by an amount that the court or arbitral tribunal think is appropriate.

[edit] Dispute resolution and arbitration provisions in contracts

It is the case that many construction contracts contain arbitration agreements. When the Act was a Bill before Parliament the policy question arose as to how this should be dealt with in considering whether or not the third party should also be bound by the arbitration agreement in the contract when it seeks to enforce its third party rights.

The Act deals with this at section 8. In essence it is in two parts. The first is to create the possibility of making a third party's right to intervene subject to the application of the arbitration agreement in the contract. Where that route has been chosen in the drafting of the contract, then the second part is to provide for third parties to be able to insist on arbitration if extra-contractual claims are brought against the third party.

In respect of both of these parts, the arbitration agreement has to be an agreement in writing for the purposes of the Arbitration Act. Otherwise, the remedies must be pursued in court, not in arbitration.

NB: Where step-in rights are included under third-party rights (which can only impose rights, not obligations) they must be conditional upon also accepting the associated obligations.

[edit] Case law

[edit] Linden Gardens v Lanesta Sludge (1994)

• The purported assignment of the benefit of a large construction contract was ineffective.
• The result was that the party entitled to enforce was not the party who had suffered the loss.
• The House of Lords rejected a submission that the loss therefore disappeared into a ‘black hole’.

[edit] Darlington v Wiltshier (1995)

• The building owner faced a similar difficulty arising from using a separate financier to enter the building contract which was then to be assigned to the local authority.
• There were defects in the work but the contractor contended that the loss was suffered prior to assignment.
• The Court of Appeal held the plaintiff entitled to recover.

[edit] Alfred McAlpine v Panatown (2000)

• The building contract was with a nominee company within the same group of companies which owned the site.
• The right of action appeared to be vested in a party other than the one that had suffered damage.
• Held that the case did not fall into any of the exceptions of the common law privity rule.

[edit] Related articles on Designing Buildings Wiki

• Alternative dispute resolution.
• Arbitration.
• Assignment.
• Breach of contract.
• Caveat emptor (buyer beware).
• Collateral warranties.
• Common law.
• Construction contract.
• Contract conditions.
• Defects.
• Delay analysis.
• Difference between collateral warranties and third party rights.
• Privity of contract.
• Recovery of third party losses.
• Reliance letter.
• Step in rights.

[edit] External References

• The Contracts (Rights of Third Parties) Act in full.