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You are here: BAILII >> Databases >> The Law Commission >> Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(13) (31 July 1996) URL: http://www.bailii.org/ew/other/EWLC/1996/242(13).html Cite as: [1996] EWLC 242(13)

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PART XIII

Consequential Amendments

1. Our General Approach

13.1 In this Part, we address the question of whether any of the many statutes passed on the basis of the third party rule (including statutory exceptions to it) (1) require amendment in the light of our reform.

13.2 It is important at the outset to clarify that we regard our proposed statute as carving out a general and wide-ranging exception to the third party rule, while leaving that rule intact for cases not covered by the statute. (2) Moreover, it is not intended that the statute should give the third party full "contractual rights" nor that the third party should simply be deemed to be a party to the contract. So, for example, if the third party were simply treated as having the same rights as a contracting party, the contracting parties could not vary or cancel the contract without the third party's consent, thus undermining our approach in Part IX. Nor would we wish to give the third party the right to terminate the contract (that is, to wipe away the contract for the future) for the promisor's substantial breach. (3)

13.3 It follows that, in our view, where statute has prescribed a particular regime to apply to "contracts", "deeds" and "agreements", and to "parties" to contracts, deeds and agreements on the understanding that only parties could enforce the rights and obligations created by those contracts, deeds and agreements, that understanding should continue to govern the interpretation of that particular statute, unless the contrary is specifically provided in the statute.

13.4 We therefore recommend that:

(44)our proposed statute should not be interpreted as giving the third party full "contractual rights" nor as deeming the third party to be a party to the contract. It follows that, although no general legislative provision on this seems necessary, "contracts", "parties" to contracts, and "contractual rights and obligations" should be construed as they would have been prior to the enactment of our proposed reform. However, to avoid contradiction, a legislative provision is required to make clear that the references to treating the third party as if a party to the contract for the purposes of recommendations (2), (23) and (25) above should not be interpreted as treating the third party as if he were a party to the contract for the purposes of any other enactment. (4) (Draft Bill, clause 6(6))

13.5 The above recommendation clarifies that our proposed Act is not to undermine or, indeed, render uncertain the operation of other statutes affecting contracts. A much more difficult question is whether we ought, by consequential amendment, to extend a policy, that on the face of it has been worked out legislatively in respect of contracting parties only, to claims by third parties under our Act. Our general answer to that question is that it would be foolish to attempt such an exercise across the whole range of statutes. In effect it would require detailed consideration of every statute that has an impact on contracts, (5) and would involve proposing amendments on a statute by statute basis. To attempt this without specialist knowledge of each area and without the views of informed consultees would be a herculean task that would be likely to miss its mark. We should also emphasise that, given that statutes have been passed against the background of a large number of common law and statutory exceptions to the third party rule, we think it most unlikely that glaring policy problems will be left if we do not make consequential amendments reflecting our new statutory exception.

13.6 Having said that, we have considered in detail the interrelationship between our reform and a limited number of, what one may term, "core contract" statutes. These are statutes which are either central to one's thinking about contract or have been drawn to our attention as statutes which merit consideration in the light of our proposed reform. In addition to the main statutory exceptions to the third party rule (6) the enactments which we have looked at are as follows:- Gaming Acts 1845, 1892; Law Reform (Frustrated Contracts) Act 1943; Law Reform (Husband and Wife) Act 1964 (NI); Misrepresentation Act 1967; Defective Premises Act 1972; Supply of Goods (Implied Terms) Act 1973; Consumer Credit Act 1974; Unfair Contract Terms Act 1977; Civil Liability (Contribution) Act 1978; Arbitration Acts 1950, 1975 and 1979; Sale of Goods Act 1979; Limitation Act 1980; Supply of Goods and Services Act 1982: Building Act 1984; Companies Act 1985; Insolvency Act 1986; (7) Financial Services Act 1986; Minors' Contracts Act 1987; Consumer Protection Act 1987; Consumer Arbitration Agreements Act 1988; Contracts (Applicable Law) Act 1990; Civil Jurisdiction and Judgments Act 1982, 1991; Unfair Terms in Consumer Contracts Regulations 1994.

13.7 Our conclusion is that, even in relation to that limited range of enactments - and subject to two provisions on limitation periods and section 2(2) of the Unfair Contract Terms Act 1977 respectively - no consequential amendments are required. This is for one of two reasons; either the enactments are already sufficiently widely worded to apply to claims by third parties under our proposed statute and it is appropriate that they should so apply; or, if that is not so, amendment to render the enactments applicable to claims by third parties under our proposed statute is unjustified in terms of policy at least in this project. While we do not propose to set out the details of those two reasons in respect of each of the core contract statutes, we would like to set out our thinking on UCTA 1977 in some detail (because we have agonised most about it). We must also explain the amendment recommended to the Limitation Act 1980.

13.8 We therefore recommend that:

(45)subject to recommendations (46) and (47) below, no consequential amendment to other legislation is required by our proposals.

2. The Unfair Contract Terms Act 1977

13.9 We here set out why we believe that an extension of UCTA 1977 so as to restrict the ability of promisors to exclude liability to third parties should not be pursued in this project. The essential situation in mind is where there is an exclusion clause contained in the contract which, as a matter of construction, excludes or restricts the promisor's liability for breach of his obligations to the third party. Analogous to that is where the benefit to the third party is qualified by a condition. The third party may wish to argue that the exclusion or restriction (or condition) is unreasonable under section 3 of UCTA 1977. The difficulty for the third party is that, as it stands, section 3 of UCTA 1977 does not appear to apply to claims by third parties under our proposed Act. It can be argued that, as a matter of policy, UCTA ought to be extended to cover such a situation. If this were not so, third parties would be left exposed to unreasonable exclusion clauses; third parties might be ?deceived' as to their entitlement; and one would be producing an ?uneven' law whereby, in an action by the promisee to enforce the promise for the third party, section 3 of UCTA 1977 would apply whereas, in our proposed direct action by the third party, UCTA 1977 would not apply.

13.10 Despite the force of these arguments, we consider the following counter-arguments to be compelling:-

(i) Our test of enforceability rests on effecting the intentions of the contracting parties to confer legal rights on the third party. To apply UCTA 1977 - much of which is concerned to protect consumers irrespective of the true construction of a contract - to claims by third parties would cut across that essential basis of our reform.

(ii)Linked to (i) is the argument that the intentions of the contracting parties in respect of the legal entitlement of the third party have a more important active role under our reform than does the concept of ?intention to create legal relations' in determining whether the original contract is valid. (8) It follows that an exclusion of liability may merit greater respect as regards third party rights under our reform then it does in determining the legal entitlement of the contracting parties inter se.

(iii)Our approach is not to give a third party exactly the same rights as if he had been a contracting party. (9) There is therefore no inconsistency in giving the promisee more secure rights than the third party.

(iv)In applying the test of enforceability the common law rules as to the incorporation and construction of exclusion clauses (10) can go much of the way to stopping, for example, promisors relying on exclusion clauses hidden away in small print. And misrepresentation by the contracting parties to the third party as to the contents of the contract would potentially give the third party the right to recover its reliance loss for the tort of deceit or negligent misstatement.

(v) While third parties will not be as well protected as they would be if we went ahead and amended UCTA 1977, they will of course have better rights under our proposals than they have under the present law.

(vi)Under our proposals, UCTA 1977 will continue to operate to control exclusion clauses in respect of claims by the promisee to enforce the promise for the third party's benefit. So, for example, if the promisor has undertaken responsibility but has then limited it in the small print, UCTA 1977 s 3(2)(a) would apply: the promisor, when in breach of contract, would be limiting his liability by reference to the term in the small print. The limitation would only be valid if it were reasonable. If the problem was that the promisee was somehow misled into thinking that a third party would get enforceable rights when this was not what the contract provided, the promisee could rely on the present s 3(2)(b)(i): the promisor would be claiming to rely on the small print to ?render a contractual performance substantially different from that which was reasonably expected'.

(vii)If we were to recommend reform of UCTA 1977, some difficult questions of policy would be raised as to the precise extent and form of the amendments. In particular, we would have to decide whether reasonableness should be judged as between the promisor and the promisee or as between the promisor and the third party. And we would have to decide whether one can sensibly apply to third parties the notion of ?dealing as a consumer' in UCTA 1977. We might also be forced to deal, in respect of sections 6-7 of UCTA 1977, with tricky problems relating to the exclusion of implied terms in contracts for the sale of goods: for example, it is not absolutely clear that all contracts in which goods are bought for the benefit of third parties are classified as contracts of sale. (11) Without the benefit of consultees' views, we would prefer not to tamper with the definition of a contract of sale but this might be unavoidable if sections 6-7 were extended to cover claims by third parties under our proposed reform. Furthermore, it is possible that full protection of third parties against being ?misled' as to their entitlement would need to go much further than the control of exclusion or limitation clauses to include, for example, defences and variation or cancellation clauses that the third party did not know about. It would appear that such wide protection raises policy issues that go well beyond those underpinning UCTA 1977. We should emphasise, however, that we would not wish anything in our proposed legislation to be construed as hampering the protection of third parties by the judiciary through the application or extension of common law techniques. (12)

(viii)We believe that, as a matter of practical politics, one step should be taken at a time. To reform the privity doctrine to reflect the contracting parties' intentions is to take a relatively uncontroversial step. To combine that with an amendment which would in certain circumstances prevent promisors contracting out of conferring legal rights on third parties is much more controversial and might jeopardise the acceptance of our central reform.

(ix)Given that we are, in effect, departing from a long-established common law doctrine we think that there is much to be said for allowing a period of time for the effect of our reform to ?settle down' before pursuing consumer protection measures in relation to claims by third parties. Indeed it would be tantamount to ?shooting in the dark' to attempt such measures in advance of seeing what, if any, problems are thrown up in practice.

(x) Although we venture this argument with some diffidence, as the correct interpretation is far from clear, it appears that the Unfair Terms in Consumer Contracts Regulations 1994, implementing EEC Council Directive 93/13, are inapplicable to conditions on, or exclusions of, a third party's rights. (13) If this is correct, the treatment of contracting parties and third parties in respect of "unfair terms" will be significantly different whatever one does about UCTA 1977. (14)

13.11 There are two final points to make in respect of the Unfair Contract Terms Act 1977. First, in the reverse situation, where the third party seeks to enforce an exclusion clause (A excluding C's liability to A in the tort of negligence) and it is the promisor who wishes to invoke UCTA 1977, there appears to be no difficulty. UCTA 1977 applies so as to render the clause void under section 2(1) (as regards negligently caused personal injury or death) or valid only in so far as reasonable as between the contracting parties under sections 2(2) and 11(1). No amendment to UCTA 1977 is required and, indeed, the situation is covered by recommendation 25 above. (15)

13.12 Secondly, we have been troubled by section 2(2) of UCTA 1977. Applying our policy that UCTA 1977 should not restrict a promisor excluding its liability to the third party, the promisor ought to be able to exclude its liability to the third party for the breach of a contractual duty of care. Yet, as it stands, section 2(2) (in contrast to, for example, section 3) would apply to a claim by a third party under our proposed Act for breach of a contractual duty of care. That is, the breach of the obligation to the third party would constitute the breach "of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract". (16) We therefore consider that section 2(2) of UCTA 1977 should be amended so as to ensure that it does not apply in respect of a third party bringing an action under our proposed Act for the breach of a contractual duty of care. This amendment would not, of course, affect the operation of exclusion clauses in relation to claims by third parties in tort. Nor would it affect the operation of section 2(1) of UCTA 1977, which renders void the exclusion or limitation of negligently caused personal injury or death (assuming business liability). Admittedly, to leave section 2(1) unamended, and therefore applicable to claims by third parties under our proposed Act, may be regarded as a contradiction of our wish to effect the parties' intentions. But the exclusion or limitation of liability for negligently caused personal injury or death is an extreme case as is reflected by such a clause being rendered automatically void. In our view, section 2(1) should apply to claims by third parties under our proposed Act for personal injury or death (albeit that such a claim will, presumably, be rare).

13.13 We therefore recommend that:

(46)section 2(2) of the Unfair Contract Terms Act 1977 shall not apply in respect of a claim by a third party under our proposed Act for the breach of a contractual duty of care. (Draft Bill, clause 6(4))

3. Limitation Act 1980

13.14 In our view, the limitation period for actions brought by third parties to enforce a contract should be the same as the limitation period which would have applied if the third party had been a party to the contract. We therefore recommend an amendment to the Limitation Act 1980 making it clear that actions brought by third parties under our Act are to be treated as ?actions founded on simple contract' or as ?actions upon a specialty' for the purposes of the Limitation Act 1980. (17) We do not think that any other amendment of the 1980 Act is necessary (for example, sections 11 and 12 do not, in our view, require amendment).

13.15 We therefore recommend that:

(47)actions brought by third parties under our proposed Act are to be treated as "actions founded on simple contract" or as "actions upon a specialty" (depending on the nature of the contract) for the purposes of the Limitation Act 1980. (Draft Bill, clause 6(5))

Footnotes to Part XIII

(1)Part XII (Existing Exceptions) did not consider "consequential amendments" to other statutes.

(2)See para 5.16 above.

(3)See para 3.33 above.

(4)An obvious example is section 3 of the Unfair Contract Terms Act 1977 which applies "as between contracting parties where one of them deals as a consumer or on the other's written standard terms of business".

(5)A LEXIS search of statutes performed by us using the search terms ?contract' or ?deed' or ?agreement' with ?party' or ?promisor/ee' or ?covenantor/ee' revealed over 800 entries.

(6)These are listed in paras 2.52-2.62 above.

(7)Although we have satisfied ourselves that any difficulties raised by the effect of our reform on the Insolvency Act 1986 are surmountable without amendment to the 1986 Act, we have had most concern about the impact of our proposals on company and individual voluntary arrangements (see ss 1-7 and 252-254 of the Insolvency Act 1986). We understand that the non-binding effect of voluntary arrangements on creditors who were not given notice of the voluntary arrangement meeting is considered to be a general defect in the insolvency legislation. As far as our Act is concerned, a particular difficulty concerns non-existent third parties (see para 8.6 above). While we consider that a non-existent third party who satisfies the test of enforceability would class as a ?creditor' under the 1986 Act, this will not be so where the third party's right has been validly cancelled. It follows that, provided the debtor obtains the promisee's consent to cancel the third party's right, voluntary arrangements will not be hindered by our reform's recognition that rights of enforceability may be conferred on non-existent third parties. To avoid the need for the promisee's consent, it would appear that an amendment to the Insolvency Act 1986 would be needed to ensure that non-existent third parties who satisfy the test of enforceability do not class as creditors under the 1986 Act.

(8)See para 7.7 above.

(9)See para 13.2 above.

(10)See Treitel, The Law of Contract (9th ed, 1995) pp 197-224. Bingham LJ's judgment in Interfoto Ltd v Stiletto Ltd [1989] QB 433 is particularly interesting in its references to a contractual principle of dealing in good faith.

(11)See para 7.41, note 30, above.

(12)See para 1.10 above.

(13)See, for example, reg 5(1) "An unfair term in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer". See generally on the Unfair Terms in Consumer Contracts Regulations 1994, Treitel, The Law of Contract (9th ed, 1995) pp 245-259.

(14)14Again, if this interpretation is correct, and given that in other EC countries third party rights to enforce contracts are well established, one can only assume that the Directive rests on a policy decision either that third parties do not merit the same protection as contracting parties or that, if they do, this should be a matter for the individual member states.

(15)See paras 10.22-10.23 above.

(16)Section 1(1)(a) UCTA 1977. In our view, this interpretation of s 1(1)(a) and s 2(2), as encompassing a claim by a third party under our proposed Act, is a valid one despite recommendation 44 (see para 13.4) above.

(17)See sections 5 and 8 of the Limitation Act 1980.