Privity of Contract: Contracts for the Benefit of Third Parties [1996] EWLC 242(15) (31 July 1996)

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Arguments for Reform

(1) The rule of English law whereby a third party to a contract may not enforce it should be reformed so as to enable contracting parties to confer a right to enforce the contract on a third party. 3.29 3.29)

(2) A right to enforce the contract means (1) a right to all remedies given by the courts for breach of contract (and with the standard rules applicable to those remedies applying by analogy) that would have been available to the third party had he been a party to the contract, including damages, awards of an agreed sum, specific performance and injunctions; and (2) a right to take advantage of a promised exclusion or restriction of the promisor's rights as if the third party were a party to the contract. (3.32 3.32 and draft Bill, clause 1(4) and 1(5))

The Form of the Legislation

(3) The third party rule should be reformed by means of a detailed legislative scheme. 5.9 5.9)

(4) The legislation should not be construed as preventing judicial development of third party rights. (5.11 5.11 and draft Bill, clause 6(1))

(5) The remedies available to the promisee in a contract enforceable by a third party should be left to the common law. (5.17 5.17 and draft Bill, clause 4)

The Third Party Rule and Consideration

(6) The legislation should ensure that the rule that consideration must move from the promisee is reformed to the extent necessary to avoid nullifying our proposed reform of the doctrine of privity. 6.8 6.8)

(7) Without prejudice to his rights and remedies at common law, a joint promisee who has not provided consideration should not be regarded as a third party for the purposes of our reform. (6.12 6.12 and draft Bill, clause 8)

The Test of Enforceability

(8) The test of enforceability should be as follows:

(a) a third party shall have the right to enforce a contractual provision where that right is given to him - and he may be identified by name, class or description - by an express term of the contract (the "first limb");

(b) a third party shall also have the right to enforce a contractual provision where that provision purports to confer a benefit on the third party, who is expressly identified as a beneficiary of that provision, by name, class or description (the "second limb"); but there shall be no right of enforceability under the second limb where on the proper construction of the contract it appears that the contracting parties did not intend the third party to have that right (the "proviso"). (7.6 7.6 and draft Bill, clause 1(1) and 1(3) (the first and second limbs), clause 1(2) (the proviso) and clause 7(1) and 7(2)(a))

(9) There should be no special test of enforceability for consumers in our proposed legislation. 7.56 7.56)

Designation, Existence and Ascertainability of the Third Party

(10) There should be an "avoidance of doubt" provision to the effect that the third party need not be in existence at the time of the contract. (8.6 8.6 and draft Bill, clause 1(3))

(11) There should be no requirement that the third party be in existence at the time of acceptance by another third party. 8.8 8.8)

(12) The proposed legislation should contain no special provisions governing pre-incorporation contracts. 8.16 8.16)

(13) Although no legislative provision on this is necessary, a third party shall have no right to enforce a contract or contractual provision unless he or she is capable of being ascertained with certainty at the time when the promisor's duty to perform in the third party's favour arises, or when a liability against which the provision seeks to protect the third party is incurred. 8.18 8.18)

Variation and Cancellation

(14) The contracting parties' right to vary or cancel the contract or, as the case may be, the contractual provision should be lost once the third party has relied on it or has accepted it ("acceptance" meaning "an assent by words or conduct communicated by the third party to the promisor"). The posting rule, applicable to the acceptance of offers sent by post (and possibly by some other means), should not apply. (9.26 9.26 and draft Bill, clause 2(1) and (2))

(15) The reliance test should be qualified so that reliance should only count where (unless the promisor is aware that the third party has relied) the promisor could reasonably have foreseen that the third party would rely on the promise. (9.30 9.30 and draft Bill, clause 2(1)(b) and 2(1)(c))

(16) The contracting parties may expressly reserve the right to vary or cancel the third party's right irrespective of reliance or acceptance by the third party. (9.40 9.40 and draft Bill, clause 2(3)(a))

(17) The parties, by an express term, should be able to lay down a crystallisation test different from reliance or acceptance. (9.42 9.42 and draft Bill, clause 2(3)(b))

(18) Although no legislative provision on this is necessary, where there is more than one third party who satisfies the test of enforceability, the relevant crystallisation test would need to be satisfied by each third party in order to crystallise that third party's rights. 9.44 9.44)

(19) A contractual term to the effect that the contract is irrevocable should be as open to variation or cancellation by the contracting parties as any other term. 9.47 9.47)

(20) There should be a judicial discretion to authorise a variation or cancellation (and on such terms, including as to the payment of compensation to the third party, as seems appropriate) in certain limited circumstances irrespective of reliance or acceptance by the third party. The discretion should extend to where the parties cannot reasonably ascertain whether the third party's consent is required for the cancellation or variation of the contract; or where the third party's consent cannot be obtained because his whereabouts cannot reasonably be discovered or because he is mentally incapable of giving his consent. (9.51 9.51 and draft Bill, clauses 2(4) to 2(7))

Defences, Set-Offs and Counterclaims

(21) The third party's claim should be subject to all defences and set-offs that would have been available to the promisor in an action by the promisee and which arise out of or in connection with the contract or, insofar as a particular contractual provision is being enforced by the third party, which arise out of or in connection with the contract and are relevant to that contractual provision. (10.12 10.12, draft Bill, clause 3(2) and 7(2)(b))

(22) The contracting parties may include an express provision to the effect that the promisor may not raise any defence or set-off that would have been available against the promisee; conversely, the parties may include an express provision to the effect that the third party's claim is subject to all defences and set-offs that the promisor would have had against the promisee. (10.16 10.16 and draft Bill, clause 3(3))

(23) It should be made clear that, in addition to the third party's claim being subject to defences and set-offs that the promisor would have had available in an action by the promisee, the third party's claim is also to be subject to the defences, counterclaims (not arising from the contract) and set-offs that would have been available to the promisor had the third party been a party to the contract. (10.19 10.19 and draft Bill, clause 3(4))

(24) The contracting parties may include an express provision to the effect that the promisor may not raise any defence, set-off or counterclaim that would have been available to the promisor had the third party been a party to the contract. (10.21 10.21, draft Bill clause 3(5))

(25) Where the third party seeks to rely on the test of enforceability to enforce an exclusion or limitation clause (or conceivably an analogous type of clause) he may do so only to the extent that he could have done so had he been a party to the contract (where the phrase ?had he been a party to the contract' means to refer to matters that affect the validity of the clause as between the contracting parties as well as matters affecting validity or enforceability that relate only to the third party). (10.23 10.23, draft Bill clause 3(6))

(26) The present general rule whereby parties to a contract cannot impose burdens upon third parties should be retained, although they may impose conditions upon the enjoyment of any benefits by them. The distinction between imposing burdens and conditional benefits (and hence the line between what falls outside our reform and what falls within it) depends on whether the condition is the basis merely of a defence or set-off to the third party's claim or whether, on the contrary, the condition is the basis of a claim or counterclaim by the promisor against the third party. This recommendation therefore ties in with recommendations (21) and (23) above and no further legislative provision is required. 10.32 10.32)

Overlapping Claims

(27) The promisor's duty to perform should be owed to both the promisee and the third party and, consequently, unless otherwise agreed between the contracting parties, the promisee should retain the right to enforce a contract even if the contract is also enforceable at the suit of the third party. (11.4 11.4 and draft Bill, clause 4)

(28) Although no legislative provision on this is necessary, a promisor who has fulfilled its duty to the third party, whether wholly or partly, should to that extent be discharged from its duty to the promisee. 11.6 11.6)

(29) Although no legislative provision on this is necessary, a release given to the promisor by the third party should not discharge the promisor's obligation to the promisee (unless otherwise agreed in the original contract). 11.8 11.8)

(30) Although no legislative provision on this is necessary, the effect of a release of the promisor by one third party on the promisor's obligations to another third party is dependent (unless otherwise agreed in the original contract) on whether the promise is for the benefit of the third parties independently of each other, or whether it is for the benefit of the third parties jointly. If the promised benefit is to be enjoyed independently, the release by one third party should not discharge the promisor's obligation to the other third parties. But if the promise is for the joint benefit of the third parties, the release by one third party should normally discharge the promisor's obligation to the other third parties. 11.10 11.10)

(31) Performance by the promisor to the promisee (rather than to the third party) and accepted by the promisee, or the release of the promisor by the promisee, should be straightforwardly regarded as a variation or cancellation of the contract and should therefore be governed by the recommendations in Part IX. 11.12 11.12)

(32) There should be no order of priority between promisee and third party.11.15 (Paragraph 11.15)

(33) Where the promisee has recovered substantial damages (or an agreed sum) representing the third party's loss or assessed on the basis that the promisee will "cure" the breach for the third party, the third party will not be entitled under our proposed Act to an award which duplicates that sum and thereby imposes double liability on the promisor. (11.21 11.21 and draft Bill, clause 5)

(34) While no legislative provision to this effect is required, where a third party has pre-existing legal rights against the promisee, he should not lose those rights because the promisor and promisee enter into a contract whereby the promisor agrees to discharge the promisee's liability to the third party, but should acquire an additional right against the promisor. 11.26 11.26)

(35) While it is unnecessary for there to be a legislative provision on this, no compromise or settlement of the promisee's liability to the third party by the conferral of enforceable contractual rights against the promisor should be disturbed. 11.26 11.26)

Existing Exceptions

(36) The statutory and common law exceptions to the third party rule should be preserved by a statutory provision to the effect that our reform of the third party rule is to be without prejudice to any right or remedy of a third party which exists apart from our proposed Act. (12.2 12.2 and draft Bill, clause 6(1))

(37) There should be no statutory listing or codification of the existing statutory and common law exceptions. (12.2 12.2)

(38) There should be no legislative provision in our proposed legislation dealing with the issue of concurrent liability in tort and contract. (12.4 12.4)

(39) A third party shall have no right of enforceability under our proposed Act in the case of a contract for the carriage of goods by sea governed by the Carriage of Goods by Sea Act 1992 except that a third party can enforce an exclusion or limitation of liability in such a contract if he satisfies the test of enforceability. (12.11 12.11 and draft Bill, clause 6(2)(a) and 6(3)(a))

(40) A third party shall have no right of enforceability under our proposed Act in the case of a contract for the international carriage of goods by road or rail, or cargo by air, governed by the relevant international conventions, except that a third party can enforce an exclusion or limitation of liability in such a contract if he satisfies the test of enforceability. (12.15 12.15 and draft Bill, clause 6(2)(b) and 6(3)(b))

(41) A third party shall have no right of enforceability under our proposed Act in respect of a contract contained in a bill of exchange, promissory note or other negotiable instrument. (12.17 12.17 and draft Bill, clause 6(2)(c))

(42) Reform of the Third Parties (Rights Against Insurers) Act 1930 should not be covered in our general reform of the third party rule. 12.21 12.21)

(43) There should not be an extension of section 11 of the Married Womens' Property Act 1882 at this stage. 12.27 12.27)

Consequential Amendments

(44) Our proposed reform 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. (13.4 13.4 and draft Bill, clause 6(6))

(45) Subject to recommendations (46) and (47), no consequential amendment to other legislation is required by our proposals. 13.8 13.8)

(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. (13.13 13.13 and draft Bill, clause 6(4))

(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. (13.15 13.15 and draft Bill, clause 6(5))

Miscellaneous Issues

(48) There should be no requirement that the promisee be joined as a party to the litigation when a third party sues to enforce a contract. 14.3 14.3)

(49) The existing Rules of Court are adequate to deal with joinder of the promisee in an action brought by a third party under our proposed reform. 14.5 14.5)

(50) Although no legislative provision on this is necessary, a third party should be able to assign its rights under our proposed Act in an analogous way to that in which a contracting party can assign its rights. 14.7 14.7)

(51) Although no legislative provision on this is necessary, the standard choice of law rules applicable to contract (or, where the third party seeks to rely on an exclusion clause, the standard choice of law rules applicable to an exclusion clause operating as a defence to an action in tort) should determine whether our proposed Act applies in respect of facts involving a foreign element.14.13 14.13)

(52) A third party shall have no rights of enforceability under our proposed reform in respect of an arbitration agreement or a jurisdiction agreement. (14.19 14.19 and draft Bill, clause 6(2)(d) and (e))

(53) The proposed legislation should not affect contracts entered into prior to its commencement date, which should be six months after receiving the Royal Assent. (14.21 14.21 and draft Bill, clause 9(2))

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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(15) (31 July 1996) URL: http://www.bailii.org/ew/other/EWLC/1996/242(15).html Cite as: [1996] EWLC 242(15)

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