The Contracts (Rights of Third Parties) Act 1999 (c. 31) is an act of the Parliament of the United Kingdom that significantly reformed the common law doctrine of privity and "thereby [removed] one of the most universally disliked and criticised blots on the legal landscape".Dean (2000) p.143 The second rule of the doctrine of privity, that a third party could not enforce a contract for which he had not provided consideration, had been widely criticised by lawyers, academics and members of the judiciary. Proposals for reform via an act of Parliament were first made in 1937 by the Law Revision Committee in their Sixth Interim Report. No further action was taken by the government until the 1990s, when the Law Commission proposed a new draft bill in 1991, and presented their final report in 1996. The bill was introduced to the House of Lords in December 1998, and moved to the House of Commons on 14 June 1999. It received royal assent on 11 November 1999, coming into force immediately as the Contracts (Rights of Third Parties) Act 1999.
Background
The historical doctrine of privity consisted of two rules. The first was that a third party may not have obligations imposed by the terms of a contract, and the second was that a third party may not enforce a contract for which he has not provided consideration.McKendrick (2007) p. 137 The first rule was not contested, while the second was described as "one of the most universally disliked and criticised blots on the legal landscape".Dean (2000) p. 1 Originally, the second rule was not held to be valid. In the 17th century, a third party was allowed to enforce terms of a contract that benefited him, as shown in Provender v Wood Hetley 30, where the judgement stated that "the party to whom the benefit of a promise accrews, may bring his action".Flannigan (1987) p. 564 The first reversal of this law came in Bourne v Mason 1 Vent., where the Court of King's Bench found that a third party had no rights to enforce a contract that benefited him. This ruling was quickly reversed, and decisions immediately after used the original rule.
Over the next 200 years, different judges provided different decisions as to whether or not a third party could enforce a contract that benefited them. The dispute ended in 1861 with Tweddle v Atkinson 121 ER 762, which confirmed that a third party could not enforce a contract that benefited him.Flannigan (1987) p. 565 This decision was affirmed by the House of Lords in Dunlop Pneumatic Tyre v Selfridge and Co Ltd AC 847 in 1915, where Lord Haldane stated that only a person who was party to a contract could sue on it.Mulcahy (2008) p. 94 This version of the doctrine is commonly known as the original or basic doctrine.Turner (2007) p. viiMcKendrick (2007) p. vii
Criticism of the original doctrine The second rule of privity, that a third party cannot claim benefits from a contract, was widely criticised by academics, members of the judiciary and legal professionals. One problem was that the rule made no exceptions for cases where it was obviously intended for the third party to claim a benefit, such as the young couple in Tweddle v Atkinson, or the widow in Beswick v Beswick, where an uncle gave his nephew a business, on the condition that the nephew would pay the uncle a certain amount per week, and in the event of the uncle's death, give a lesser amount to his widow.Mulcahy (2008) p. 95
A second argument used to undermine the doctrine of privity was to point out the large number of exceptions to the rule created by acts of Parliament, which seemed to indicate that Parliament itself had an issue with the doctrine.Flannigan (1987) p. 572 Critics also argued that with the large number of inconsistencies and exceptions with the doctrine of privity, it was a "bad" law, as it provided no reliable rule; the way that the law works in theory is hugely different from how it is enforced in the courts.Jacobs (1986) p. 466 The doctrine is also not found in many other legal systems, such as that of the United States.Flannigan (1987) p. 569
The doctrine came under criticism from many academics and judges, including Lord Scarman, Lord Denning, Lord Reid and Arthur Linton Corbin, and Stephen Guest wrote that "[I]t is said that it serves only to defeat the legitimate expectations of the third party, that it undermines the social interest of the community in the security of bargains and it is commercially inconvenient".Treitel (1983) p. 458
Formation The first legislative proposal to reform the doctrine of privity was made in 1937; the Law Revision Committee, in their Sixth Interim Report, proposed an act of Parliament that would allow third parties to enforce terms of a contract that specified that they were allowed. The Second World War intervened, and the report was not acted on; even as late as 1986 the assumption was that Parliament would not act, and any reform would come from judicial sources (in particular, the House of Lords).
In 1991, the Law Commission (the successor to the Law Revision Committee) published Consultation Paper No. 121 "Privity of Contract: Contracts for the Benefit of Third Parties", which proposed a similar change,Turner (2007) p.379 and, in July 1996, the final report (No. 242), along with a draft bill, were published.Hughes (1999) p.431 The proposed changes were supported by the legal profession and academics alike. The bill was introduced to the House of Lords on 3 December 1998, and, during its second reading, was jokingly offered to Lord Denning as a birthday present due to his fight to overturn the doctrine of privity.MacMillan (200) p.721 It was moved to the House of Commons on 14 June,Bridge (2001) p.85 and it received royal assent on 11 November 1999.
Provisions Section 1: Right of third party to enforce contractual term Section 1 of the act overrides the old common law rule that a third party could not enforce the terms of a contract, as established in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd, and also the rule that a third party was unable to act against the promisor, established in Tweddle v Atkinson.Andrews (2001) p.353 It allows a third party to enforce the terms of a contract in one of two situations: firstly if the third party is specifically mentioned in the contract as someone authorised to do so, and secondly if the contract "purports to confer a benefit" on him.Contracts (Rights of Third Parties) Act 1999 S.1(1)
An exception to the "purports to confer a benefit" basis for enforceability involves contracts that include language barring third parties from applying the rule.Dean (2000) p.144Contracts (Rights of Third Parties) Act 1999 S.1(2) Another exception applies to contracts between solicitors and their clients to write wills, something governed by White v Jones 2 AC 207. After the act was first published, Guenter Treitel argued that in a situation where the promisor felt that the second rule had been wrongly applied by a statement in the contract, the onus would be on him to prove it.Andrews (2001) p.355 In Nisshin Shipping Co Ltd v Cleaves & Co Ltd EWHC 2602, the High Court supported Treitel's reasoning.McKendrick (2007) p.147
The second situation, that a third party can enforce terms that "purport to confer a benefit on him", has been described by Meryll Dean as too broad, and one view put forward in the parliamentary debates was that it was "un-workable" in situations such as complex construction contracts involving dozens of sub-contractors with chains of contracts among them.Dean (2000) p.145 This argument, and a proposal to exempt the construction industry from the act, was rejected by both the Law Commission and Parliament. The phrase "purport to confer a benefit" was originally found in the 1937 Law Commission paper, and was used in the New Zealand Contracts (Privity) Act 1982 before it was adopted for the English act.
The third party must be identified by name or as a member of a particular group, and does not need to exist when the contract was made.Whincup (2006) p.83Contracts (Rights of Third Parties) Act 1999 S.1(3) This can cause problems, however – if, for example, a party (party A) enters a contract to have another party (party B) construct a building, and A later sells the building to C who finds that it has structural problems, C has no cause of action against B because he was not named in the original contract.McKendrick (2007) p.149
If a third party chooses to enforce the terms of a contract, he can do so against the promisor and has the right to any remedy that would be available if he was party to the contract, such as specific performance.Contracts (Rights of Third Parties) Act 1999 S.1(5) An exception to this is the ability to terminate the contract and have it rendered void, since the Law Commission believed that "the third party should not be entitled to terminate the contract for breach as this may be contrary to the promisee's wishes or interests".McKendrick (2007) p.151
Although the topic is not discussed in the Law Commission's report or the bill itself, it is generally considered that the third party has no rights against the promisee, regardless of his rights against the promisor.Stevens (2004) p.304 Andrew Burrows, who prepared the Law Commission's report, said that the third party does not acquire rights against the promisee,Burrows (1996) p.544 something Guenter Treitel has also suggested.Treitel (2003) p.658 A different stance is taken in Scots law, where a promisee has a duty to the third party to ensure performance of the contract.
Section 2: Variation and rescission of contract Section 2 of the Act governs changes to and rescission of contracts. It prevents parties to a contract rescinding it or altering it to remove or modify the terms that affect the third party if the third party has told the promisor that he "assents" to the term,Contracts (Rights of Third Parties) Act 1999 S.2(1)(a) or that he has relied on the contract (and the promisor knows this, or could be expected to have known this).Dean (2000) p.148Contracts (Rights of Third Parties) Act 1999 S.2(1) This is only the default position; the act allows parties to insert clauses into the contract which allow them to rescind or alter the contract without the consent of the third party if they so choose. The courts can ignore the consent of the third party and allow the promisor and promisee to change the contract if the third party is mentally incapable, unfindable or if it is impossible to tell if the third party has truly consented. At the same time the courts may add conditions to that decision, such as requiring the promisor or promisee to pay the third party compensation.
Assenting is considered complete when the third party "communicates" his assent to the promisor, which can be done in a variety of ways, including by post. The contract may specify the communication method(s), and if it does, any other method is not valid.Andrews (2001) p.360
The third party does not have to have suffered a detriment from his "reliance"; it is enough that he has simply relied on the contract. It must be the third party who relied on the term, rather than another party closely related to the third party. If the third party relies on the terms of the contract, which are then breached, he can not only claim damages for any loss he suffered from relying on the contract but also for "standard" damages, such as loss of profit.McKendrick (2007) p.152
Section 3: Defences available to promisor