English law can be unfair. In 1962, Peter Beswick agreed to hand over his business to his nephew, John. In exchange, John contracted to pay a sum of money to Peter each week and, after his death, to Peter's widow. After Peter died, John decided not to pay. He almost succeeded. Peter's widow could not sue under the contract herself as she was not a party to it — but she was administering Peter's estate, and was able to enforce it on his behalf.
This is an example of the rule of privity of contract: just as only the parties to a contract can acquire legal obligations under that contract, they are also as a general rule the only parties which acquire any legal rights under it. A third party, like Peter's widow, cannot enforce a contract where they suffer a loss as a result of its breach.
The Contracts (Rights of Third Parties) Act 1999 (CRTPA) creates an exception which mitigates the harshness of this rule. Where a contract confers a benefit on a third party, that party may acquire the right to sue. It is important for businesses to be aware of CRTPA since it can give rise to sometimes unexpected legal risks, and can even prevent the rescission or alteration of a contract without the consent of persons who are not parties to the contract.
When does CRTPA apply?
CRTPA applies to most contracts, but some exceptions are stated in Section 6. These include employment contracts and most contracts for the carriage of goods. If a contract is not exempted under Section 6, then under Section 1 a person who is not a party to a contract may in his own right enforce a term of the contract if: (a) the contract expressly provides that he may, or (b) the term purports to confer a benefit on that person, unless the contract indicates in some way that that party was not intended to be able to enforce it. Accordingly, unless it is intended that third parties should be able to enforce a contractual term, it is generally advisable to state explicitly in the contract that they cannot. Under Section 1(3), the third party does not have to be explicitly named in the contract provided that they are identified as a member of a class or by means of a description. As an example, if a contract between a wholesaler and a retailer explicitly referred to consumers, then any consumer whom the contract purported to benefit could potentially sue under it, unless of course their right to do so is excluded.
What are the effects of third parties' rights?
Where a third party has rights under a contract as a result of CRTPA, under Section 1(5) they can take full advantage of all the legal remedies for any breach of contract that would be available to a party to that contract. This means that they will be able to claim monetary compensation for any loss they suffer as a result of the breach. In some circumstances they may even be able to secure an injunction or specific performance. (An order for specific performance will require a party to fulfil their contractual obligations.)
It may also make it difficult to rescind such a contract or vary it in such a way as to extinguish or alter the third party's rights. Under Section 2(1), there are three circumstances in which such variation or rescission will require the consent of an affected third party:
(a) Where the third party has communicated his assent to the party which contracted to provide the benefit.
(b) Where the party which contracted to provide the benefit knows the third party has relied on the relevant term.
(c) Where the third party has in fact relied on the relevant term and the party which contracted to provide the benefit can reasonably be expected to have foreseen that they would do so.
Are there any restrictions to liability to third parties?
Under Section 3, parties to the contract can rely on all the usual defences to a claim for breach of contract. So they can argue, for instance, that their liability should be limited because the third party has failed to limit their loss or has been contributorily negligent. To prevent double recovery, Section 5 stops a party to the contract and a third party from both recovering the full amount for the same loss.
When entering into a contract, it is prudent to consider whether the contract purports to confer benefits on any third parties which are named or identified as members of a class or by description in the contract. If so, you should consider whether they may be able to enforce the terms and, if you do not want them to be able to do so, you should expressly state that they cannot.
This article was researched and written by Adam Myers.