Pebbles that spell trouble

Last week I talked about the “shoe borrower’s act”, properly called the Contracts (Rights of Third Parties) Act 1999. It has particular importance in construction and applies to all contracting from 11 May 2000.

It asks in what circumstances can an outsider to a contract (a third party) enforce a contract or contractual provision to which it is not a party. In other words, when can the outsider stand in the shoes of a party to the contract and sue?

First, here is a reminder of the basic rules. The starting point is to ask if the two contracting parties have expressly provided that I, the outsider, may enforce a term of that contract. “Mr Bingham shall have the right to enforce this contract” will do nicely, since it is an express term of the contract and I am identified to have a right. More tricky is where the parties do not expressly contract to confer a right on me, yet all the circumstances point to me being the beneficiary. The act says that if I am not expressly identified, I can ask if the contract purports to confer a benefit on another person or group or class, and, if so, I can sue – provided the parties intended that I could sue on that contract.

So, let’s look at some examples. The first one is easy. Bingham Ltd owns a plot of land. The sale is agreed with you for £100 000 to the company and £50 000 to the Institute of Destitute Quantity Surveyors. You fail to pay the institute. The act will allow the institute to sue you for breach of payment obligation.

The second example is where I engage you to build a conservatory on my daughter’s house. You complete, I pay, but then a defect is found. If I sue you for breach, I will only recover nominal damages of, say, £10 because I have suffered no loss. The loss is that of my daughter. The contract with you was a clear and express intention to confer a benefit on the outsider named as a person and the benefit was to build with reasonable care. The benefit conferred is expressly on my daughter. There is a presumption under the act that the contract purported to confer a benefit, and she can sue on it. This latter item is called “the proviso”, that is she can sue provided the contract in all the circumstances shows an intention that she could enforce. That proviso applies whether she is named expressly or implicitly. Crucial, then, is not only the named beneficiary but also finding an intention that the parties to the contract conferred the right to sue on the contract term.

Finding an intention that the parties conferred the right to sue on the contract term is crucial

The third example shows how difficult it might be to find the intention of the contracting parties to let me, the outsider, sue or enforce. This time, I am a book distributor called Bingham.com. A new warehouse is built by you for my firm. Your flooring subcontractor is alleged to have made a mess when it laid it. Its subcontract expressly names me as the employer at a specific site for specific works. Undoubtedly it is conferring a benefit on my building, or is it? If I want to sue on the subcontract promise to provide a good floor by standing in the shoes of the main contractor, it is attractive to say the subcontractor was purporting to confer a benefit on me through the main contractor. It is arguable, however, that the flooring enterprise was conferring a benefit on the main contractor so that the main contractor could confer any benefit on me. I may fail on that ground alone.

But, in any case, do I fail with the proviso? The flooring firm might show there was no intention in the subcontract that I could enforce or sue as an outsider. How come? Because the surrounding circumstances of a string of construction contracts ordinarily provide that the employer pursues the main contractor, which in turn sues the subcontractor. Those circumstances may be enough to defeat the ability to sue under the act.

A fourth example is quite different but useful. The main contract contains an exclusion clause.

It seeks to exclude all liability of the main contractor to its clients of “all agents, servants, employees and subcontractors” engaged by the main contractor in the performance of this particular contract. The engineer engaged by the main contractor is negligent in its geotechnical survey causing me, the employer, loss. I decide to sue it in the tort of negligence. But I am likely to fail since the main contract purports to confer a benefit of the exclusion clause on the agents or servants of the main contractor.