Once upon a time a third-party beneficiary was unable to sue. Not any more. The implications of the “shoe borrower’s act”, in terms of supply chain litigation, for instance, could be far reaching.
My daughter’s 21st birthday party went with a real bang. The bang happened at about 3am when the minibus turned up to collect the party goers. The driver backed quite happily into my garden until he excavated one concrete restraining post, one 8 ft oak post and a collection of interwoven fence panels. It was a nice piece of demolition. I couldn’t help thinking about this little taxi firm being up against the 81 barristers from my chambers. So far, though, the firm has been very apologetic. A builder has been engaged to put things right. I am nervous.

And then I thought about Hitler. Do you know that if it hadn’t been for that fellow diverting the attention of parliament in 1939, we would have enacted a certain piece of legislation at that time. Instead, it has taken another 61 years to arrive.

On 11 May 2000, the “shoe borrower’s act” came fully into force. Its correct name is the Contracts (Right of Third Parties) Act 1999.

I will tell you about it – and its effect on the rebuilding works in my garden – but first let me ask if you have heard of a legal rule called “privity of contract”?

It means that a person can only enforce a contract if he is a party to it. So, if the taxi demolition firm enters into a contract with a builder for the purpose of conferring a benefit on a third party, said party has no right to sue for breach of that contract.

Things changed on 11 May 2000. If you are an architect, engineer, QS, builder, subcontractor, supplier or even a lawyer, life has taken a new turn. Your contracts from that date, whether for professional services or wigglepins, may well lead to circumstances in which a third party will have the right to stand in the shoes of a party to the contract, and sue you. The “shoe borrower’s act” is a significant piece of legislation, especially important for people in the construction industry. Important enough for a recent amendment to be made by JCT to its Standard Form Building Contracts, such as JCT98, IFC, MW98, NAM, NSC, and WCD98.

Privity hasn’t been abolished but, like my fence, it has suffered a serious assault. The circumstances when a third party can stand in a contracting party’s shoes are twofold. First, when your contract expressly provides that an outsider can sue over the contract. Second, and more likely, when a term in the contract purports to confer a benefit on the third party. The tricky word is “purports”.

A builder has been engaged by the taxi firm to put things right. I am nervous. Then, I thought about Hitler …

Professor Andrew Burrows, the principal law commissioner for this act, tells me that the clause enshrining this right was lifted from the tried and tested Third Party Rights Act in New Zealand.

The thrust of this part of the act is to ask of a contract term whether it is intended to confer a benefit on an outsider, and whether it appears, objectively speaking, that the parties intended that the outsider had a right to enforce it. Professor Burrows explains that the act contains a presumption that the parties do intend to confer a benefit unless that presumption can be rebutted.

So, in real life you can foresee a situation where, say, a curtain-walling manufacturer has a supply-only contract with the installing subcontractor for my office block in Biggleswade. This in turn purports to confer a benefit on me, as I am at the top of the supply chain heap, even though I am not a party to that contract.

But if it is right to say a benefit is conferred, then I am entitled to stand in the shoes of the subcontractor and sue the supplier. Moreover, I can do this even though the chain is broken by the insolvency of, say, the subcontractor. I still have a right to sue.

The supplier, by the way can, use any defence that would have been available to it under the supply contract. Also, remember, that I can phrase the main contract in such a way that a subcontractor or supplier becomes a third-party beneficiary. These people then have a right to sue me.

By now you can see, I guess, how a third party could benefit from a rebuilding contract between the taxi firm and the builder. If the builder does the job badly and there exists a term that purports to benefit me, I can stand in the shoes of said taxi firm and sue the builder direct. Though I am bound to say I would have to use all of my 81 barrister colleagues.