In the past, the law's failure to recognise third party rights has come in for considerable judicial flak. One of the effects of the privity doctrine is that a third party may not be able to recover losses – even if the contract was being carried out for its benefit – because it was not a contract party. This can frustrate the legitimate interests of contracting parties and is not followed in most EU countries.
The main proposals
The essence of the Act is to enable contracting parties to confer a benefit on a person who is not a contract party and may in his own right enforce it ("a third party"). The Act sets out two limbs under which a third party may be given the right to enforce a contractual term:
In practice, the second limb will probably be one of the Act's most significant provisions and its interpretation is likely to cause several difficulties. The question of whether a term purports to confer a benefit is one of construction. It seems clear there is a rebuttable presumption that a third party has an enforceable right unless the contrary can be established.
All of this means that it will be essential for construction industry members to review contracts even more carefully. Contracting parties will want to ensure they are not unwittingly creating third party rights. Consideration will need to be given on whether expressly to exclude third party rights or, if they are to be allowed, to modify their extent.
A third party may be identified in the contract by name, as a member of a class or as answering a particular description. The party need not exist at the time the contract is made. Therefore, a description such as "any purchaser and/or any tenant" should suffice.
In exercising the right to enforce a contract term, the third party must do so in accordance with other relevant terms as if it had been a contracting party. For example, any financial cap may also be binding on the third party.
The third party will also have remedies that are available under the contract to contracting parties. It will be able to sue for damages, seek an injunction or order for specific performance. The normal rules applicable to contract law will apply to the third party.
The Act will not (unless otherwise agreed by the parties) apply to contracts entered into before 11 May 2000.
Varying or cancelling a third party right
The Act provides protection to third parties so that the original contracting parties cannot vary or cancel their rights without consent.
This means a variation or cancellation cannot occur once the third party communicates assent to a term, or the term is relied on in circumstances where the promisor (see below) is aware of the reliance.
There is some concern as to whether, for example, a contract administrator can vary the details of specified contract works without the third party's consent. It seems clear that the Act is not intended to restrict the ability of the contract administrator unilaterally to issue variations to works details.
The Act does allow the original contracting parties to provide that the contract can be varied without the third party's consent, or require that the party's consent to any variation is not unreasonably withheld or delayed.
The promisor and promisee
The promisor is defined in the Act as "the party to the contract against whom the term is enforceable by the third party".
The promisor is entitled to raise any defence or set-off in any claim by the third party that would have been available to him against the other party to the contract, or which have been stipulated for in the contract itself. In addition, the promisor may have rights of set-off or defence in relation to any matter if a contract expressly gives these rights in connection with third party proceedings.
The promisee is defined as "the party to the contract by whom the term is enforceable against the promisor".
The Act states that the enforcement of a contractual term by the third party against the promisor will not limit or prevent the right of the promisee to sue the promisor. This raises the risk of "double recovery". Therefore, if the promisee has recovered damages on behalf of the third party which then brings a separate action, the Court has a discretion to reduce any award in favour of the party "as it thinks appropriate" to take account of the sum already recovered.
Some forms of contract have been expressly excluded, including negotiable instruments, certain contracts of employment and contracts for carriage of goods.
If a contract contains an arbitration clause, a third party may have to accept that enforcing his rights under the contract will require him to go to arbitration.
If contracts now provide for terms to be enforceable by third parties, can we rid ourselves of collateral warranties? This is unlikely, certainly in the short-term. Certain drafting bodies are already including within their contracts a provision to the effect that there is no intention to create third party rights.
In the breathing space between now and May 2000, more "sophisticated" provisions may be included within standard contracts with the aim of removing the need for collateral warranties. However, even then, it may take the industry a long time to get used to the idea that warranties are no longer necessary.
Finally, it is essential that all contracts are reviewed before the Act comes into force. This should prevent the conferring of enforceable benefits on third parties which is not intended. For example, if you are a consultant and your appointment obliges you to release information in good time so that works contractors are not delayed, then you may well face a direct claim from a contractor who alleges that his programme has been adversely affected by your late release of information.
Source
Building Sustainable Design
Postscript
Kevin Greene is a Partner in the Construction & Engineering Department of Nicholson Graham & Jones, Solicitors. Tel: 0171-648 9000 or e-mail: kevin.greene@ngj.co.uk
