The Contracts (Rights of Third Parties) Bill 1999

The Contracts (Rights of Third Parties) Bill 1999 has been introduced in the House of Lords to implement, with some amendments, the recommendations of the Law Commission in its report on Privity of Contract: Contracts for the Benefit of Third Parties, Law Com No 242 (1996).

The Bill reforms the rule of "privity of contract" under which a person can only enforce a contract if he is a party to it. The rule means that where a contract purports to confer a benefit upon someone who is not a party to it, that person has no right to sue for breach of contract. Under the provisions of the new Bill, the right to enforce the terms of a contract is, in certain circumstances, conferred upon third parties.

Two circumstances are provided for in which a third party is to have a right to enforce a term of a contract. Firstly, where the contract expressly provides that he should have that right, and secondly, where the term purports to confer a benefit upon him. In the second case, the third party will have no such right if this is excluded by, or is otherwise inconsistent with, the contract. In both cases, the third party must be expressly identified, but need not be in existence when the contract is made, allowing for enforceable rights to be conferred on, for example, a company which has not yet been incorporated. The Bill applies so as to enable a third party to take advantage of an exclusion or limitation clause, as well as to enforce "positive" rights.

Once the third party has the right under the Bill to enforce a term of the contract, the Bill provides that the contract may cancelled or varied in a way which affects the third party's right only if the third party consents, however, the Bill also makes provision for the court to have limited power to dispense with the need for such consent.

The right conferred by the Bill is additional to any right the contracting party ("the promisee") has in relation to the enforcement of a contractual term which benefits a third party. The Bill makes provision to avoid double liability, created by the fact that a party to a contract may be liable to the third party as well as to the promisee in respect of the same promise, by providing that where the promisee has recovered a sum from the promisor in respect of the third party's loss, any subsequent award to the third party will be reduced by the court. The Bill also provides that defences, set-offs and counterclaims may be raised in proceedings brought by a person with a right conferred by the Bill.

The Bill does not confer rights on a third party in respect of a contract on a bill of exchange, promissory note or other negotiable instrument. Contracts formed by the memorandum and articles of association of a company under s14 Companies Act 1985 are excluded from the scope of the Bill. Employment and similar contracts and contracts for the carriage of goods are also excluded.

The Bill is expected to be enacted later this year.