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
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
The Bill is expected to be enacted later this