Contracts (Rights of Third Parties) Act 1999 - does it apply to you?

United Kingdom

The Contracts (Rights of Third Parties) Act 1999 can now apply whether you know it or not

Apart from a few exempted categories, a contract entered into, renewed or restated after midnight on 10th May, 2000 is capable of granting directly enforceable rights to third parties (possibly, even if the contracting parties do not realise it). If this happens, the contracting parties may not be able to reverse or modify the effect of the Act or terminate the contract without the third party's consent.

For the first six months since the Act came into force (on 11th November, 1999) the Act could not apply unless the contract expressly adopted it. On 11th May the balance shifted, so that the Act will automatically be taken to apply unless the contract expressly provides otherwise.

If the contract expressly states that an identifiable third party has the right to enforce a term of the contract in his own right, that right will be protected by the Act. Broadly, the Act will also protect the third party against any attempt by the contracting parties to remove or vary it without the third party's consent. The same can apply where the contract does not expressly confer on a third party a direct right to enforce, but is capable of being read as intending to do so.

As a precaution, the Act should be considered as a matter of course in relation to all new contracts (apart from excepted categories, such as negotiable instruments and employment contracts). If necessary, the contract should be reworded before it becomes binding, to make sure that the Act does not apply. If it is intended that the Act should apply, very careful drafting is required to ensure that the scope of the rights granted is no less or more extensive than the parties intend.

Further information on the Act is stored in the LawNow archive, including the article dated 1st March, 2000. Or you can contact Simon Howley on 020 7367 3000 (sqh@cms-cmck.com)