Updated: Oct 18, 2022
The established jurisprudence of the Contract law in UK was that only the persons who are privy to a contract shall have the right to sue, and be sued, in an action for breach of contract. The parties are needed to establish consensus ad idem to have an enforceable right under the contract. However, there were some exceptions to this general principal, the passing of Contracts (Rights of Third Parties) Act, 1999, seeks to codify this exceptions and make some fundamental changes in the state of the law of privity of contract. The act made provisions in which a third party to a contract can sue for its breach, subject to certain conditions.
PRIVITY OF CONTRACT
The doctrine of Privity of Contract consisted of two premises:
1. The third party cannot be imposed with the obligation arising out of a contract.
2. The third party shall not have a right to enforce a contract in which he has not provided a consideration.
In Tweddle V. Atkinson (1861) the parties entered into a contract and expressly conferred a benefit of the contract to a third party, but the court while adhering to the strict standards of privity of contract, disallowed the claim. Although, there was some differences of opinion by Blackburn J. who acknowledged the existence of an exception that the family member of the petitioner had provided the consideration to the contract, but the claim ultimately failed.
In Errington v Errington & Woods (1952) the reliance was placed on the implied promise in a unilateral contract that once the performance of the act has commenced, it can’t be revoked. However, the case was lacking mutual promise, but yet it was enforced and the claim succeeded.
In Beswick V Beswick (1968) a similar technical and formal approach was taken by the courts. Mr Beswick entered into a contract with his nephew that the nephew will make payments of a fixed amount for the lifetime of Mrs Beswick, but the nephew ceased to make the payments as stated in the contract after the death of Mr Beswick. Mrs Beswick initiated anaction to compel the nephew for payments, the trial judge denied the claim while defending the Rule of Privity, but the court of appeal and the House of Lords held that although the Mrs Beswick was not a party to the contract, but still she can sue the nephew in the capacity of executor of the estate of her deceased husband and upheld the claim.
There were instances where the courts have laid down dissenting judgments and the rule of privity of contract was subjected to different interpretations. If the rule was strictly applied in Beswick as applied in Tweddle V Atkinson, then the nephew would have unjustly escaped the liability of payments to Mrs Beswick. Therefore it was the dire need of the hour to codify the rule and provide it its due certainty.
DRAWBACKS OF CONTRACTS (RIGHTS OF THIRD PARTIES) ACT, 1999
1. Uncertainty on the enforceability of rights of third parties:
There are two situations provided under the act when a third party can enforce its rights under a contract:
a. if the contract expressly provides for such right; or
b. if a term of the contract purports to confer a benefit upon a third party, unless it appears that on a proper construction of the contract the parties did not intend for the term to be enforceable by the third party.
As the Lord Chancellor put it, there is a presumption that the parties intended the term to be enforceable but it can be rebutted. This means that it will be for the contracting party being sued by the third party to prove that an enforceable benefit was not intended.
The clause (b) above has been a subject of considerable criticism and debate as it can give rise to uncertainty. The parties to the contract purporting to give benefits to third party may provide that in the contract itself and it will be inappropriate for the alleged defaulting party to the contract to prove that the suing third party was not intended to have such right as the burden of proof will be on the party to the contract.
2. Rights of Third Parties are subject to relevant parts of the Contract:
The subsection (4) of section 1 provides that the right of third parties will be subject to other provisions of the contract. Therefore, such rights shall be restricted by contractual limitation period, arbitration clause, or a net contribution clause. The right of third parties shall be regarded as an independent right and this clause provides for an inappropriate restriction on that right.
3. Application of Rules of Breach Of Contract:
Section 1(5) of the Act provides that the third party shall be entitled to any remedy which had been available to him in an action for breach of contract like damages or specific performance and the rules relating to such remedy shall apply.
This provides various options for the defaulting party to put forth defences such as the loss of the third party is excluded by another clause of the contract; or that the third party failed to mitigate his loss; or the loss suffered was too remote. Subsection (6) also provides a similar provision for the third party in case he has been sued, the third party can rely on the exclusionary clauses provided in the contract for his benefit.
4. Codification not Comprehensive:
The Contracts (Rights of Third Parties) Act, 1999, doesn’t comprehensively codify the common law principles and exclusions existed before the passing of the act. Although, the act doesn’t expressly repeal other exceptions and principles, and other principles will be complementary of the act, but inclusion of some and exclusion of others give rise to uncertainty.
The passing of The Contracts (Rights of Third Parties) Act, 1999, has fundamentally changed the status of privity of contract, and enhanced the level of legal certainty and precision in business and individual transactions. But the law in accordance with its nature and objective will remain dynamic and has to keep developing with the advancement of society.