#2106 - Commentary On Contract (Rights Of Third Parties) Act 1999 - Contract Law

Commentary on Contract (Rights of Third Parties) Act 1999

Test of Enforceability

• First = Simple Test s.1(1)(a) and s.1(3)

  • Two conditions

    • S.1(1)(a): Third party is expressly mentioned as having a specific right

    • S.1(3): Identification may comprise of

      • Name of third party

      • Identification of class of which X falls into (e.g. stevedores)

      • Or a particular description of whom X could be (e.g. person living at particular address)

        • Third party need not be in existence when agreement is made

• Second Test = Implied Test s.1(1)(b) s.1(2) and s.1(3)

  • Three conditions

    • S.1(1)(b): Term must purport to confer a benefit on third party

      • Burrows: not meant to include consequential benefits

        • E.g. Trietel: A employed under contract with B to cut B’s hedge adjoining C’s land

          • Does this fall within s.1(1)(b)?

            • C = expressly identified

            • But any benefit is consequential to C from B’s main benefit

            • So can’t be sued on by C.

      • The Laemthong Glory (No.2) [2005]: Sellers sell goods, buyer agrees to indemnify sellers, servants and agents against loss caused by the seizing of the ship, Ship was then seized. Ship owners suffered loss – can they use indemnity clause?

        • Held

          • For the purpose of delivering the cargo it’s right to say that the owners acted as the charterers' agents,

          • Others might also be involved, perhaps stevedores or port agents something of that kind,

            • should they be the agents of the charterers in fact,

              • but it is clear that the primary party to whom this clause was intended to refer as “your agents” must be the owners

    • S.1(3): Third party must be expressly identified by name, description or class (but need not be in existence)

    • S.1(2): Avoid presumption of parties intending to confer rights on X being overturned by evidence to the contrary

      • Burrows: attempting to balance need for certainty with need for flexibility, borrowed from NZ Law.

        • Comes from idea “when is it likely that parties have conferred a benefit?”

          • Answer = expressly identified

          • Presumption = expressly identified X is entitled to sue

  • How to rebut the presumption

    • Express term that third party not allowed to rebut presumption

    • Or other inconsistent terms which would also suggest this

      • E.g. clause that says no assignment of rights.

    • Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004]: Owners -> charterers, with agreement to pay brokers’ commission. Owners then refused to pay said commission. Brokers sued as 3P.

      • Coleman J:

        • S.1(2) only rebuts presumption where proper construction clearly shows opposite intent –

          • where expressly stated or something like this that third party not to have benefit of that clause

        • If not mentioned, or where clauses show some neutral intent

          • Then presumption is to be found in favour of the third party gaining the benefit.

Need for a second test?

• Burrows: number of reasons why need second test

  • Contractual rights between two parties are not always governed by express rights (e.g. implied terms)

  • First test would only grant remedy to the people with smart enough lawyers to have produced a “magic formula” of contract drafting.

  • Act would not have very wide extension otherwise.

• Advantages of Two tests

  • Position for contract draftsman is such that they can make the position absolutely clear one way or another

    • Either you expressly confer the right

    • Or expressly preclude the right by negating the presumption under second test

      • “no third parties under Rights of Third Parties Act 1999 shall have the right to enforce terms of this contract”.

  • But, if they aren’t precisely clear

    • Then still chance for X to receive justice and conferral of benefit through second test.

• MacMillan: Problem = Law Com assumes that parties intend to seek remedies only from those they have contracted with and not cut across contractual chains. In fact, this ain’t the case.

  • E.g. A contracts with B to perform building work. B subcontracts to C. Unless clearly stipulated, clear that work of C is performed for the benefit of A.

    • A will therefore sue C if B goes insolvent and C fails to perform. C will suffer double loss: won’t get paid by B, and will get sued for non-performance by A.

      • Means that a wise draftsperson will just expressly stipulate that a term does not confer a benefit on anyone except the contracting parties to avoid this risk.

What about negative rights (e.g. exclusion/limitation clauses)?

• These are covered by s.1(6)

  • Expressly states that X can use Act to avail himself of use of exclusion/limitation clauses

    • Burrows: would normally fall within first test, but would otherwise fall within second

      • E.g. New Zealand Shipping Co v Satterthwaite [1975]:

        • As long as third parties expressly identified in contract

        • Then would simply fall within s.1(6) and s.1 generally.

          • And they’d get a benefit of the exclusion clause in head contract.

  • But Andrews: Under s.3, C can only challenge exclusion clauses that exclude injury/death by negligence

    • Even if B could challenge under UCTA and UTCCR – this same protection does not apply to C even if it applies to B.

Variations in the contract

• S.2(1)Where a third party has a right under s.1

  • The parties to the contract may not, by agreement,

    • rescind/vary contract so as to extinguish or alter his entitlement under that right, without his consent, if—

      • (a) the third party has communicated his assent to the term to the promisor,

        • S.2(2)(a) either by words or conduct

        • S.2(2)(b) or if by post, only when received by promisor.

      • (b) the promisor is aware that the third party has relied on the term, or

      • (c) promisee has relied on term and the promisor can reasonably be expected to have foreseen that this reliance would occur.

  • Andrews: Where vitiating factor on party to contract

    • Party to contract will be allowed to validly set aside or rescind a contract w/o needing consent even though this will prejudice a third party’s right/reliance

      • B/c B is not rescinding the contract by agreement with A – it is B merely taking unilateral advantage of his right to rescind

    • But parties won’t be able to release each other from contract obligations

      • Even for free

        • Cos this’ll involve the creation of deed for release which requires agreement.

• S.2(3) This is subject to any express terms in the contract that contradict these provisions.

  • How about where B retains the right in the contract to alter the beneficiaries of A’s obligations?

    • Trietel: C’s rights are not varied when B nominates D instead of C

      • The process involves a redirection of the target of A’s promise, and the contracts terms themselves remain unchanged

        • Thus s.2(1) doesn’t clog it cos C can only have had an expectation that his right was provisional and revocable

        • This is supported by the construction clause of s.1(4)

• Dispensing with consent

  • Court can dispense with consent if

    • S.2(4)(a) Third party’s consent cannot be obtained because his whereabouts cannot reasonably be ascertained

    • S.2(4)(b) Third party is mentally incapable of giving his consent.

    • S.2(5) Or if court satisfied that reliance of third party cannot be reasonably ascertained.

      • S.2(6) If the court does this, it may then impose conditions or require third party compensation by parties to...