Rights of Third Parties
Traditionally, the doctrine of privity of contract limited the rights and obligations under a contract to the parties involved in the agreement. However, there are circumstances where third parties, who are not directly involved in the contract, may acquire rights under it. These rights can arise through legislative exceptions, specific contractual provisions, or legal principles that recognize the interests of third parties.
Contracts (Rights of Third Parties) Act 1999
The Contracts (Rights of Third Parties) Act 1999 is a key piece of legislation in the UK that allows third parties to enforce contractual terms under certain conditions. This Act provides a significant exception to the privity of contract doctrine. Key provisions include:
- ★ Express Identification: A third party can enforce a contract term if the contract expressly states that they can do so. The third party must be explicitly identified by name, as a member of a class, or by a particular description.
- ★ Conferral of Benefit: Even if not expressly mentioned, a third party can enforce a term if the contract purports to confer a benefit on them, unless it appears that the parties did not intend the term to be enforceable by the third party.
- ★ Exclusions and Limitations: The parties to the contract can exclude or limit the application of the Act, thus preventing third parties from enforcing terms.
- ★ Defenses and Variation: The third party's rights are subject to any defenses and limits that the contracting parties have against each other. Additionally, the contracting parties can vary or rescind the contract in a way that affects the third party's rights, provided the third party has not relied on the contract or agreed to the variation or rescission.
Common Law Exceptions
Even before the 1999 Act, common law recognized certain exceptions to the privity rule, allowing third parties to acquire rights under specific circumstances:
- ★ Agency: An agent acting within the scope of their authority can bind the principal, who is then entitled to enforce the contract, even if they are not a direct party to it.
- ★ Trusts: If a contract establishes a trust, the beneficiaries of the trust, though not parties to the contract, can enforce their rights under the trust.
- ★ Collateral Contracts: In some cases, a third party may be able to enforce a collateral contract that exists alongside the main contract, particularly when the collateral contract involves a promise to benefit the third party.
Assignment of Rights
Parties to a contract may transfer (assign) their rights under the contract to third parties, who then acquire the ability to enforce those rights:
- ★ Assignability: Most contractual rights can be assigned unless the contract expressly prohibits assignment or if the nature of the rights makes them personal to the original party.
- ★ Notice of Assignment: For the assignment to be effective, notice of the assignment must be given to the obligor (the party required to perform under the contract).
- ★ Limitations: While rights can be assigned, obligations typically cannot be transferred to a third party without the consent of the other contracting party, as this would fundamentally alter the original agreement.
Examples
Example 1 - Rights Under the Contracts (Rights of Third Parties) Act 1999
Scenario:
A company contracts with a software developer to create a custom program. The contract specifies that the program will include features beneficial to a subsidiary of the company, expressly allowing the subsidiary to enforce the contract terms regarding those features. Under the Act, the subsidiary can enforce these terms even though it is not a party to the contract.
Example 2 - Agency and Third Party Rights
Scenario:
An estate agent (acting as an agent) signs a lease agreement on behalf of a landlord. The tenant can enforce the terms of the lease against the landlord, who is the principal, despite the landlord not being a direct signatory to the lease agreement.
Conclusion
The rights of third parties in contract law have evolved significantly, particularly with the introduction of the Contracts (Rights of Third Parties) Act 1999. This legislation and other common law exceptions provide third parties with the ability to enforce contract terms under specific conditions. Understanding these rights is crucial for both contract drafters and third parties, ensuring that contracts can effectively confer benefits and obligations beyond the immediate parties involved.