WHEN DO THIRD PARTY RIGHTS ARISE UNDER THE CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999 (UK)?

• Author: YEO TIONG MIN
• Date: 01 December 2001
• Published date: 01 December 2001

I. Introduction

There are two aspects to the common law doctrine of privity of contract. The first, that a contract cannot impose liabilities on a third party, is not very controversial. The second, that in general a contract can only confer rights on parties to the contract even if it is clearly the intention of the contracting parties to benefit a third party,1 is highly controversial, and has been the subject of much judicial criticism.2 The problems caused by the doctrine of privity of contract and judicial techniques to circumvent it are well documented in contract textbooks.3 There are three main techniques: One relies on actions by the third party on the promise itself by way of assignment, agency or trust; another depends on rights arising apart from the contract itself;4 and the third hinges on actions by the promisee to enforce the promise, or to recover damages for its breach, for the benefit of the third party.

Common law countries have been very slow to create any direct exceptions to the privity doctrine. The only notable judicial developments have occurred in Australia and Canada. The Australian High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd5 has allowed a third party to enforce a term in a contract, but in a situation where the third party would have been able to do so under legislation but for the fact that the relevant events occurred before the law took effect. It has not made any visible impact on Australian law since. The Canadian Supreme Court has allowed a third party to rely on an exclusion clause in London Drugs Ltd v Kuehne & Nagel International Ltd.6 The exception has since been extended to allow a third party to enforce a waiver of subrogation clause term in an insurance contract.7

The most forceful argument in favour of a direct right of enforcement of third party rights is respect for the autonomy of the contracting parties.8 This was adopted as the primary basis for the reform of English law by the Law Commission for England and Wales in its report on Privity of Contract: Contracts for the Benefit of Third Parties.9 Subsequently, the Contracts (Rights of Third Parties) Act 1999, c 31,10 was enacted for England and Wales11 by the United Kingdom Parliament, following substantially the recommendations of the Law Commission. While it left untouched the regime of liabilities imposed on third parties,12 it opened up a whole new legal regime for third parties to enforce contracts directly, where the conditions of the legislation are satisfied. It has potentially wide-ranging effects on many typical contracts that affect third parties, including construction contracts, distribution contracts, and software licences.

The legislation has no direct relevance to Singapore law, which still follows the common law doctrine.13 However, it is indirectly relevant to Singapore in three ways. First, many international contracts are governed by English law, and the modified privity doctrine is now part of domestic English contract law.14 Secondly, in view of the fact that several other significant common law jurisdictions have already made legislative reforms of the common law privity doctrine,15 the English model is one possible model for Singapore to follow if it is considering reform in this area. It provides an interesting study of how the problem of privity can be approached, and how realistically it can be expected to solve the various problems

raised by the privity doctrine. Thirdly, the extent to which the statutory reform may affect common law developments related to the privity doctrine is of relevance to Singapore, because the English common law is still at least highly persuasive in Singapore.

II. The Contracts (Rights of Third Parties) Act

The purpose of the Contracts (Rights of Third Parties) Act was not to abrogate the doctrine of privity.16 Nor was it intended to affect the various techniques which the common law has devised around it.17 It was not intended to alter the rule that a contract cannot impose obligations on third parties. What it did was to create a broad statutory exception to the doctrine of privity, allowing the parties to a contract, in specified circumstances, to confer enforceable rights on a third party.

The key to the reform lies in the first three sub-paragraphs of section 1 of the Act. The rest of the statute contains provisions on the conditions of enforcement, variation and cancellation, and the circumstances under which relevant defences, set-off and counterclaims may be available to the promisor against the third party. The key provisions identify the circumstances in which the third party has the legal right to sue the promisor. It is the key that unlocks the rest of the provisions of the Act. If that threshold is not crossed, the entire Act is inapplicable. The key provisions of section 1 are set out below.

Right of third party to enforce contractual term.	1.— (1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if-
		(a) the contract expressly provides that he may, or
		(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

To summarise the effect of the above provisions, a third party may enforce a term in the contract, subject to further limitations and restrictions elsewhere in the statute, when two conditions are satisfied: (1) there must be sufficient identification of the third party in the contract; and (2) there must be contractual intention that the third party has the legal right to enforce the specific term. More specifically, third party rights arise where:

(1) the third party is expressly identified in the contract in one of three ways:

1. (a) by name; or

2. (b) as a member of a class; or

3. (c) as answering a particular description;

and

(2) either

1. (a) the contract expressly provides that the third party may sue on the term; or

2. (b) the term purports to confer a benefit on the third party, unless on a proper construction of the contract the parties did not intend the third party to be able to sue.

This is the gateway to the enforcement of third party rights, and will likely be the legal battleground during the early stages of the implementation of the legislation. This article focuses on issues of interpretation and application of these key provisions. For brevity, unless otherwise indicated, the promisor, promisee and the putative third party will be referred to as A, B and C respectively when discussing scenarios.

III. Express identification of the third party

A. “expressly”

The requirement for the express identification appears straightforward. Section 1(3) requires the third party beneficiary to be “expressly

identified”. This rules out an implied term identifying the third party who is to enforce the contract. In this respect, the legislative reform is more restrictive than the exception to privity created by the Canadian Supreme Court, where identification of third parties by implication is permissible.18 However, the English position is not as restrictive as it might at first sight appear. An express term does not have to be written down in an agreement. An express term may appear in a collateral contract, or the oral portion of a partly oral and partly written contract, or, if it was inadvertently left out of a written contract, it could be read in by construction or written into the contract by way of rectification.19

B. “identified” by “name”, “class”, or “description”

Section 1(3) requires the third party to be identified by name, class or description. The third party may not exist at the time of the contract. So, eg, children unborn at the time of contracting may be future beneficiaries of the contract.

One potential problem is the certainty of identification of the third party beneficiaries. Where the third parties are identified by name, difficulties are unlikely to arise. However, if, as is more likely to be the case, the third parties are identified by class or description, there may be difficulties in the level of certainty that is required of the term identifying them. The problem is less likely to arise in commercial contracts where third parties tend to be identified by a legal nexus (eg, employees, sub-contractors, sub-purchasers). The problem is more likely to arise in noncommercial contexts (eg, A promises B to pay B’s “relatives”). In principle, the normal rules of certainty of contractual terms should apply. The terms must be sufficiently certain at the time of contracting, but this does not necessarily mean that the identity of the third party must be ascertainable with certainty at the time of contracting. The right conferred on the third party is inextricably linked to the identity of the third party. But the right does not have to accrue at the time of contracting. What is required is that at the time the right to enforce the contract is alleged to

have accrued, the third party must be ascertainable with certainty.20 How much certainty is required?21 The answer is likely to depend on the nature of the promisor’s obligation. In most cases the only relevant consideration is whether, at the time the right of enforcement accrues, the third party is within the defined class or not. However, if the promisor’s contractual obligation is to pay a fixed sum of money equally divided among members of a class of beneficiaries, then the definition of the class may need to be conceptually clear enough for a complete...