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Session 1998-99
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Standing Committee Debates
Second Reading Committee Debates

Contracts (Rights of Third Parties) Bill [Lords]

Second Reading Committee

Tuesday 29 June 1999

[Mr. Jim Cunningham in the Chair]

Contracts (Rights of Third Parties) Bill [Lords]

10.30 am

The Parliamentary Secretary, Lord Chancellor's Department (Mr Keith Vaz): I beg to move,

    That the Chairman do now report to the House that the Committee recommends that the Contracts (Rights of Third Parties) Bill [Lords] ought to be read a Second time.

I warmly welcome you to the Chair, Mr. Cunningham. I am pleased to introduce this short Bill, which gives effect to Law Commission recommendations for law reform. The Bill, which met with general support in another place, implements recommendations from Law Commission report No. 242, "Privity of Contract: Contracts for the Benefit of Third Parties", which was published in July 1996. I thank the Law Commission for its excellent and valuable work on modernising and reforming the law, of which the Bill is a good example.

The effect of the common law doctrine of privity of contract is that a contract cannot usually confer rights or impose obligations on any person except the parties to it. As lawyers on the Committee will know, that is a fundamental principle of common law. A third party cannot enforce rights under a contract, even when it is obvious that it is to confer a benefit on him.

There has been widespread criticism of that non-recognition of third-party rights among judges, academics and law reform bodies. In the view of the Law Commission, no other rule of English contract law has been subject to so much criticism by senior judges. More than 30 years ago, Lord Reid called for the rule to be reconsidered, and Lord Scarman did the same in 1980. In 1995, Lord Steyn said:

    "the case for recognising a contract for the benefit of a third party is simple and straightforward. The autonomy of the will of the parties should be respected. The law of contract should give effect to the reasonable expectations of contracting parties . . . there is no doctrinal, logical or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties".

There are several statutory exemptions to the rule, and the courts have occasionally found ways round it, although they were elaborate and artificial. I am sure that the Committee will agree that the present situation is most unsatisfactory.

The Bill makes the necessary reform. It provides that a third party will have a right to enforce a term of a contract when the contract expressly provides that he should have that right. He will also be able to enforce a term that purports to confer a benefit on him where there is no such express provision, unless it is clear from the construction of the contract that the contracting parties did not intend him to have a right of enforcement. Once a third party has a right to enforce a term, there will be limitations on the extent to which the contracting parties may modify their contract without his consent.

I stress that contracting parties will not be obliged to give enforceable rights to a third party on whom a benefit is to be conferred; it is for them to decide whether to do so. If it is apparent from the contract that they did not intend to do that, the third party will still be unable to enforce the term.

I also stress that the Bill does not change that part of the rule under which a burden cannot be imposed on a third party without his consent. It is clearly right that that principle should remain. The Bill deals solely with benefits that are conferred on third parties.

Until now, English law has been in the minority in maintaining the rule. The Bill will bring English law into line with the law in Scotland, in most member states of the European Union and in much of the common-law world, including the United States of America. The harmonisation of the aspect of the law before us--particularly in the commercial field--can be nothing but beneficial to the interests of the business community.

In accordance with its usual practice, the Law Commission produced with its report a draft Bill to give effect to its recommendations. Further consideration after the report and draft Bill were published led to a number of improvements being made before the Bill was introduced in another place, and others were made during its passage through that place. I am grateful to the Law Commission for its continuing assistance in making those improvements possible. None of the changes affect the basic principles of the law, which I outlined earlier.

A full explanation of the current law and proposed changes to it can be found in the Law Commission report. In addition, the Bill is accompanied by the new-style explanatory notes, which have been prepared to assist readers of the Bill and to help to inform debate on it. Before turning to the detailed provisions of the Bill, I should mention that it has been modified throughout to reflect the fact that a third party's interest may be limited to particular terms of the contract, rather than applying to the contract as a whole.

Clause 1 is the central provision of the Bill. It sets out the circumstances in which a third party may have the right to enforce a term of a contract. As I have said, he or she will have that night if the contract contains an express term to that effect. A third party may also have the right where there is a contractual term purporting to confer a benefit on him or her, unless the contract shows that that was not the intention of the contracting parties. In order to acquire the right, the third party must be expressly identified in the contract. He or she need not be identified by name, so long as he or she is identified as a member of a class, or answers a particular description. The remedies available to a third party will be the same as those available to a party to a contract bringing an action for its breach.

It is open to the parties to make the third party's rights subject to conditions or limitations. They may agree, for example, that if the third party wishes to enforce his right, he must do so by arbitration. Clause 1(4) accordingly provides that the third party's right to enforce a contractual term is subject to any other relevant term in the contract.

Clause 1 also defines "the promisor" and "the promisee"--terms which are used throughout the Bill. The promisor is the party against whom the contractual term is enforceable by the third party, and the promisee is the contracting party by whom the term is enforceable against the promisor.

Clause 2 restricts the way in which the contracting parties can rescind or vary the third party's entitlement under the contract without his consent, once the third party has the right to enforce a term.

Clause 3 deals with the defences, set-offs and counter-claims that are available when the third party seeks to enforce a term of the contract. Clause 4 provides that the Bill will not affect the rights of the promisee to the contract to enforce a term of the contract. Clause 5 prevents the promisor from exposure to double liability to both the promisee and the third party.

Clause 6 provides that the new rule in clause 1 will not apply to various types of contract for which other legislation already deals with the issue of third party rights. It is in clause 6 that the Bill differs most from the draft Bill attached to the Law Commission report. More kinds of contract are now excluded from the rules in clause 1. Clause 6 now makes it clear that a third party, such as a customer of an employer, does not have the right to enforce a contract of employment against an employee. The Bill is not intended to affect employment laws and the right of workers to take lawful industrial action. Another type of contract excluded in clause 6 from benefiting from the Bill's provisions is one on a bill of exchange, promissory note or other negotiable instrument.

Clause 7 ensures that a third party preserves any rights or remedies that may be available to him or her at common law or by statute apart from the Bill. It also provides that if a third party exercises his right to refer a matter to arbitration, part I of the Arbitration Act 1996 then applies as if the reference were under a written arbitration agreement with the promisor. Finally, clause 8 provides that the Bill will come into force on Royal Assent.

I apologise for detaining the Committee with what sounds like a law lecture so early on a Tuesday morning, but the Bill is a useful law reform measure that will enable parties to contracts to make agreements in accordance with their wishes, and will benefit third parties. It has been widely welcomed, not only in the other place but by the judiciary, who for the past 30 years have urged Parliament to act. Parliament is now acting.

10.39 am

Mr. Nick Hawkins (Surrey Heath): I join the Minister in warmly welcoming you to the Chair, Mr. Cunningham, and in thanking the Law Commission for once again producing an extremely thorough report that recommended the changes before us.

As my noble and learned Friend Lord Kingsland said in another place, the Opposition welcome the Bill. I should like to refer briefly to one or two aspects, but the Minister--in what he called a bit of a law lecture--set out the history and context very well.

Mr. John M. Taylor (Solihull): I should like to relieve the Minister of any charge of having given a law lecture. Moreover, it is refreshing to hear from a Minister who can distinguish Parliament from the Government. He said that Parliament, rather than the Government, was now acting. How very refreshing to hear that from the Minister, who clearly realises that the Government are subordinate to Parliament.

Mr. Hawkins: As usual, I am delighted to have given way to my hon. Friend, who put his skilful and well observed point with great charm and courtesy, as he always does. No doubt the Minister will respond equally courteously in due course.

As the Minister said, in the case of Beswick v. Beswick in 1967, Lord Reid expressed concerns about the way in which the existing rule, in place since the case of Tweddle v. Atkinson in 1861, was operating. He firmly asserted the need for change. I should like also to mention the late great Lord Denning, who did a great deal to highlight the way in which the inadequacies in Tweddle v. Atkinson had been operating throughout the 1940s and 1950s. Other Law Lords have used what Lord Kingsland has described as "jurisprudentially ingenious" techniques to try to bring about justice while circumventing the rule as it was operating.

It is the role of Parliament to seek to provide laws that remove the necessity for any jurisprudential ingenuity and make contracting parties certain of the position. Having paid tribute to Lord Denning, I should also mention that other distinguished judges have played a large part in seeking to advance the need for the changes before us, the most recent being Lord Goff, who did so in 1995. Academic commentators have also had a significant role.

The Minister rightly mentioned that the rule brought to bear in the case of in Tweddle v. Atkinson had been the subject of a great deal of academic criticism. When I knew that the measure was to be debated, I took an opportunity available to many of us who study law, and contacted someone who taught me the law of contract many years ago. I cannot claim to have been the best student of contract law that there has ever been, but I had the great good fortune that my original tutor in contract law is still very active. His name is Professor Michael Furmston, who now teaches in the university of Bristol, but who taught me at Oxford. He is the distinguished co-author of "Cheshire, Fifoot and Furmston on Contract".

I thought that there could be no one better to instruct me--as he used to instruct me years ago--on the subtleties of the Law Commission report. I had only a brief conversation with Professor Furmston, as he was about to fulfil other commitments, including teaching at the university of Singapore for three months this summer. He told me that the subject before us had been looming large in his thoughts, as he is currently the rapporteur of the privity of contract group in a fascinating organisation called UNIDROIT. The Minister may have come across UNIDROIT, which is an international, worldwide organisation seeking to establish a common code for commercial contracts the world over. That task is as valuable as a great deal of the work done by the Law Commission. He confirmed to me 7 8 [Mr. Hawkins]

that as long ago as 1958, when he was a young academic, he wrote an article criticising the way in which the rule operated in Tweddle v. Atkinson. He is delighted that the Law Commission's proposal has been brought forward, as is the entire legal profession, especially the judiciary.

Although I have given that paean of praise and said that the official Opposition welcome the measure, a number of concerns have been expressed about it by the construction industry. Lord Howie of Troon tabled probing amendments dealing with some of those concerns in another place, and I should like to raise the subject now for two reasons. First, it is important that the construction industry, which is a crucial British worldwide success story, should have its worries discussed in the Committee. Secondly, even a Bill that has been recommended by the Law Commission should receive scrutiny under this new Second Reading Committee procedure.

The Committee should be aware at the outset that although I have no current interest to declare, for a couple of years before the 1997 general election I was the Parliamentary consultant to the Building Employers Confederation. One of the reasons why I held that post was that I had done quite a bit of work, while practising at the Bar and as an in-house corporate counsel, for the construction industry. I was therefore aware of the concerns that Lord Howie, who has an even longer and closer connection with the construction industry, raised.

In the debate in another place, Lord Howie said that the Bill might not take full account of the nature of contracts in the construction industry. He pointed out that--as the Minister said, and the helpful explanatory notes make clear--the Law Commission's proposals incorporated in the Bill

    "take account mainly of arrangements involving one promisee and one promisor with roughly equal strength"

--that is, equal bargaining power in the sphere of commercial contracts--

    "and a reasonably well-defined pattern of third parties."

He went on to say

    "The construction industry is not like that."

--[Official Report, House of Lords, 2 February 1999; Vol. 596, c. 1423.]

Lord Howie cited the examples of the building of a power station and the construction of the channel tunnel, pointing out that projects of that nature involve a network of contracts. Anyone who has dealt with the construction industry will know that. The project never appears in just one complete contract; there is a series of parts. The main contractor on one part of the work may have a subcontractor, while on another part of the work that subcontractor may be a main contractor. The first main contractor could then become a subcontractor on that part of the contract. The construction industry depends on a whole body of specialist subcontractors, any of which could be main contractors for one part of a huge project, or subcontractors or third parties.

Concerns undoubtedly exist in the construction industry. When I discussed the matter with Professor Furmston, he felt, as an experienced academic, that many of the problems could be dealt with by careful drafting. Itis important to emphasise the care in drafting that all parties to future construction contracts will have to take after the Bill is enacted. If that is not highlighted in Parliament, there is a danger that those who draft such contracts will not take the necessary care.

Lord Howie referred to the fact that pieces of construction work are imprecise. I was fascinated to see that he chose the Jubilee line as an example, and said:

    "We all know that the Jubilee Line may or may not be finished in time for the millennium."

He went so far as to say that the line

    "will probably not be finished".

I am sure that the Minister will not agree with that opinion.

It is interesting to hear that comment from someone so knowledgeable about the construction industry, given the problems with London Transport and on the London underground at the moment. I know that you will pull me up if I go too wide of the subject, Mr. Cunningham, but I am referring to the legitimate concerns raised by Lord Howie about the Bill in another place. He mentioned

    "factors such as inclement weather, the fact that foundation conditions might be different or floods might occur. There might be union strikes, as was the case in the old days."

The militancy that still exists within London Underground is undoubtedly a concern to anyone worried about construction contracts on the Jubilee line.

In relation to the Bill, Lord Howie continued:

    "There are all kinds of factors which impinge on a contract"--

including those that I quoted him as having mentioned--

    "and make the contract liable to change during its period. That change impinges on third parties."--[Official Report, House of Lords, 2 February 1999; Vol. 596, c. 1424.]

There are concerns about the Bill, and a belief is held by many people in the construction industry that the academic nature of the proposed reform might mean that parts of it might not work especially well in the context of the construction industry. Lord Howie produced only probing amendments; in the end, he was reassured by the Lord Chancellor in another place about the way in which contracts could be drafted in the light of the legislation. I hope that the Minister will be aware that we may need to return to the concerns of the construction industry when we come to consider the Bill on Report and on Third Reading.

I want to mention one other matter in my opening remarks, namely my fascination regarding a 1995 case in the Court of Appeal that was one of the most important factors leading to the Law Commission report. That was the case of Darlington borough council v. Wiltshier Northern Ltd. The Minister referred in his opening remarks to the comments of Lord Justice Steyn, with which the Law Commission commenced the report that led to a draft Bill. That case is fascinating because it arose from an attempt by the parties to bypass the strict financial constraints that the then Government had imposed on local authorities to stop them spending money when they had substantial debts. The local authority had used a finance house--Morgan Grenfell--for that purpose. 9 10

I could not help observing with wry amusement that such a case, political in its origins and arising most recently from that attempt by the previous Government, had led to what might, at first sight be regarded as a precise and academic piece of Law Commission redrafting. The Minister might recognise some of the ironies of that situation. We are talking as if the matter were simply a precise and legalistic law lecture, but it had its origins in a political issue.

Having said that, I wish to echo what my noble and learned Friend Lord Kingsland said in another place. The Opposition welcome the Bill, especially the Government amendments made in another place to take account of the concerns raised by Lord Borrie and others. Lord Borrie talked about his work in the Consumers Association and about the effect of the Unfair Contract Terms Act 1977 and how it would apply. I hope that the Minister will not be adverse to considering the concerns of the construction industry, and conceding that further amendments might have to be made at a later stage.

10.53 am


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