House of Lords

Session 1998-99 Publications on the internet Other Bills before Parliament Arrangement of Clauses (Contents)

Contracts (Rights Of Third Parties) Bill [H.L.]

These notes refer to the Contracts (Rights of Third Parties) Bill [H.L.] as introduced in the House of Lords on 3rd December 1998 [HL Bill 5] Contracts (Rights Of Third Parties) Bill [H.L.] EXPLANATORY NOTES INTRODUCTION 1.     These explanatory notes relate to the Contracts (Rights of Third Parties) Bill [H.L.] as introduced in the House of Lords on 3rd December 1998. They have been prepared by the Lord Chancellor's Department in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given. SUMMARY 3.     The Bill reforms the rule of "privity of contract" under which a person can only enforce a contract if he is a party to it. The rule means that, even if a contract is made with the purpose of conferring a benefit on someone who is not a party to it, that person ("third party") has no right to sue for breach of contract. 4.     The Bill provides for circumstances in which a third party is to have a right to enforce a term of the contract, i.e. where the contract expressly provides that he should have that right or where the term purports to confer a benefit on him and he is expressly identified. In the case where the term purports to confer a benefit on him, the third party has no such right if this is excluded by, or is otherwise inconsistent with, the contract (clause 1(1) to (3)). 5.     Once a third party has the right under the Bill to enforce a term of a contract, the Bill provides that there are circumstances in which the parties to the contract may only cancel it, or vary it in a way which affects the third party's entitlement, if he consents. However, this provision is subject to the express terms of the contract. The Bill also makes provision for the court to have limited power to dispense with the need for the third party's consent (clause 2). 6.     The Bill makes provision about the circumstances in which defences, set-offs and counterclaims can be raised in proceedings brought by a person with a right conferred by the Bill (clause 3). 7.     The right conferred by the Bill is additional to any right the contracting party ("the promisee") has in relation to the enforcement of a contract term which benefits a third party (clause 4). The Bill makes provision to avoid the potential for double liability created by the fact that a party to a contract may be liable to the third party as well as to the promisee in respect of the same promise (clause 5). 8.     The Bill does not apply to certain contracts (whether wholly or partially) (clause 6). BACKGROUND 9.      The Bill implements, with some amendments, the recommendations of the Law Commission in its Report on Privity of Contract: Contracts for the Benefit of Third Parties, Law Com No 242 (1996). COMMENTARY Clause 1: Right of third party to enforce contractual term Subsection (3) requires that the third party be expressly identified in the contract by name, class or description, but establishes that the third party need not be in existence when the contract is made. This allows contracting parties to confer enforceable rights on, for example, an unborn child or a future spouse or a company that has not yet been incorporated. Subsection (4) clarifies subsection (1). The term being enforced should not be construed in isolation from the rest of the contract. Subsection (5) makes it clear that all the remedies which are available to a person bringing an action for breach of contract are available to a third party seeking to enforce his rights under subsection (1). The normal rules of law applicable to those remedies, such as the duty to mitigate one's loss, apply by analogy to the third party's action. Subsection (6) makes it clear that the Bill is to apply so as to enable a third party to take advantage of an exclusion or limitation clause, as well as to enforce "positive" rights. Clause 3: Defences etc. available to promisor Subsection (2) can be illustrated as follows- (I) a third party can no more enforce a void, discharged or unenforceable contract than a promisee could; (II) P1 (the promisor) and P2 (the promisee) contract that P2 will sell goods to P1, who will pay the contract price to P3 (the third party). In breach of contract, P2 delivers goods that are not of the standard contracted for. In an action for the price by P3 (just as in an action for the price by P2) P1 is entitled to reduce or extinguish the price by reason of the damages for breach of contract. Subsection (3) can be illustrated as follows- P1 and P2 contract that P1 will pay P3 if P2 transfers his car to P1. P2 owes P1 money under a wholly unrelated contract. P1 and P2 agree to an express term in the contract which provides that P1 can raise against a claim by P3 any matter which would have given P1 a defence or set-off to a claim by P2. Subsection (4) makes it clear that the promisor also has available any defence or set-off, and any counterclaim not arising from the contract, which is specific to the third party. It can be illustrated as follows. (I) P1 contracts with P2 to pay P3 £1000. P3 already owes P1 £600. P1 has a set-off to P3's claim so that P1 is only bound to pay P3 £400. (II) P3 induced P1 to enter into the contract with P2 by misrepresentation, but P2 has no actual or constructive notice of that misrepresentation. P1 may have a defence (or a counterclaim for damages) against P3 which would not have been available had the action been brought by P2. Subsection (5) makes subsections (2) and (4) subject to any express term of the contract which narrows the defences or set-offs available under clause 3(2) or narrows the defences, set-offs or counterclaims available under clause 3(4). For example- (I) in relation to subsection (2), P2 agrees with P1 to purchase a painting, the painting to be delivered to P3, who is expressly given a right to enforce the delivery obligation. P2 owes P1 considerable sums for other art works purchased. P2 wishes to ensure that P3's right is not affected. P1 and P2 expressly agree that P1 may not raise against P3 defences and set-offs that would have been available to P1 in an action by P2. (II) in relation to subsection (4), P1 agrees with P2 to pay £5000 to P3 if P2 will transfer a number of cases of wine to P1. P3 is in dispute with P1 over a prior contract and P1 alleges that P3 owes P1 money. P2 is concerned that P1 may seek to withhold part of the £5000 payable to P3 by raising a set-off or counterclaim against P3 in relation to the prior contract. Consequently P1 and P2 include an express term that P1 may raise no defences, set-offs or counterclaims of any nature whatever against a claim by P3 to enforce P1's obligation to pay the £5000. Subsection (6) ensures that an analogous approach to that set out in subsections (2) to (5) applies where the proceedings are brought against the third party and he seeks to avail himself of, for example, an exclusion clause. Clause 6: Exceptions Subsection (2) excepts the contract under section 14(1) of the Companies Act 1985 which states- "Subject to the provisions of this Act, the memorandum and articles, when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles". Subsection (3), which prevents a third party (for example, a customer of an employer) acquiring a right under the Bill to enforce a term of a contract of employment, or similar contract, against an employee or worker uses various expressions which are defined in the National Minimum Wage Act 1998 or are defined by reference to that Act. The definitions, which are referred to in subsection (4), are as follows. (I) By section 54- "contract of employment" means a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing; "employee" means an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment; "worker" (except in the phrase "agency worker" or "home worker") means an individual who has entered into or works under (or, where the employment has ceased, worked under)- (a) a contract of employment, or (b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual; "worker's contract" is to be read in accordance with the definition of a worker. (II) By section 35(2)- an individual is a "home worker" if he contracts with a person for the purpose of that person's business, for the execution of work to be done in a place not under the control or management of that person. (III) By section 34(1)- an individual is an "agency worker" if he-      (a) is supplied by a person ("the agent") to do work for another ("the principal") under a contract or other arrangements made between the agent and the principal; but      (b) is not, as respects that work, a worker, because of the absence of a worker's contract between the person and the agent or the principal; and      (c) is not a party to a contract under which he undertakes to do the work for another party to the contract whose status is, by virtue of the contract, that of a client or customer of any profession or business undertaking carried on by the individual. (IV) As to the definition of "relevant contract", the reference to the case where section 34 applies is to the circumstances in which, under subsection (1) of that section, an individual is an agency worker. The work falling within paragraph (a) of that subsection is the work which the agency worker is supplied to do for the principal. Subsection (5), which excludes certain contracts relating to the carriage of goods, nevertheless does not prevent a third party from taking advantage of a term excluding or limiting liability. In particular, this enables clauses which seek to extend an exclusion or limitation of liability of a carrier of goods by sea to servants, agents and independent contractors engaged in the loading and unloading process, to be enforced by those servants, agents or independent contractors (so called "Himalaya" clauses). Subsections (6) and (7) set out the definition of a "contract for the carriage of goods by sea". It is intended to exclude from the Bill not only those contracts already covered by the Carriage of Goods by Sea Act 1992 but also those to which the 1992 Act could be applied by virtue of regulations made under section 1(5) of that Act (eg a contract for the carriage of goods by sea evidenced by an electronic bill of lading). Section 1(5) of the 1992 Act states- "The Secretary of State may by regulations make provision for the application of this Act to cases where a telecommunication system or any other information technology is used for effecting transactions corresponding to -      (a) the issue of a document to which this Act applies;      (b) the indorsement, delivery or other transfer of such a document; or      (c) the doing of anything else in relation to such a document." No such regulations have yet been made. Clause 7: Supplementary provisions relating to third party Subsection (2) prevents a third party from invoking section 2(2) of the Unfair Contract Terms Act 1977 to contest the validity of a term excluding or limiting the promisor's liability under the Bill to the third party for negligently caused loss or damage (other than personal injury or death). Section 2(2) of the 1977 Act (in which "other loss or damage" means loss or damage other than death or personal injury), states- "In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness". Subsection (3), which applies the standard limitation periods for actions for breach of contract to actions by third parties under the Bill, refers to sections 5 and 8(1) of the Limitation Act 1980. Section 5 states- "An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued". Section 8(1) states- "An action upon a speciality shall not be brought after the expiration of twelve years from the date on which the cause of action accrued". Subsection (4) ensures that those references in the Bill to the position "if the third party had been a party to the contract" are not to be interpreted as meaning that the third party should be treated as a party to the contract for the purposes of any other enactment. One example is section 3 of the Unfair Contract Terms Act 1977 which applies "as between contracting parties where one of them deals as a consumer or on the other's written standard terms of business". Subsection (4) makes it clear that that section does not apply to claims under the Bill. FINANCIAL EFFECTS OF THE BILL None is expected. EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER None is expected. SUMMARY OF THE REGULATORY APPRAISAL A Regulatory Impact Assessment is not necessary for the Bill. The conclusion from a draft assessment was that the legislation will have a negligible impact on business, charities and voluntary bodies. COMMENCEMENT The Bill is to come into force at the end of the period of six months which begins on the day on which the Bill is passed (ie receives Royal Assent). The Bill does not apply to contracts entered into before the end of that six month period. EUROPEAN CONVENTION ON HUMAN RIGHTS Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of that Act). The statement has to be made before second reading. On 2nd December 1998 the Lord Chancellor made the following statement: In my view the provisions of the Contracts (Rights of Third Parties) Bill are compatible with the Convention rights.