Singapore: The Contracts (Rights Of Third Parties) Bill 2001 Introduced In Parliament

Introduction

The United Kingdom (the ‘UK’), on 11 November 1999, introduced the UK Contracts (Rights of Third Parties) Act 1999 (the ‘UK Act’). The UK Act implements recommendations of the English Law Commission Report on Privity Of Contract: Contracts For The Benefit Of Third Parties (the ‘Law Commission Report’), which recognised the need for reform to enable third parties to enforce contracts.

The Contracts (Rights of Third Parties) Bill 2001 (the ‘Bill’) was introduced in Parliament on 25 September 2001. The Bill is in identical terms to the UK Act.

This Update begins by quickly explaining the doctrine of privity of contract. It then explores the changes to be introduced by the Bill and possible implications thereof.

The doctrine of privity of contract stands for the proposition that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person (the ‘third party’) except the parties to it. This is true even if the contract attempts to confer benefits onto the third party.

The rigidity of the rule has, on occasion, caused significant commercial inconvenience as many contracts contain exclusions of liabilities and indemnities in favour of third parties. These third parties have had to depend on the ability of a contracting party to obtain substantial redress on their behalf.

The doctrine has been criticised for causing injustice to third parties and not according with the intention of contracting parties. In this regard, the Law Commission Report contains a fairly thorough discussion on the injustices, and the justification for having the issue dealt with statutorily. It is, for instance, noted that because of the injustices caused to third parties, parties have had to use artificial means to get around the privity requirement. These artificial means include arguing the existence of an agency relationship, that a trust has been created, that there is a collateral contract, or that there has been an assignment or novation. This has led to some uncertainty as parties are never entirely sure of the success of their claims.

The Bill, if passed into law, will change the privity of contract rule which prevents third parties from enforcing a term of a contract, even where the contract is made for the purpose of conferring a benefit on the third party. It will have a significant impact for a wide range of contracts. Having said this, the Bill does not affect rights given to third parties otherwise than under the Bill itself. Thus, the parties to a contract can continue to use existing means to confer third party rights.

The passing of the Bill in Singapore will bring Singapore law more closely in line with the other systems of contract law, including UK, US, France, Germany and New Zealand. This is especially important in the local context as Singapore aims to be the commercial hub of the region and will thus have dealings with persons or companies worldwide. It would be advantageous in this respect to have a system of contract law which most of the commercial world is familiar with.

A third party is a person who is not a party to a contract. The Bill gives a third party a right to enforce a term of a contract if:

• the contract expressly provides that it may; or
• the term purports to confer a benefit on him, unless on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

The second limb of this test, which is in identical terms to the UK Act, can potentially create uncertainty in that a third party may claim that a contractual term ‘purports to confer a benefit’ on it in circumstances where the parties to the contract did not really intend this to be the case or did not consider the possibility that the contract might give the third party directly enforceable rights. This creates a rebuttable presumption in favour of the third party and against the promisor (ie the party to the contract against whom the term is enforceable by the third party).

In other words, once it is shown that a contractual term purports to confer a benefit on the third party, it will be for the promisor to show that it was not the parties’ intention that the term be enforceable by the third party.

A practical impact of this is that contracting parties may find themselves exposed to greater liability where such liability was not intended. This can be easily resolved by the parties to the contract ensuring, where there might be any doubt, that the contract is clear in its terms as to whether or not any terms of the contract are enforceable by third parties.

The Bill, if adopted, will apply to all contracts entered into before the end of six months from the date of the bill coming into force.

Clause 7 of the Bill spells out a number of contracts which will not attract its application. These include:

• contracts on a bill of exchange, promissory note or other negotiable instrument;
• contracts binding on a company and its members under section 39 of the Companies Act;
• contracts of employment against an employee; and
• contract for the carriage of goods, whether by sea, rail, road or air.

It should be noted that the Bill gives a third party rights to enforce a term of a contract but it does not enable the parties to an agreement to impose obligations on the third party.

A third party cannot have rights under a contract unless he is expressly identified in the contract by name, or as a member of a class, or as answering a particular description. It is not necessary for the third party to be in existence at the time the contract is entered into. The effect of this is that the contracting parties can confer enforceable rights on, for example, an unborn child or a future spouse or a company that has not been incorporated.

A critical question for the contracting parties is whether they are free to amend the contract or bring it to an end even though a third party has a right to enforce one of its terms. Clause 3 of the Bill provides that where a third party has a right to enforce a term of a contract under the proposed enactment, the parties may not, by agreement, rescind the contract or vary it in a way which would adversely affect that right, unless the consent of the third party is obtained, if:

• the third party has communicated his assent to the term to the promisor;
• the promisor is aware that the third party has relied on the term; or
• the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

Each of these instances are discussed below. Note, however, that this is subject to the express terms of the contract, which may exclude the third party's rights to veto the rescission or variation of the contract or specify other circumstances in which the third party's rights crystallise.

The effect of this Clause is generally to curb the contracting parties’ freedom of contract thereby allowing the third party some certainty in arranging his or her affairs. However, unlike the common law treatment of collateral warranties, the parties’ freedom to alter the contract is only limited to the extent that any of the three enumerated items above are satisfied, or as expressly stated in the contract.

It is clear and an accepted principle that a contract should not be varied where a third party has expressly communicated his assent to the contracting parties. This is recognised by Clause 3(1)(a) the Bill.

Assent by the third party may be conveyed by words or conduct. Where the assent is sent by post, the postal rule is modified to the extent that the assent is established only when the promisor receives the assent.

However, to the extent that the Bill requires ‘reliance’ and ‘reasonable foreseeability’ on the part of the contracting parties, there is ambiguity created.

Clause 3(1)(b) of the Bill requires the third party to have relied on the term of the contract. Reliance, in the context of the Bill, would refer to mere reliance, as opposed to detrimental reliance. Reliance serves to indicate that expectations have been engendered in the third party. It was argued in the Law Commission Report that to require the reliance to be detrimental would shift the focus away from protecting the plaintiff’s expectation interest to protecting the plaintiff’s reliance interest. The insistence that reliance be detrimental makes it very difficult, albeit not impossible, to explain why the third party is entitled to performance of the promise, or its monetary substitute in the form of expectation damages, rather than damages for reliance loss.

The ‘mere reliance’ standard is easily met. For example, parties may contract to develop a piece of land and stipulate in the contract that certain contractors are employed in the development. If any of these contractors enter into negotiations with suppliers and the contracting parties subsequently decide to alter the contract, it is obvious that the contractor has relied on the contract, even if negotiations are at a preliminary stage and the contractor has nothing to lose.

Clause 3(1)(c) of the Bill provides that no variation is possible where the promisor can reasonably be expected to foresee reliance on the part of the third party. The requirement of reasonable foreseeability also brings about much confusion on the part of the contracting parties.

Reasonable foreseeability, being a common law development, also suffers from the same ambiguity that plagues the mere reliance / detrimental reliance debate. Reasonable foreseeability has to be considered on a case-by-case basis and there are many situations in which contracting parties can be deemed to have reasonably foreseen that a third party would benefit from a term in the contract, even if the contracting parties never intended it in the first place. This extends the initial aim of the proposed enactment, which was to give effect to the intentions of the contracting parties to confer benefits on third parties.

While the Bill, if passed, will confer considerable rights on a third party, the effectiveness of these rights may in some instances be limited. We highlight some here.

Firstly, the Bill allows parties to the contract to apply to court to dispense with the third party’s consent to a rescission or variation, for instance, where they can show that the third party’s whereabouts cannot reasonably be ascertained. Although the dispensation will only be granted upon the satisfaction of inter alia the condition indicated, the issue remains that the third party may inevitably lose his rights under the contract.

Secondly, where a third party has rights to enforce a particular contractual term, he will have the same remedies that would have been available to him in an action for breach of contract as if he had been a party to the contract. Thus, the third party will be entitled to the same rights to obtain damages, an injunction or an order for specific performance as it would have had if he had been a party to the contract.

However, the proposed enactment also provides that the third party can only enforce the contract subject to and in accordance with any other relevant term of the contract. Accordingly, the contracting parties can expressly include provisions that limit and control the extent of any rights given to the third party. The necessary implication is that a well crafted agreement can end up not conferring any benefit on the third party at all.

Finally, the Bill, in its bid to protect the interests of the promisor (and rightly so), will empower the court to lower the extent of damages recoverable by the third party where it is shown that the promisee has previously recovered the sum from the promisor. The Bill does not then deal with the issue of sharing between the promisee and the third party as the need may arise. Whilst Common Law principles can to some extent deal adequately with this issue, perhaps it would be good measure to include in the enactment the precise extent of sharing.

The Bill also deals with the position where a term of the contract excludes or limits the liability of a third party. References in the Bill to a third party enforcing a term of the contract are construed as references to the third party availing himself of an exclusion or limitation Clause. Therefore, the Bill will not only give third parties rights to use contractual terms to take proceedings against a contracting party; a third party may also be able to rely on an exclusion Clause as a defence in any proceedings against him.

The Bill does not specifically state whether a third party can assign any right it has under the enactment to enforce a term of the contract. It would seem that going on Common Law principles that such a right would exists. This view is also supported by the Law Commission Report and the debates in the House of Lords when the UK Act was being passed.

Clause 9 ensures that, where appropriate, the provisions of the Arbitration Act or the International Arbitration Act apply in relation to third party rights under the Bill. Without the Clause, the main provisions of the Arbitration Act or the International Arbitration Act would not apply because a third party is not a party to the arbitration agreement between the promisor and the promisee.

Clause 9(1) deals with what is likely to be the most common situation. The third party’s substantive right (for example, to payment by the promisor) is conferred subject to disputes being referred to arbitration. This sub-Clause is based on a ‘conditional benefit’ approach. The Clause ensures that a third party who wishes to take action to enforce his substantive right is not only able to enforce effectively his right to arbitrate, but is also ‘bound’ to enforce his right by arbitration (so that, for example, a stay of proceedings can be ordered against him under the Arbitration Act or the International Arbitration Act).

Clause 9(2) is likely to be a rarer application. The Clause deals with situations where the third party is given a right to arbitrate under this Clause, but the ‘conditional benefit’ approach underpinning Clause 9(1) is inapplicable. For example, where the contracting parties give the third party a unilateral right to arbitrate or a right to arbitrate a dispute other than one concerning a right conferred on the third party under Clause 9(1). To avoid imposing a pure burden on the third party (in a situation where, for example, the contracting parties give the third party a right to arbitrate a tort claim made by the promisor against the third party), the Clause requires the third party to have chosen to exercise the right. Under Arbitration Act or the International Arbitration Act, the right to apply for a stay of proceedings can only be exercised by someone who is already a party to the arbitration agreement. The timing point at the end of this Clause is designed to ensure that the third party who chooses to exercise his right to go to arbitration by, for example, applying for a stay of proceedings under the Arbitration Act or the International Arbitration Act, can do so.

The reform of the requirement of privity of contract, as stated earlier, has been carried out in various systems of law. Broadly speaking, the requirements across the various jurisdictions are similar and they confer very much the same entitlements under the contract. It is only apt that they are introduced in Singapore as well.

This Update has provided but a quick overview of the Bill and some possible implications. It is imperative to bear in mind that the implications can be fairly wide-ranging, and so appropriate advice should be obtained.