On 28 March 2016, Bermuda enacted the Contracts (Rights of Third Parties) Act 2016 (the Act), bringing Bermuda law on privity of contract more into line (on an opt-in basis) with other common law jurisdictions such as England and Wales, Singapore, New Zealand, Hong Kong and the Cayman Islands.
Prior to the Act, contract law in Bermuda was subject to the strict common law doctrine of privity of contract. This meant that a person who was not a party to a contract had no enforceable right to sue under the contract, even where the contract expressly purported to confer a benefit upon them.
The application of the privity doctrine was often significant in Bermuda in the context of cut-through clauses in reinsurance contracts, and in the context of indemnities and exculpation clauses between fund investors and fund managers.
Scope of Application of the Act
Parties entering into a contract in Bermuda, or governed by Bermuda law, on or after 28 March 2016, can now able confer legally enforceable contractual rights on third parties, so long as the third party is expressly identified in the contract and the contract expressly provides in writing that the third party may enforce the contract. Where such express provisions are not included in the contract, the common law doctrine of privity of contract will continue to apply.
Parties can select the specific contractual terms which they intend to be enforceable by a third party and distinguish them from terms that are only agreed to be enforceable between the contracting parties.
Although the Act does not apply retrospectively, where a contract entered into prior to the commencement date includes terms conferring rights on third parties and those terms comply with the Act, the terms will be deemed to have become enforceable from 28 March 2016. Parties may also amend contracts entered into prior to the commencement date in order to comply with the Act.
The Act expressly excludes the following contracts from conferring third party rights:
- A contract on a bill of exchange, promissory note or other negotiable instrument.
- Any contract binding on a company and its members under section 16 of the Companies Act 1981.
- A contract of employment against an employee.
- A contract for the carriage of goods by sea or road or carriage of cargo by air and associated letters of credit.
Third Party Enforcement
Where a third party exercises its right to enforce a term of a contract, the third party will be able to obtain any remedy that would normally be available to the contracting parties, including damages, injunctions and specific performance. All exclusions and limits of liability provided for in the contract will, however, remain applicable to third party claims.
The Act protects against the risk of double liability, ensuring that where a contracting party has obtained complete or partial recovery, the court retains a discretion to reduce any award to the third party 'to the extent it thinks appropriate to take account of the sum recovered'.
Where a third party makes a claim under a term of the contract, the party against whom the term is enforceable (the promisor) is entitled to rely on any defence, set-off or counterclaim available under the contract and which would be available had the claim been brought by a direct party to the contract.
Variation and Rescission
The Act protects the accrued rights of third parties by restricting the contracting parties' ability to rescind or vary the terms of the contract, without the consent of the third party, where such variation or rescission would extinguish or alter the third party's rights.
For such protection to exist, however, the third party must have either: (i) communicated its assent to the term, by words or conduct, to the promisor; (ii) relied on the term with the promisor's awareness of such reliance; or (iii) relied on the term in circumstances where the promisor would reasonably be expected to have foreseen that the third party would rely on the term.
This restriction is subject to any express terms of the contract that allow the contract to be rescinded or varied without the consent of the third party or that specify the circumstances in which the contract can be so rescinded or varied. The court also has a discretion to dispense with the third party's consent where it is satisfied, in all the circumstances, that it is 'just and equitable' to do so.
As long as the contract does not expressly provide otherwise and the right conferred is assignable, a third party may also assign its own third party rights to another person in the same way as a party to the contract may assign its own rights.
Where a third party right to enforce a term in a contract is subject to an arbitration agreement, the third party will be treated as a party to the arbitration agreement as regards any contractual disputes.
In practical terms, contracting parties entering into contracts governed by Bermuda law, or made in Bermuda (whether in the form of service agreements or insurance contracts), will want to consider whether or not those contracts are intended to include, or exclude, third party rights, with a view to addressing the issue expressly in their contracts going forward.
Given slight differences between the wording of Bermuda's legislation and the wording of UK's Contracts (Rights of Third Parties) Act 1999, it remains to be seen to what extent the Bermuda Court will treat English case law as persuasive, in the event of a future dispute.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.