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Privity of contract and third parties
A fundamental principle of common law is the doctrine of privity of contract, which states that only parties to a contract may enforce its terms. Enforcement may take various forms, such as an action for an agreed sum, damages for breach of contract, specific performance of contractual obligations or an injunction to restrain a breach.
A third party is a person who is not a party to a contract. As a general rule, a contract cannot be enforced by (or against) a third party.
Under English law, an important exception to this general rule is the Contracts (Rights of Third Parties) Act 1999 (Act). The Act allows a third party to enforce a term of a contract to which it is not party if:
- The contract expressly provides that the third party may (s.1(1)(a)); or
- The relevant contract term purports to confer a benefit on the third party (s.1(1)(b)), 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 (s.1(2)).
To benefit from the Act, a third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description. However, the third party need not be in existence when the contract is entered into (s.1(3)).
Standard form construction contracts such as the JCT and NEC generally exclude the Act, except in the case of specific categories of third parties.
Third party rights in construction contracts
Construction projects often involve interested third parties beyond the employer and contractor, such as purchasers, tenants or funders, who are not party to a construction contract but may require the ability to enforce its terms.
For example, a landlord might engage a contractor to design and build a new office, which is let to a tenant following completion. If defects later emerge in the contractor's work, the tenant has no direct recourse against the contractor in the absence of a contractual relationship or rights having been expressly granted in the tenant's favour.
To address this gap, construction contracts may include one or both of the following mechanisms:
- Third party rights: The contract may include a schedule of rights to be conferred on certain third parties. These rights are typically given effect through a third party rights notice (often drafted in a form specified by the contract), which the employer serves on the contractor to confirm that such rights have vested in the third party.
- Collateral warranties: These are separate agreements, which the employer can require the contractor to enter into with and for the benefit of specified third parties. Like third party rights, the underlying construction contract typically prescribes the form that the collateral warranty must take.
Whilst collateral warranties have traditionally been more common in the UK construction industry, third party rights have become increasingly prevalent due to their relative ease of use as they do not require separate agreements to be executed.
* This article was originally published as part of the "Legal Terms Explained" series of Construction Law.
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.
