New legislation is about to effect a radical change to the fundamental principle of English law that only those who are parties to a contract can enforce rights under that contract. The Contracts (Rights of Third Parties) Act will enable contracting parties to confer enforceable benefits, but not burdens, on others. The Act received Royal Assent on 11 November 1999. The effects of the Act can be excluded.
How does this affect me?
If the Act is not excluded, then when it comes into force a third party will have rights under a contract -
- first, where the contract expressly states that the third party may enforce a contractual term
- secondly, where a contract term "purports to confer a benefit" on the third party.
The third party must be identified, but not necessarily by name - it could be identified as a member of a class or as answering a particular description e.g. "all future tenants or occupiers". Where there is room for doubt, the burden of proof will be on the parties to the contract to prove that it was not the intention that a third party should take a benefit. The Act provides that the third party will be treated as if he had been a party to the contract for the purpose of enforcing any rights given to him, so he will be able to sue for damages or seek an injunction or an order for specific performance. Once the third party's rights have "crystallised" then the original contracting parties will not be able to alter those rights without the third party's consent.
What are the possible consequences?
The Act will apply to every sort of contract, with only very limited and specific exceptions. The main incentive of the Act was to benefit consumers and individuals and its effect, therefore, is extremely wide.
In the property industry there will be many contracts which, it could be argued, purport to confer benefits on third parties. An everyday example would be a lease containing a covenant by one tenant of a shopping centre not to cause any annoyance or nuisance to adjoining tenants. It may be that those adjoining tenants could now all sue the annoying tenant as if they were parties to the lease. Strictly speaking a landlord and a tenant could not agree a surrender of such a lease either, as once the adjoining tenant's rights have crystallised they can not be altered or extinguished without that tenant's consent.
Using the new legislation, a landlord could include in a lease a covenant requiring the tenant to ensure that subtenant's covenants in any underlease are to be given for the benefit of the tenant and the landlord, so that the landlord could directly enforce the provisions of the underlease. Or the landlord of a block of residential flats could require each tenant to agree to covenant with him and the other tenants to observe and perform the terms of the lease, and then allow the tenants themselves to enforce the leases or seek redress for any breaches. The trick will be to use the new legislation imaginatively in order to exploit its full potential.
When will this affect me?
The Act will come into force on 11 May 2000. It is not retrospective and will only affect contracts made after it becomes effective, unless the parties to the contract agree that its provisions should apply earlier to a particular deal.
What should I do now?
The Act is facilitative only, and it is easy to exclude the effects of the Act on particular contracts if this is what is required.
Third party rights should be considered carefully in all property transactions starting now. These rights can be hard to spot. Any reference to a third party, whether in the first draft or included during negotiation, should be reviewed e.g. "occupiers of the Building", "any superior landlord" "mortgagee and all persons authorised by the Landlord", "the Developer's agents", "successors in title". As an initial fall back position exclusion of the Act is probably the more prudent course. Even where third parties are to be given rights, contract provisions should make it clear that the original contracting parties still have the right to vary or rescind the contract without reference to that third party.
This note is intended to give a general overview of the Contracts (Rights of Third Parties) Act 1999 in a property context. If you require advice on the consequences of the new legislation in a specific situation, please contact Caroline Andresier, the property department's professional support lawyer, or your usual Macfarlanes' contact. Macfarlanes have also produced a client note on the extensive implications of the Act for the construction industry