The Contracts Act 1999

In May 2000, the Contracts (Rights of Third Parties) Act 1999 came into force. The Act brought to an end one of the basic principles of English law known as "privity of contract", whereby it was established that nobody could make a claim under a contract unless he or she was a party to that contract.
The Act provides that third parties can make claims under a contract to which they are not a party. In order to make such a claim, the third party must be expressly referred to as having the right to enforce the contract or the contract must "purport to confer a benefit" on the third party. That latter provision does not apply if, on a proper consideration of the terms of the contract, "it appears that the parties did not intend the term to be enforceable by the third party".
The construction industry has generally been quite hostile to this new Act. Lawyers have advised their clients that contracts should clearly exclude the provisions of the Act on the basis that, in the example of a contract between a client and a main contractor, there is an unacceptable and unquantifiable risk in permitting potential claims from third parties such as funders, purchasers, future tenants, designers and subcontractors.
The one notable exception to this is the new Major Project Form, published last year by the JCT. This wholly embraces the Act by identifying the third
parties that may be entitled to obtain benefits under the main contract and by setting out in a third party rights schedule precisely what those benefits are intended to be.
One of the key objectives underlying this approach is to try to avoid the proliferation of separate warranties and other collateral agreements that these days tend to be a feature of large construction projects.
The case of Nisshin Shipping Co v Cleaves & Co appears to be the very first case in which the Act has been considered by the courts and although it concerns shipping rather than construction, it provides a clear example of the manner in which the Act may be utilised by third parties to bring claims under a contract to which they are not a party.
Cleaves was a ship chartering broker that had negotiated nine contracts for the charter of ships between Nisshin, the ship owners, and various charterers. These agreements between the owner and the charterers, commonly referred to as charter parties, contained clauses stating that a commission of 1% was payable by the owners to Cleaves on any hire paid under the charter.
Nisshin had refused to pay the commission. It argued that its agency relationship with Cleaves had been brought to an end as
the result of a repudiation by Cleaves, brought about by the principal of Cleaves becoming a shareholder and senior manager of a company that was a competitor to Nisshin.
Cleaves disputed that it was in breach of its agency agreement. Relying upon the 1999 Act, it brought a claim for payment of its commission under the terms of the charter party agreements. Since these agreements contained arbitration clauses, Cleaves referred the matter to arbitration. Nisshin applied to the court for a declaration that the arbitrators had no jurisdiction to hear the claim and that the 1999 Act had no application.
Mr Justice Colman rejected these submissions and held that Cleaves was entitled to rely on the 1999 Act. In so doing, he gave helpful guidance on the operation of the Act. First, the charter agreements did not expressly state that Cleaves was entitled to enforce any term of the contract. Accordingly it was necessary to determine whether the contract "purported to confer a benefit" on Cleaves. The judge held that this requirement had indeed been satisfied on the facts of the case. The clause stating that Cleaves was entitled to a commission of 1% did "purport to confer a benefit" on Cleaves.
As previously noted however, that provision would not apply if, on a proper reading of the contract as a whole, it appeared that the parties did not intend the term to be enforceable by the third party. Crucially, Mr Justice Colman concluded that if the contract was silent on the subject of third party rights, that silence would generally indicate that the third party would be entitled to take advantage of a term of the contract that purported to confer a benefit upon him.
Justice Colman concluded that since the charter party did not express an intention contrary to the entitlement of Cleaves to enforce the commission term, Cleaves remained entitled to rely on that term by virtue of
the 1999 Act.
Moreover, the judge concluded that Cleaves could rely upon the arbitration clause contained within the charter party to bring the claim in respect of their commission.
What is clear from all of this is that, in appropriate cases, the Contracts (Rights of Third Parties) Act will be effective to allow third parties to make claims on contracts to which they are not a party, unless such rights have been expressly excluded.
Where the parties to a contract wish to confer a right to enforce a term of the contract on a third party, it is essential that they examine the contract as a whole, and set out carefully which terms of the contract are to apply to the third party and exclude the terms that are
not to apply.