On November 11, 1999 the Contracts (Rights of Third Parties) Act 1999 became law in England and Northern Ireland. The act will apply to contracts governed by English law or the law of Northern Ireland entered into beginning May 11, 2000. It will also apply to each English law contract entered into beginning November 11, 1999 which expressly provides for its application.
The new statute will have far-reaching implications for a variety of contracts, and, as contracts are at the core of business transactions, for business in general. It fundamentally alters the English law principle of "privity of contract" that permits only parties to a contract to enforce its terms, even if the contract clearly purports to confer a benefit on a third party.
The statute will enable a person that is not a party to a contract to enforce its terms if the contract expressly provides that the non-party may do so, or if one or more terms of the contract purport to confer a benefit on the non-party, unless on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the non-party.
Therefore it becomes important that contract drafters take into account whether any third party has been given rights under a contract. The parties may agree in the contract to exclude the application of the statute. If this is not done, one or more of the parties may be exposed to unanticipated claims by third parties not subjectively intended to be beneficiaries of the contract.
The new act does not affect rights granted to third parties by means other than the act itself. Therefore, if the parties to a contract wish to grant third party rights under it, they may continue to do so through the use of collateral contracts, novations, assignments, deed polls, trust relationships and other established English law mechanisms. *
- Capital Markets Report
- This Report is published periodically by the Capital Markets Department of Cadwalader, Wickersham & Taft. © 2000 Cadwalader, Wickersham & Taft. All rights reserved. Quotation with attribution is permitted. The newsletter provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. For further information on the articles contained in this Report, or matters related to Cadwalader, Wickersham & Taft's practice, please contact a member of the Firm.