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Third Party Rights – Parties Not Named in the Contract

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This article has been submitted by Greenaway Scott

When it comes to contracts, the general understanding is that there must be offer, acceptance, and an exchange of consideration for it to be valid.

When carried out, these three supposedly simple rules form the agreement between the parties in a contract, providing them with the ability to sue each other. This is also referred to in law as the doctrine of privity of contract.

In general, under the doctrine of privity of contract only the parties to a contract are bound by its terms and obligations imposed by that contract.  Similarly, only the named parties are entitled to benefit from, and enforce the rights also created by, the contract. This also means that third parties are not bound, and do not benefit from, the contact unless they are named parties.

However, third party rights can arise in contract in various different ways. For example, the contract itself may expressly confer rights on a third party, or it could purport to confer a right to a third party, a good example of this would be a product guarantee protecting a consumer under a contract between a manufacturer and a supplier. So how do third parties protect their rights under contract law?

The High Court has set out how to identify third parties that are entitled to enforce their rights even if they are not named in the contract, under the Contracts (Rights of Third Parties) Act 1999.

The Contracts (Rights of Third Parties) Act 1999 states that a third party is entitled to rights in a contract if it is expressly identified in the contract by name or description. This creates a statutory exception to the doctrine of privity of contract.

In a recent case the High Court held that it was possible to identify a class or person who could enforce their rights under a contract by process of construction of the express terms of the contract. The question was whether the document purported to confer a benefit on the third party.

This is a useful decision to interpret the enforceability of third party rights under the Contracts (Rights of Third Parties) Act 1999.

If you would like advice on third party rights in contracts please contact the Commercial team by emailing [email protected] or visit our website at www.greenawayscott.com.