The English law doctrine by which only the parties to a contract may sue or be sued under that contract is known as "privity of contract". Therefore, traditionally, if a contract between A and B appeared to grant a benefit to C, the latter could not, in its own right, bring an action to enforce the terms of the contract. Nevertheless, in certain circumstances there were ways by which the privity rule could be bypassed (for example, if the third party could establish a trust or agency situation).
However, the Contracts (Rights of Third Parties) Act 1999 may now allow a third party to enforce a term as if it were a party to the contract. This will be possible where:
1) the term to be enforced purports to confer a benefit on the third party, or
2) the term to be enforced expressly provides that it may be enforced by the third party.
The Act applies to contracts concluded on or after 11th May 2000. Prior to that date, there was a six month "opt in" stage, during which parties could agree to apply the Act to contracts made within that period.
To fall within the Act, the third party must either be expressly identified in the contract by name or, alternatively, as answering a particular description or being a member of a particular class. However, the third party need not be of that class or description at the time the contract is concluded. The Act will not apply if it is clear from the contract that it was not the intention of the parties to confer rights on the third party, or the contract excludes the application of the Act.
The contractual term could be one which grants the third party a positive right (for example, the right to receive payment upon performance of the contract), or provides immunity from suit (for example, an exceptions clause which extends defences to various parties who are not themselves parties to the contract).
In the event that a third party does bring a claim against a party to the contract, the latter will be entitled to use any defence under the contract or right of set-off which is either expressly granted by the contract or which would have been available if it was being pursued by the other party to the contract.
CONTRACTS FOR THE CARRIAGE OF GOODS BY SEA
There are certain contracts which are generally excluded by the Act: in particular, contracts for the carriage of goods by rail, road or air which are subject to the rules of international convention, and contracts for the carriage of goods by sea. A contract for the carriage of goods by sea is defined by the Act as a bill of lading, sea waybill or corresponding electronic transaction.
However, the Act has some limited application to such contracts in that a third party may be able to rely on exclusion or limitation clauses contained in them. Therefore, stevedores, although not identified by name in a bill of lading, but by description or class, may rely on a Himalaya clause in the bill of lading, where relevant, to defend themselves against a claim from consignees. However, stevedores should not be able to enforce a bill of lading clause against one of the parties to the contract of carriage if, for example, it purported to give stevedores the right to overtime payments.
On the other hand, the Act does apply to charterparties. Charterparties usually provide for the payment of brokers' commission: for example, lines 172-175 of the NYPE form. By virtue of the Act, brokers will now be able to bring an action in their own right against the parties to the charterparty for any failure to pay commission. In reality, whether brokers will do so will, of course, depend on commercial considerations.
Those involved in the offshore sector will be familiar with contracts containing sometimes complicated knock-for-knock indemnities relating to personal injury and/or property of servants and agents of the parties and to those sub-contractors. Where such indemnities purport to confer a benefit on a sub-contractor, the term may be enforced by the sub-contractor. However, so far as the term may create a burden on the sub-contractor, e.g., perhaps denying the sub-contractor a right which he would otherwise have had outside the contract, the Act will not be applicable.
HULL AND MACHINERY INSURANCE
A Hull and Machinery policy may purport to confer a benefit on, for example, the mortgagee of a vessel. The mortgagee may be entitled to claim under the policy notwithstanding the fact that it is not a party to the contract of insurance.
The Act will have no relevance so far as Gard's cover is concerned, since Gard's Rules are subject to Norwegian law. For those Clubs whose Rules are subject to English law, the Act may still be of little relevance due to the "pay to be paid" rule. This provides that a Member must first discharge the liability himself, before he is entitled to reimbursement from the Club. If the Member fails to pay the third party, the third party will not, by virtue of the Act, be able to pursue the Club directly, since the third party will not have greater rights under the contract than the parties to the contract themselves. The Club will be able to rely on any policy defence, including the "pay to be paid" rule.
It should be noted that the contractual party responsible for performance of a particular term is protected under the Act from double liability. Therefore, taking the example of brokers' commission mentioned above, a possible scenario could be: charterers pay hire net, having deducted commission payment, which is the responsibility of owners under the charterparty. Charterers, as is customary, are to pass on the commission to the brokers, but before doing so charterers go bankrupt. Under the Act, the brokers have the prima facie right to enforce the payment of commission. However, owners will not be obliged to pay twice, by virtue of the protection against double liability.
Once a right has been granted to a third party, the Act places certain restrictions on the contractual parties' ability to vary or rescind the contract, if by doing so it would alter or extinguish the third party's right under that contract. The Act specifies the circumstances in which the parties may not vary or rescind. However, it appears that unless the third party has no knowledge of the contract it may be difficult to vary or rescind it. It may therefore be advisable to insert into the contract a clause stating that the parties have the right to vary or rescind it and this right can not be vetoed by any third party who may have rights under it. The potential problem is illustrated by the following example: an agreement between owners and charterers to terminate a long term charter early, or reduce the hire rate, may extinguish or reduce a broker's right to commission on hire earned, prompting the broker to bring an action in respect of loss of commission which he would have earned had the charterparty run its full term, or hire remained at the original rate.
Contracts subject to English law may have to be reviewed with the Act in mind and consideration may have to be given as to whether standard clauses should be amended or whether the contract should exclude the Act altogether.