Julie Exton revisits the Contracts (Rights of Third Parties) Act 1999 and considers its limitations in the light of the recent decision in Avraamides


The Contracts (Rights of Third Parties) Act 1999 is scarcely a recent piece of legislation (it came into force in May 2000) but there is a dearth of reported cases on the subject.



Somewhat tautologically, the introduction to the Act itself states that it is an Act to make provision for the enforcement of contractual terms by third parties. In fact, this short Act (only ten sections) turned privity on its head and followed recommendations from the Law Commission in its report, Privity of Contract: Contracts for the Benefit of Third Parties (Law Com No242 (1996)). Previously, the only person who could sue the seller for faulty goods or services was the purchaser, even if someone else had received them.



Since the Act's implementation, in certain circumstances a third party may himself sue without involving the original purchaser. Common examples include: where a person has ordered goods on the Internet to be delivered to someone else; someone who has bought the bride and groom a wedding present from a wedding list in a shop; and the person who books a holiday on behalf of himself and others named on the booking form. The person who receives the goods or the present or any one or more of the holiday companions is now able to sue the supplier.



But it is not a free-for-all. First, section 1 of the Act makes it clear that a person who is not a party to a contract may in his own right enforce a term of a contract only if:

l The contract expressly provides that he may, or

l The term purports to confer a benefit on him (unless, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party).



And, second, to take advantage of the Act's provisions, 'the third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into' (section 1(3)).



Furthermore, and unsurprisingly, the third party's rights will be no greater than the contracting parties, so he, too, will for instance be bound by, or be able to take advantage of, provisions limiting or excluding liability. But the Act also protects the third party from the contracting parties rescinding the contract or varying it so as to adversely affect his rights, unless he first consents (section 2). And, if he is sued, the promisor may avail himself of any defences that would have been available to him had he, instead, been sued by the promisee (section 4). So, for example, a third party could no more enforce a void, discharged or unenforceable contract than a promisee could. But section 1 of the Act does not affect the promisee's rights and section 5 protects the promisor from double liability, if, say, the promise has already recovered in respect of a third party's losses.



In Laemthong International Lines Co Ltd v Abdullah Mohammed Fahem & Co [2005] EWCA Civ 519, a strong Court of Appeal (Vice-Chancellor Sir Andrew Morritt, Lords Justice Clarke and Neuberger) held that a shipowner was entitled under the Act to enforce a letter of indemnity against a receiver of cargo, where the shipowner was the agent of the charterer for the purpose of complying with a request by the receiver, in the letter of indemnity, that the cargo be delivered to the receiver, and where there was nothing in the letter of indemnity to indicate that the parties did not intend the relevant terms to be enforceable by the shipowner.



Avraamides and anor v Colwill and anor [2006] EWCA Civ 1533 (Themis Avraamides (1) and Emma Maitland (2) v Mark Colwill (1) and Stephen Martin (2) t/a Bathroom Trading Company to give it its full name) dealt with more prosaic matters and involved works carried out to two bathrooms. Mr Avraamides and his wife (the respondents to the appeal) brought an action against two individuals, Messrs Colwill and Martin (the appellants), seeking to hold them personally liable for failures in the refurbishment of the two bathrooms. The judge at first instance decided that the respondents' contract was, in fact, with a company known as Bathroom Trading Company (Putney) Limited. He also decided that all the refurbishment work was the responsibility of Putney.



However, on 1 April 2003, a transfer agreement had been entered into between Putney and Colwill and Martin (BTC). By the agreement, BTC had agreed to (1) 'buy the assets, and to settle the current liabilities of [Putney]... for the year ended 31 March 2003' and... (3) 'to complete outstanding customer orders... and to pay in the normal course of trade any liabilities properly incurred by [Putney] as at 31 March 2003'.



Lord Justice Waller, who gave the lead judgment, could understand the temptation to find a route that would render the appellants liable. They had taken over the assets of Putney and agreed to meet liabilities. If the Act did not apply, as Putney then had no assets, the respondents would be left without a remedy. But there was, unfortunately, an insuperable problem and it involved the interpretation of the phrase 'expressly identified'.



In the court's view, the use of the word 'express' in section 1(3) simply did not allow a 'process of construction or implication'. Lord Justice Waller wondered whether the respondents could rely on the fact that 'customers' were identified in the agreement as beneficiaries of the first part of paragraph 3, even if liabilities in the second part included persons other than customers (such as utilities). He asked himself whether it could it be submitted that, even though others are included within the liabilities under the second part, 'customers' as a class were identified and that was sufficient.



The answer to that, in his view, was no. The difficulty was that the section was concerned with the benefit conferred on a third party, and with the identification of that person. The benefit from the obligation to pay liabilities properly incurred would benefit third parties - but of a large number of unidentified classes. Lord Justice Waller reluctantly allowed the appeal.



This decision illustrates the limitations of the Act and whom it will protect but it, nevertheless, remains a useful, and perhaps under-used, weapon in the litigation armoury.



District Judge Julie Exton sits at Bristol County Court