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Contract Law - Third Parties Summary
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Comprehensive summary/exam notes on the rights of third parties in Contract Law. This document covers the provisions of the Contracts (Rights of Third Parties) Act 1999, the rules on variation and rescission of contract and avoiding double liability, and whether the promisee can recover on behalf o...

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  • October 6, 2024
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  • 2022/2023
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Third Parties
Contracts (Rights of Third Parties) Act 1999:
s.1 – a person who is not a party to a contract may in his own right enforce a term of the
contract if the contract expressly provides that he may (s.1(1)(a)) or the term purports to
confer a benefit on him (s.1(1)(b)).
Dolphin Maritime v Sveriges – in order for a term to “purport to confer a benefit” on
a third party, one of the purposes of the parties’ bargain must have been to benefit the
third party.
s.1(2) – subsection (1)(b) does not apply if on a proper construction of the contract, it appears
that the parties did not intend the term to be enforceable by the third party.
s.1(3) – the third party “must be identified in the contract by name, as a member of a class or
as answering a particular description.”
Chudley & Ors v Clydesdale Bank plc – suggests a broad interpretation is to be taken.
CA held that it was not necessary for the letter of instruction to mention a
third-party investor by name, finding that reference to “a client account” in
the LOI together with the name of the investment scheme was express
identification of the class, namely clients of the bank’s customers who were
investing in the scheme in question.
s.1(5) – where the third party does acquire a right to enforce a term, there “shall be available
to the third party any remedy that would have been available to him in an action for breach of
contract if he had been a party to the contract”.
Normal rules of contract law will apply.

Variation and Rescission of Contract:
s.2(1) – where a third party has a right under section 1 to enforce a term of the contract, the
parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as
to extinguish or alter his entitlement under that right, without his consent if –
(a) the third party has communicated his assent to the term to the promisor,
(b) the promisor is aware that the third party has relied on the term, or
(c) the promisor can reasonably be expected to have foreseen that the third party
would rely on the term and the third party has in fact relied on it.
s.2(2) – the assent –
(a) may be by words or conduct, and
(b) if sent to the promisor by post or other means, shall not be regarded as
communicated to the promisor until received by him.

Avoiding double liability:
The Act does not impinge upon the promisee’s rights under the contract.
Both the promisee and the third party will have an action against the promisor.
Steps therefore have to be taken to reduce, if not eliminate, the possibility of double
liability on the part of the promisor.
s.5 – where the promisee has recovered from the promisor a sum in respect of (a) a third
party’s loss in respect of the term, or (b) the expense to the promisee of making good to the
third party this default of the promisor, then the court shall reduce any reward to the third
party to such extent as it thinks appropriate to take account of the sum recovered by the
promisee.

Can the promisee recover on behalf of the third party?
Panatown –
If the promisee can demonstrate that the parties to the contract intended (expressly or
impliedly) that the employer should be able to recover damages on behalf of the third
party, then he will be able to recover damages on the owner’s behalf.

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