One of the fundamental principles of contract law is privity of contract.
The principle says that only parties to a contract may enforce the terms of the contract. A third party to a contract is anyone who is not a party to it.
Enforcement might take the form of:
- claiming for damages arising from a breach of contract
- an injunction to prevent an anticipated breach of contract by one of the contracting parties
- specific performance of the contract
The Contracts (Third Party Rights) Act 1999 changed the law of privity of contract.
Third parties may now enforce the terms of a contract where:
- an express right has been granted to do so in the agreement, or
- the contract confers a benefit to a third party.
"Confers" in this context means one of the purposes of the transaction (rather than one of its incidental effects) was to benefit the third party: Dolphin Maritime v Sveriges Angartygs (2009).
Status of Third Parties
The existence of the right to enforce the contract does not make the third party a party to the contract. The third party simply has the right to sue on the contract, claim damages or an injunction as if they were a party to the contract.
This example clause excludes the operation of the Contracts (Third Party Rights) Act altogether.
Drafting clauses such as these to grant rights to third parties (as opposed to exclude them) is a form of art. It depends on the rights to be granted, to whom they're to be granted and the limitations to those rights intended to be granted.
Permitting third parties to have rights under a contract expands the exposure to risk of the contracting parties: they could be sued by any person deriving a benefit from the contract
Example: Third Party Rights Clause
No person who is not a party to this Agreement will have any right to enforce it pursuant to the Contracts (Rights of Third Parties) Act 1999.