The bill allows a third party to enforce the terms of a contract, either if the contract expressly provides that it may, or if a term 鈥減urports to confer a benefit鈥� on it, unless there is evidence of a contrary intent. The latter is open to interpretation and so is ideal fodder for litigation lawyers. I can envisage circumstances in which, owing to careless drafting, the first a promisor learns of an intention to confer a benefit is when it reads about it in a letter of claim from the third party鈥檚 solicitor. And to rebut it, the promisor has to prove a negative (that this was not his intent) 鈥� every bit as difficult as it sounds.
The courts have been shifting this way since the case of St Martin鈥檚 Property Corporation Ltd vs Sir Robert McAlpine in 1993. The builder, which had made rather a mess of things, was looking untouchable because the party that had suffered the loss was not the party with whom it was in contract. The House of Lords did not want to see the builder get off scot-free, so, not to be hampered by anything so pedestrian as an age-old principle of English law, it tiptoed around privity of contract, using logic that left many learned legal commentators scratching their heads. But the good guys had won, and everyone, except the builder and its lawyers, applauded, even if a little uneasily. Similar cases followed in 1994 and 1996.
Few would dispute that there are circumstances where third parties should recover. But whereas there were occasional instances of injustice to third parties in the past, now every contract will run the risk of injustice to the promisor by granting third party rights where they may never have been intended. In our era of litigation avoidance, this bill seems to be an own goal.
- The bill will mean more complex contracts
- A third party has no right to contract information
- It may find itself bound to a contract that limits its rights
The disadvantages for the promisor under the bill are obvious, but the bill may not be so great for the promisee either. The promisee (say, a developer) will find that, in certain cases, it cannot agree with the promisor to vary a contract without the consent of a third party 鈥� which may be difficult to reach or even identify. Added to that, the negotiations for its building contracts and consultant appointments are likely to become more complicated still. Ironically, even the third party, for whom the bill is intended, may find it would be better off with collateral warranties. Under the bill, it will be bound by the same defences and limitations as apply to the promisee. There is no provision allowing it access to information about a contract under which it believes it may benefit. It appears that the bill offers no help if the promisor is more than one contractual link away from it. And its recovery from the promisor is reduced by any sum the promisor has paid to the promisee for the third party鈥檚 loss.
So, as proven by all those Scottish warranties still changing hands, it won鈥檛 be the end of collateral warranties, as heralded by many, including the Law Commission; it is just another complication.
In addition, there are still unclear aspects of the bill. What exactly is a 鈥渢erm鈥�? Can a third party benefit if a term confers a benefit as an incidental side effect? Can a promisor exclude liability to the third party in tort? These issues do not appear to have been conclusively addressed.
Postscript
Melinda Parisotti is a barrister and a director of Wren Managers, which manages a professional indemnity mutual for architects.
