Contracts – third party rights

Prior to 11 May 2000, only the parties to a contract could acquire directly enforceable rights or obligations under it. Since the introduction of the Contracts (Rights of Third Parties) Act 1999 (the Act), it is possible, in some circumstances, for third parties to enforce contractual rights, such as intellectual property rights, payments, or protection from liability.

In this article, we give an overview of the Act and discuss the 2024 UK Supreme Court case that considered its provisions.

The Act

Under the Act, a third party is entitled to enforce a contractual term if:

1. The contract expressly states that the term may be enforced by the third party; or
2. The term purports to confer a benefit on the third party, unless it appears from the contract that the parties did not intend the term to be enforceable by the third party (this is a question of contract interpretation).

A third party may be identified either by name, as a member of a class, or by a particular description.

Where the Act applies, the third party may seek the same remedies as if it had been a party to the contract (for example, damages).

UK Supreme Court case

The Supreme Court recently considered the provisions of the Act in the case of Secretary of State for the Department of Environment, Food and Rural Affairs v Public and Commercial Services Union [2024] UKSC 41.

Background

The Public and Commercial Services Union (PCSU) sought to enforce terms in the contracts of employees of three government departments, in relation to ‘check-off’ facility arrangements (whereby union subscriptions were deducted from their gross salary) which had been removed by their employers in 2014/15. The PCSU was not a party to these contracts, and the employment contracts did not expressly state that the terms could be enforced by the PSCU.

The High Court found that removal of the check-off facility was a breach of contract and, further, that the PCSU could bring a claim under the  Act to enforce the relevant contractual terms. This decision was appealed, and the Court of Appeal subsequently overturned the High Court’s decision, finding that the parties to the contract did not intend the terms to be enforceable by the PCSU. The Court of Appeal’s judgment was then appealed to the Supreme Court.

Supreme Court judgment

The key question considered was whether the parties intended that the relevant terms within the employees’ employment contracts were to be enforceable by a third party (the PCSU).

The Supreme Court held that:

(a)   Where a contractual term purports to confer a benefit on a third party, there is a strong presumption that the term is enforceable by that third party. It does not need to be shown that the parties positively intended that the term should be enforceable.

(b)  Where there is no express contractual term rebutting the presumption that the term is enforceable, the test for implying such a term is a very demanding one.

(c)   The party seeking to rebut the presumption must show – on an objective basis – that the parties had a positive common intention that the term should not be enforceable by a third party.

So, where a contractual term purports to confer a benefit on a third party, the presumption under the Act that the third party can enforce the term will not be rebutted merely by the absence of an express term stating that the term should be enforceable. Instead, the burden will fall on the contracting parties to show that their common intention was that the term should not be enforceable by a third party. This is a tall order where no such express term exists, and the contracting parties are likely to have great difficulty persuading a court that an implied term to that effect existed.

The Supreme Court’s conclusions mean that businesses may need to consider more carefully the potential issue of creating enforceable third-party rights in commercial contracts.

If you have any questions in relation to the creation and enforceability of third-party rights, or you would like any assistance with, or advice on, commercial contracts more generally, please do not hesitate to contact our Commercial Team who would be happy to assist.