Contracts (Rights of Third Parties) Act 2001

A practitioner examines the new Contracts (Rights of Third Parties) Act 2001 (Act 39/2001) and highlights the consequences of and exceptions to the Act.

The issue of reforming the deeply-entrenched rule of privity in contract law has been the subject of discussion by law reformers, at least in England, since 1937. It has been abolished in many Commonwealth jurisdictions over the years and finally in England by the English Contracts (Rights of Third Parties) Act 1999.

Singapore has now followed suit with this Act, whose length belies its significance. The Act received the presidential assent on 17 October 2001 and has come into force on 1 January 2002.

The Singapore Act is based substantially on the English Act and effects a limited abolition of the privity of contract rule, giving a third party, in certain circumstances, the right to sue on a contract.

Because of its far-reaching implications, the Act will be brought into force essentially in two stages. In the first stage, from 1 January 2002 until 30 June 2002, the Act will operate on an opt in basis and therefore will not apply unless the contract expressly provides otherwise. In the second stage, from 1 July 2002 onwards, the Act will apply on an opt out basis and, therefore, will apply unless the contract expressly or by implication provides otherwise.

When a Third Party May Sue
The heart of the Act is s 2, which allows a person who is not a party to a contract in his own right (referred to in the remainder of this article as 'C') to enforce a term of the contract if:

(a)  the contract expressly provides that
C may enforce that right (ie it gives
C the right to sue on the contract); or
(b) both the following conditions are satisfied:

The use of the double negative in this last requirement is intended to create a rebuttable presumption in favour of C that if a contract confers a benefit on C, the parties intended that C should have the right to sue for that benefit. The onus then lies on the parties to the contract to rebut the presumption.

For the reasons set out below, it is submitted that it would have accorded more with the likely intentions of the parties had the onus been placed on C, in this situation, to establish that the contract on its proper construction confers on C the right to sue for the benefit in question:

It is submitted, therefore, that introducing what is in effect a rebuttable presumption in favour of C creates a trap for the unwary or the unadvised.

Furthermore, the Act provides that C can claim rights under a contract even if he is not expressly named in it. Thus, the Act specifically provides that it is enough if C is identified in the contract as a member of a class or as answering a particular description. Further, he need not be in existence when the contract is entered into. Thus, it is possible for an unborn person, a company not yet incorporated or a management corporation not yet constituted to be conferred directly enforceable contractual rights under s 2 of the Act.

Indeed, by reason of the above arguments and the risk of unintended expansion of liability to persons not expressly identified at the time of contracting, there is a strong argument that the Act should apply on an opt in basis throughout its currency, and not only during the transitional six month period after its coming into force.

Consequence of the Act Applying to a Contract
Be that as it may, the single most important consequence of the Act is that where s 2 operates to confer rights on C, the original parties to the contract cannot by agreement vary or rescind the contract or affect C's rights without C's consent if:

Like most aspects of this Act, this bar on the parties' entitlement to vary or rescind the contract by agreement may also be contracted out of entirely or varied in scope. Further, where C may not reasonably be found or is mentally incapable, C's consent can be dispensed with by the court if necessary upon terms.

This provision does not affect an innocent party's right unilaterally to rescind the contract (eg for misrepresentation) or to terminate the contract (eg for repudiatory breach) without C's assent and regardless of C's reliance, as these are neither instances of agreed rescission or variation.

Although there is no express provision in the Act, it also appears that C is entitled to assign his rights under s 2 of the Act in the ordinary way in which contractual rights can be assigned.

If C establishes a breach of his rights, he will have available to him all remedies as though he had been a party to the contract. This will include equitable remedies, such as an injunction or specific performance, and the equitable maxim that equity will not aid a volunteer is disapplied by the Act. Similarly, the counterparty to the litigation will have all the defences available to him that he would have had if he had been sued by a party to the contract. In addition he will be entitled to assert any set-off or counterclaim specifically available to him against C.

The Act also provides that the Unfair Contract Terms Act 1977 ('UCTA') is to have modified application to any claim by C to enforce his rights. Briefly, C is entitled to the protection of s 2(1) UCTA (which prevents exclusion of liability for death or personal injury resulting from negligence), but C is not entitled to the protection of the rest of UCTA (ie C cannot require that other types of exclusion clauses satisfy the test of reasonableness).

Finally, the Act provides that: (a) C gets no additional rights than he would have had if he had been a party to the contract; (b) the same limitation period applies to an action by C as it would to an action by a party to the contract; and (c) the rights conferred on C can be made the subject of a binding arbitration clause.

The Act excludes from its operations certain classes of contracts where it was thought that the introduction of third party rights would be thought undesirable as a matter of policy.

The exclusions are: (a) bills of exchange, promissory notes or other negotiable instruments; (b) a company's memorandum and articles of association; (c) the enforcement of a contractual term against an employee (but not against an employer); and (d) terms in contracts relating to the carriage of goods by sea or carriage of goods subject to an international transport convention other than exclusion clauses.

It is important to note that other contracts, such as that under s 210 Companies Act (Cap 50) (schemes of arrangement) and Part V of the Bankruptcy Act (Cap 20) (individual voluntary arrangements) and contracts of insurance (which often make reference to third parties), are not excluded from the operation of the Act.

Comparing the Singapore Act and the UK Act
The Singapore Act is based substantially on the UK Contracts (Rights of Third Parties) Act 1999 save for the following differences taken from the New Zealand Contracts (Privity) Act 1982:

Practical Issues
When the operation of the Act switches to an opt out basis from 1 July 2002, the Act has potential for creating a trap for the unwary and unadvised and increasing the frontiers of liability in unintended and unforeseeable ways.

For this reason, practitioners drafting agreements on and after 1 January 2002 will be well advised not to allow the applicability of the Act to be determined by the default rules provided by the Act, but either to include or exclude the Act expressly in all agreements.

Further, as a matter of prudence, it is likely that most practitioners will take as their starting point the exclusion of the operation of the Act in all contracts unless clients specifically wish to confer rights on third parties and are aware of the consequences of doing so, particularly the bar on the right to rescind or vary the contract by agreement or unless the transaction cannot be structured in any other way.

If a client's instruction upon advice is that the Act is to apply, practitioners should carefully consider the following issues:

Given the revolutionary nature of the Act, the entrenchment of the privity rule and the potential for creating unintended and unforeseen liability to third parties by applying the Act, it is natural that the practitioner's instinct will be to err on the side of caution by excluding the Act in all written agreements. Given also the intuitive nature of the privity rule, it is likely that, other than in a small class of arcane contracts, the Act will not become of widespread application. Thus, it appears that the greatest scope for the Act's operation will come after 1 July 2002 in oral contracts and contracts entered into without the benefit of legal advice.

Vinodh Coomaraswamy
Shook Lin & Bok