Thursday, 14th February 2008: The Law Reform Commission’s Report on Privity of Contract
and Third Party Rights will be launched by the Minister for Enterprise, Trade and Employment,
Mr. Micheál Martin, T.D., at the Commission’s offices at 6pm this evening.
The Report completes a project on this area begun under the Commission’s Second
Programme of Law Reform and follows extensive consultation after the Commission published
a Consultation Paper on this area in 2006. The Report contains the Commission’s final
recommendations and a draft Contract Law (Privity of Contract and Third Party Rights) Bill.
Background: privity of contract and third party rights
Privity of contract is a long-established part of the law of contract. The essence of the privity
rule is that only the people who actually negotiated a contract (who are privy to it) are entitled
to enforce its terms. Even if a person is mentioned in the contract - and the contract was
intentionally for their benefit - this “third party” cannot rely on or enforce the terms of that
contract. In its Report, the Commission has recommended that, subject to certain limitations,
the privity of contract rule should be changed so that a third party who the contracting parties
clearly intended to benefit from their agreement would be able to rely on and enforce the
agreement if it is not carried out properly.
Main recommendation: a general contract third party rights rule
The Report notes that various pieces of legislation have already created specific exceptions to
the privity rule, because there is a recognition that it can cause hardship, especially for
consumers. For example, the Sale of Goods and Supply of Services Act 1980 states that
where a consumer buys a car on a finance deal, and the car turns out to be defective ( “not fit
for purpose”), they have the choice of suing either the dealer or the finance company.
Depending on the type of finance package, the actual sale might be between the dealer and
the finance company, so the consumer might be a third party to the car sale and might not be
able to sue, but the 1980 Act means that the privity rule is no obstacle to the consumer. In its
Report, the Commission recommends that a more general rule giving rights of enforcement to
third parties should be put in place. The Commission’s overall view is that the proposed
legislative scheme should be facilitative and not prescriptive. It is therefore intended to benefit
contracting parties and third parties, whether they are consumers or business people, but
parties remain free to opt-out of the scheme.
Effect of changing the privity rule in consumer building contracts
In a consumer building contract, if a woman agrees with a builder that the builder will put on an extension for the woman's son, and the builder fails to complete the building, only the woman can enforce the contract against the builder. Her son is not privy to the contract: in law, even though he is a clear beneficiary of the contract, the privity rule prevents him from enforcing the contract against the builder. The Commission’s Report recommends that this should be changed to allow the son to enforce the contract.
Effect of changing the privity rule in complex building and civil engineering contracts
In complex construction and civil engineering projects, the privity rule has had a different impact. These major infrastructural projects sometimes involve hundreds of contractors and sub-contractors. Even though much of the work they do is interconnected and interdependent, the privity of contract rule means that it would be difficult for one contractor to enforce a term against another contractor who had, for example, held up a part of the project.
To get around this, the professional and representative bodies involved in the construction industry (representing architects, builders, engineers and lawyers) developed highly complex standard form contracts to ensure some level of connection between the various sub-contractors. Because many of these construction projects are financed by central or local government, standard form contracts have also been developed by the Government Contracts Committee in the Department of Finance.
The Commission believes that, while these complex projects will continue to need detailed standard form contracts to regulate their performance, reform of the privity rule might lead to simplification of some terms. The Commission notes that, since the privity rule was reformed in the UK under a Third Party Rights Act 1999, the new versions of the standard form building and civil engineering contracts used there have become more simplified and have opted in to the 1999 Act. The Commission had concluded that, while its proposals (like the UK Act) allow for opting out, it is likely that the benefits of opting in will be taken up here.
In addition to the general right of a third party to enforce a contract term intended to benefit them, the Report contains detailed recommendations for reform of the privity rule. These include that: the third party can be identified in the contract either by name or by description; the contracting parties should remain free to include in the contract an express term providing for variation or termination of the contract; existing common law and statutory exceptions to the privity rule should be retained but be kept under review; the proposed legislation should not apply to certain contracts, such as employment contracts, certain contracts involving companies and various transport contracts regulated by international conventions; and (as already mentioned) contracting parties should be able to exclude or “contract out” of the proposed legislation.