Contracts: privity and third party rights and obligations

by Practical Law Commercial

A practice note that explains how a non-party may acquire enforceable contractual rights under English law. The note explains the common law doctrine of privity of contract and the fundamental changes introduced by the Contracts (Rights of Third Parties) Act 1999 (CRTPA 1999), which allows a third party to enforce a contract. The note explores the conditions for creating these third party rights and the correct ways to identify a beneficiary, considering the evolving interpretation of the CRTPA 1999 in light of case law. It also addresses key drafting issues and common disputes, such as the interaction between third party rights and jurisdiction or arbitration clauses. The note highlights practical risks, including the creation of unintended rights and the potential for parties to lose the freedom to vary or rescind the contract. It also provides guidance on how to draft effective clauses to grant, limit or exclude third party rights. Beyond the CRTPA 1999, the note explains other legal methods for conferring benefits, such as trusts and collateral contracts, and ways to impose contractual obligations on non-parties, such as subcontracting and novation.