The Contracts (Rights of Third Parties) Act 1999. This is a major exception to the doctrine. It allows the parties to a contract to create benefits that are legally enforceable by a third party.

Common law devices to evade the doctrine. These include:

Damages on behalf of another. In some situations the courts allow a party to a contract to recover damages for a loss suffered by a third party as a result of a breach of contract.

The trust of a promise. This device has been used to create third party rights, but has recently fallen into disuse – and has probably been superseded by the 1999 Act.

Collateral contracts. In some situations the courts will find that there is in fact a ‘collateral contract’ with a third party, sitting alongside the main contract.

Tort of negligence. A third party to a contract has sometimes been allowed to use the tort of negligence to recover damages from a party in breach, but recovery for pure economic loss is very restricted.

Statutory exceptions. There are some specific contracts (for example, certain types of insurance contract) where statutes give rights to third parties.

Privity and exclusion clauses. Parties quite often purport to give the benefits of an exclusion clause to third parties, and the courts have in some cases used agency concepts to enable these to be enforceable or to modify tortious liability. The 1999 Act reduces the need for these devices to be used.

Imposing burdens:

Restrictive covenants are used in land law to impose burdens on third party occupiers of land. Limited use of this approach has been made outside the land law context.

The tort of interference with contractual rights can be used to obtain an injunction to stop a third party encouraging a breach of contract.

5.2 INTRODUCTION

The essence of the doctrine of privity is the idea that only those who are parties to a contract can have rights or liabilities under it. This doctrine has long been regarded as one of the fundamental characteristics of the English law of contract. The effect of it is that if the two parties to a contract agree that one of them will provide a benefit to a third party, the third party is unable to sue to enforce that agreement. Equally, should the parties agree that an obligation should be imposed on a third party, they will be unable to force the third party to undertake that obligation, even if he or she has previously agreed to do so.

The strict application of this doctrine, and in particular the rule relating to benefits, has been found to be inconvenient in practice, and the courts have for a long time recognised a range of exceptions to it (e.g. the ‘trust of a promise’), and sanctioned a variety of devices for avoiding its effect (e.g. allowing a party to recover damages on behalf of the third party or constructing a collateral contract). In addition, Parliament has given parties the opportunity to avoid a significant part of the doctrine by virtue of the Contracts (Rights of Third Parties) Act 1999.

The rule about non-imposition of burdens has fewer exceptions to it, but restrictive covenants controlling the use to be made of land can bind non-parties, and in some cases tortious liability for interference with a contract has been used to circumvent the privity doctrine.

5.3 THE RATIONALE FOR THE DOCTRINE

Why has the English law of contract had such an attachment to the doctrine of privity? One answer is that since the paradigm of the classical contract is a two-party bargain, it follows that only those two parties whose dealings led to the creation of it will be regarded as being able to enforce it or be sued under it. Even the classical law, however, allowed for the possibility in certain circumstances for there to be multiparty contracts, for example, between members of a club or those entering a competition.1 It seems, therefore, that the doctrine cannot simply be based on a rule that a contract can only ever have two parties.

A related argument, and one that, as we shall see, has often been put forward by the courts, is that the doctrine of privity is based on the doctrine of consideration and, in particular, the rule that consideration must move from the promisee. This possibility is discussed in more detail below.

Whatever the technical arguments put forward, what, if any, are the policy reasons for the doctrine? What is it meant to achieve? There are two aspects to the doctrine that need to be considered separately. First, there is the rule that the burden of a contract should not be placed on a third party. At first sight this seems like a rule that is clearly justifiable. To use an unlikely but striking example from Collins: ‘It would plainly be a serious invasion of the liberty of the individual … if the parties to a contract agreed that a third person should run a marathon.’² To make such an agreement enforceable, at least without the consent of the third party, would be an unjustifiable intrusion into personal freedom. There are other situations, however, where the answer may not be so clear-cut.

Suppose, for example, that Anne owns a famous painting. Brian, the owner of a gallery, makes a contract with Anne for the loan of the painting for a special exhibition for three months. Brian spends a large amount of time and money promoting this exhibition, with Anne’s painting being the central attraction. A week before the exhibition is to open Anne sells the painting to Claire. Should Claire be obliged to allow the painting to be used in Brian’s exhibition? The doctrine of privity would say ‘no’. Claire is not a party to the contract between Brian and Anne, and so cannot be affected by obligations arising out of it. Brian is left with a remedy in damages against Anne, which may well be inadequate to recompense him,³ and will not really make up for the fact that his exhibition has lost its central exhibit. It is not clear why it would be unfair or unreasonable in such a situation to require Claire to honour Anne’s commitment to lend the painting to Brian, particularly if Claire is aware of the commitment at the time when she buys the painting from Anne. As we shall see later in this chapter, the courts have struggled to find the best solution to this type of situation – wishing in some cases to require the third party to bear the burden of the obligation, while at the same time not undertaking a direct attack on the doctrine of privity.

Even in the area of the imposition of burdens, therefore, the rule that only a party can be affected by a contract is not necessarily appropriately applied in all situations. When we turn to the conferring of benefits, there seems to be even less justification for a strict doctrine of privity. If A and B have agreed that C should have a benefit under their contract, why should C not be able to enforce this? Suppose, for example, that Alison promises Bernard that she will pay £1,000 to Oxfam if Bernard gives up smoking for a year. This is a contract that (subject to the question of intention to create legal relations)4 is clearly enforceable by Bernard. However, the charity that is to benefit will not at common law be allowed to enforce, because it is not a party to the agreement. Treitel argues that the answer may lie with the doctrine of consideration:⁵

A system of law which does not give a gratuitous promisee a right to enforce a promise may well be reluctant to give this right to a gratuitous beneficiary who is not even a promisee.

This argument is open to the objection, however, that what is really contrary to the doctrine of consideration is that a promise for which no consideration has been given should be enforceable.⁶ In the example used above, consideration has been given for Alison’s promise by Bernard. There could be no objection to Bernard seeking to enforce it (though his remedies might be limited).⁷ If the charity were given a right to sue, Alison would be under no greater obligation than she already is as regards Bernard. She can obviously only be required to pay the money once, and there seems little reason why the charity should not be able to sue her directly for it. The justification becomes even less in a situation where the third party has acted in reliance on the promise; as we have seen in Chapter 3, reliance is increasingly used by the courts as the basis for enforcing promises between two parties and there seems little reason why this should not also apply in a tripartite relationship.

5.3.1 IN FOCUS: ARGUMENTS AGAINST PRIVITY

It seems, therefore, that the rationale for the doctrine of privity is by no means clear and unanswerable. Moreover, there are several reasons why the doctrine may be said to be out of tune with the modern English law of contract. First, there is the weakening of the doctrine of consideration identified in the previous chapter. The concept of what constitutes consideration has been expanded by cases such as Williams v Roffey,⁸ and this means that it may be easier to regard third parties as having provided consideration. More importantly, there is the growth of the area of ‘estoppel’, with the associated idea of ‘reliance’ as a basis for the enforceability of promises attaining increasing importance. This would suggest that where a third party has relied on a promise made in a contract between two other parties, there may be good reason to regard the promise as enforceable by the third party.⁹

The second major reason why privity is out of tune with the modern law is that it does not accord with the reality of many commercial contracts. As Adams and Brownsword have pointed out,10 many commercial transactions (such as those surrounding construction contracts) do not simply involve two parties entering into an agreement. They involve ‘multiple linked contracts’ which can be regarded as ‘networks’,¹¹ to which the traditional approach of the doctrine of privity is simply inappropriate and unhelpful. Adams and Brownsword have suggested that a ‘network’ of contracts, with a more relaxed approach to third party rights, would have the following characteristics:¹²

(i)	there is a principal contract (or, there are a number of principal contracts) within the set giving the set an overall objective;
(ii)	other contracts (secondary and tertiary contracts, and so on) are entered into, an object of each of which is, directly or indirectly, to further the attainment of this overall objective; and
(iii)	the network of contractors expands until a sufficiency of contractors are obligated, whether to the parties to the principal contract, or to other contractors in the set, to attain the overall objective.

As well as construction contracts, Adams and Brownsword suggest that contracts for the carriage of goods and ‘many credit and financing arrangements’ fit this pattern. Within such a network, the interlocking obligations of contracts designed to achieve an overall objective is far from the classical paradigm of the two-party exchange of mutual promises or obligations and calls for a different regime from that which the traditional doctrine of privity has provided.

5.3.2 REFORM AT LAST

The doctrine has been ripe for reform for some time.¹³ A significant amendment took place in 1999, by virtue of the Contracts (Rights of Third Parties) Act 1999. But this had to deal with the issue of the extent to which rights should be extended beyond the parties to the contract. As the Law Commission recognised, in its working paper on the subject published in 1991,¹⁴ contracts can have far-reaching effects. It used the example of a contract between a building company and a highway authority for the construction of a new road. The road may be intended for the benefit of all road users, but it would surely not be acceptable for them all to have a right of action, for example, in the event of delay in completion of the project.¹⁵ It is this problem that Collins suggests provides the best rationale for having a doctrine of privity:¹⁶

The most significant justification for the doctrine of privity thus boils down to the simple point that the law of contract must draw a line at some point to set the limits to the range of liability to third parties.

In other words, the doctrine is there to avoid there being indeterminate liability to an indeterminate number of people.¹⁷ But this does not, of course, mean that the boundaries of liability have to be set as narrowly as they were under the traditional doctrine. A view can be taken as to the appropriate situations in which third parties should have rights (or even obligations) under a contract; provided that the limits are clearly defined, this should not cause problems for the law, and is likely to be more effective in meeting the intentions of all concerned.18

The fact that the strict doctrine of privity as applied by the English courts is not necessary is illustrated by the fact that, although many common law jurisdictions have adopted it, a more relaxed view has long been taken in the United States.¹⁹ Civil law jurisdictions have also not found it necessary to be as narrow as the English courts in determining who may enforce a contract. The European Draft Common Frame of Reference contains provisions very similar to those now to be found in the Contracts (Rights of Third Parties) Act 1999.²⁰

It is the way in which the traditional doctrine deals with the conferring of benefits that has attracted the most criticism and it is this area in which, following recommendations to this effect from the Law Commission,²¹ there has now been legislative intervention. The effect of the Contracts (Rights of Third Parties) Act 1999 is discussed in detail later in this chapter, and we shall try to assess there whether the reform meets the objections that have been raised. Since the Act has not replaced the common law, however, we shall start by looking at the development of the common law doctrine.

5.4 DEVELOPMENT OF THE DOCTRINE

There were some decisions dating from the seventeenth century that allowed a third party beneficiary to enforce a promise, but these pre-dated the strict formulation of the doctrine of consideration. The modern law is generally taken to derive from the case of Tweddle v Atkinson.22 This concerned an agreement reached between the fathers of a couple who were about to get married, under which the father of the bride was to pay £200 and the father of the groom £100, to the bridegroom, William Tweddle, the plaintiff. William sought to enforce his father-in-law’s promise, but it was held that he could not. The main justification appears to have been that it was necessary for there to be mutuality of obligations as between those enforcing a contract and having it enforced against them. As Crompton J put it:²³

It would be a monstrous proposition to say that a person was a party to the contract for the purpose of suing upon it for his own advantage, and not a party to it for the purpose of being sued.

It is not clear why this proposition should be thought to justify the strong epithet ‘monstrous’. There are other situations in the law of contract where there is not mutuality of this kind and yet obligations are enforced. In certain situations, unilateral contracts will lack mutuality, as will some contracts made by minors. A better reason for the decision would seem to be that William Tweddle was not the person to whom the promise was made, even though it was intended for his benefit.24 If he had been, it will be noted that it would have been quite possible for the court to have found that he had provided consideration for the promise. The agreement was clearly made in consideration of William’s marriage and, as we saw in Chapter 3, 3.9.3 (in Shadwell v Shadwell,²⁵ decided just a year before Tweddle v Atkinson), going through with a marriage ceremony can be good consideration for a promise of payment. This again indicates that the doctrine of privity is properly regarded as separate from, though closely linked to, the doctrine of consideration.

5.4.1 AFFIRMATION BY THE HOUSE OF LORDS

Tweddle v Atkinson was a decision of the court of Queen’s Bench, but the principle it was taken to have been based on was reaffirmed by the House of Lords in a commercial context in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd,²⁶ which concerned an attempt by Dunlop to control the price at which their tyres were sold to the public.

Key Case Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915)

Facts: Dunlop had a contract with Dew & Co, wholesalers in motor accessories, under which, in exchange for a discount, Dew agreed that in selling the tyres to retailers it would not give a discount, unless the retailer agreed to sell at Dunlop’s list price. Dunlop’s objective was to prevent the tyres being sold to the public at a discount. Selfridge & Co entered into such an agreement with Dew & Co. Dunlop subsequently sought an injunction and damages against Selfridge in relation to alleged breaches of this agreement.

Held: The House of Lords held that they could not succeed. The following passage from the speech of Viscount Haldane LC indicates the approach taken:²⁷

My Lords, in the law of England, certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it, consideration must have been given by him to the promisor or to some other person at the promisor’s request.

On both grounds, Dunlop’s action failed. It was not a party to the agreement between Dew and Selfridge and, moreover, had provided no consideration for Selfridge’s promise not to sell below the list price.

Note also that although this was not raised as an issue in the case, Dunlop could not, of course, rely on the terms of its contract with Dew, because Selfridge was not a party to this contract.

For Thought

Could Dunlop have recovered any compensation from Dew? Was Dew in breach of its contracts with Dunlop?

The doctrine of privity is not one for which the courts have shown any great affection,28 but it was again reaffirmed by the House of Lords in 1968 in the case of Beswick v Beswick.²⁹ A nephew had bought his uncle’s coal merchant’s business, and had promised as part of the deal to pay his uncle £6.50 a week and then, when his uncle died, to pay his aunt (if she survived) £5 a week. After his uncle’s death, the nephew refused to make the payments to his aunt, and she sued. In the Court of Appeal, Lord Denning tried to open up a broad exception to the doctrine of privity by relying on s 56(1) of the Law of Property Act 1925, which states that:

A person may take an immediate or other interest in land or other property, or the benefit of any condition, right of entry, covenant or agreement over or respecting land or other property, although he may not be named as a party to the conveyance or other instrument.

Lord Denning’s view (with which Danckwerts LJ agreed) was that this in effect abolished the doctrine of privity in relation to written contracts, and therefore allowed Mrs Beswick to sue her nephew on the promise made to her husband for her benefit.³⁰ The House of Lords rejected this argument, deciding that the history and context of s 56 meant that it should be interpreted as not intended to apply to a straightforward contractual situation such as that in Beswick v Beswick, although the exact scope of the section remains uncertain.³¹ The case, therefore, fell to be dealt with under common law principles. The House accepted what Lord Reid referred to as the ‘commonly held’ view that where a contract between A and B contains an obligation to pay money to a third party, X, ‘such a contract confers no right on X and X could not sue for the [money]’. In other words, the traditional doctrine of privity applied and Mrs Beswick was therefore prevented from suing in her personal capacity. The House of Lords agreed, however, that as the administratrix of her husband’s estate, she could take his place as a party to the contract with the nephew, and thus obtain an order for specific performance of the obligations contained in it. Thus, while affirming the doctrine of privity, the House of Lords found a way to achieve what was clearly a just result.

5.4.2 A SPECIAL CASE: MULTIPARTY CONTRACTS

There is one situation that does not fit neatly within the doctrine of privity, and that should be noted before moving on to consider the more general attempts that have been made to avoid the effects of the doctrine. This is the situation of the ‘multiparty’ contract.

As we have seen, the typical model of a contract is based on a two-party relationship. Nevertheless, there are situations which are clearly governed by contract but which do not fall into this pattern. Where each of a group of people contracts with one body, for example, on joining a sports club, and agrees to abide by the body’s rules, can one member enforce those rules against another? Or is the only contract between each member and the club itself? The issue was considered in Clarke v Dunraven.32 The case concerned the participants in a race organised by a yacht club. There was a collision during the race, as a result of which the plaintiff’s yacht sank.³³ The plaintiff sued the defendant, claiming damages based on provisions in the club rules. The defendant denied that there was any contractual relationship between him and the plaintiff. The House of Lords held that there was. The committee of the club had, in effect, made an offer to prospective entrants to the race to the effect that, if they wanted to take part in the race, they would have to abide by the conditions that the committee had laid down. One of the conditions must be deemed to be that (in the words of Lord Esher, in the Court of Appeal):³⁴

… if you do sail [for a prize in a race], you must enter into an obligation with the owners of the yachts who are competing, which they at the same time enter into similarly with you, that if by a breach of any of our rules you do damage or injury to the owner of a competing yacht, you shall be liable to make good the damage you have so done.

There was, in other words, an obligation under a unilateral contract with the club’s committee to enter into a contract with every other competitor. Applying this approach, the House of Lords held that there was a contract between all the competitors, which they had each entered into when they entered the race. The plaintiff was therefore entitled to succeed in his action, based on the obligation contained in the regulations governing the race to pay for damage caused by a breach of the rules of racing. Thus, in the example given above, each member of the sports club is in a contractual relationship, based on the rules of the club, with every other member.

Although the approach taken in Clarke v Dunraven has the potential to be applied to many situations involving clubs or competitions, it was not adopted by the Court of Appeal in Ellesmere v Wallace,³⁵ which concerned the recovery of entrance fees for a horse race.

5.4.3 IN FOCUS: ANOTHER PROBLEM

The Clarke v Dunraven analysis avoids any problems of privity, but creates difficulties as regards offer and acceptance. Who exactly is making the offer and acceptance as between the first and last individuals to join? Any attempt to find a way around this, such as making the club the agent for the receipt of both offer and acceptance, is bound to look very artificial.

5.5 EVADING THE DOCTRINE

The current position as regards the doctrine of privity is that, its status having been confirmed by Beswick v Beswick, there has not in recent years been any direct challenge in the courts to either aspect of the doctrine (that is, the conferring of benefits or the imposition of obligations). There have, however, been various attempts to evade the effects of the doctrine, some of which have been more successful than others. The whole area must, however, now be considered in the light of the Contracts (Rights of Third Parties) Act 1999. This has fundamentally changed the position in relation to the conferring of benefits, but has not altered the common law as regards imposing burdens. The order of treatment will therefore be to look first at the Act; then, briefly, at the various devices which have been used previously by the courts to confer benefits, and which may still be relevant in situations to which the Act does not apply; and, finally, at the common law rules relating to the imposition of burdens.36

5.6 THE CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999

The Act received the Royal Assent on 11 November 1999, and applies to contracts made on or after 11 May 2000. It also applies to contracts made between these two dates if the contract specifically states that the Act is to apply.37

The Act is based on the 1996 Law Commission Report No 242, Privity of Contract: Contracts for the Benefit of Third Parties.³⁸ In one respect, therefore, this may appear as a speedy response to an identified need for law reform. It should not be forgotten, however, that, over 60 years ago, a similar reform was recommended by the Law Revision Committee.³⁹

5.6.1 THE MAIN EFFECT

The simplest reform would have been to say that third parties should be able to sue whenever a contract happens to benefit them. For reasons which were noted earlier,⁴⁰ the Law Commission rejected this as being unacceptably wide, and opening the floodgates to litigation. It should only be where the contracting parties intend to confer a benefit on the third party that the right of action should arise. Even this would go too far, however. The Law Commission in its Consultation Paper which preceded the Report gave the example of a contract between a building company and a highway authority for the construction of a new road.⁴¹ Although it is one of the objects of the contract, and therefore one of the intentions of the parties, that the road will potentially benefit all road users, it would not be acceptable to allow all such users to have a right of action, for example, in the event of delay in completion of the project. The range of potential third party claimants should be narrowed to those on whom the parties to the contract intend to confer an enforceable legal obligation.⁴²

This objective is put into effect by s 1 of the Act, which states:

(1) … a person who is not a party to a contract (a ‘third party’) may in his own right enforce a term of the contract if:

(a)	the contract expressly provides that he may; or
(b)	subject to sub-s (2), the term purports to confer a benefit on him.

(2) Sub-section (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

Subsections (1)(b) and (2) therefore operate to create a rebuttable presumption that if a contract appears to confer a benefit on a third party, such a benefit is intended to be legally enforceable by that third party. A court faced with a promisor who denies that such legal enforceability was intended will have to decide what the ‘proper construction’ of the contract is. This will presumably mean applying an objective test of what reasonable contracting parties would have thought was meant by the term or terms in question.

This analysis was adopted by the first reported case on the Act, Nisshin Shipping Co Ltd v Cleaves & Co Ltd,43 and confirmed by the Court of Appeal in Laemthong International Lines Company Ltd v Artis (The Laemthong Glory) (No 2).⁴⁴ The latter case concerned a letter of indemnity (‘LOI’) issued by the receiver of goods to the charterer of the ship from which they had been unloaded. The ship was subsequently seized because another party alleged that it had a better claim to the goods. The shipowner sought to enforce the indemnity against the receiver. The Court of Appeal noted that one clause in the LOI referred to indemnifying the charterer’s ‘agents’, and took the view that the shipowner could come within this. A further clause referred to providing indemnity in the event of the ship being arrested, and that benefit was one which could only benefit the shipowner. The clauses of the LOI therefore did purport to confer a benefit on the shipowner. Once this was established, the wording of the Act had the effect that the burden of proof was on the promisor (in this case the receiver) to show that there was no intention to give an enforceable right to the third party. The receivers tried to argue that the situation was analogous with the chain of contracts which exists, for example, when goods are sold from manufacturer, to wholesaler, to retailer, or as between a main contractor and subcontractor in construction contracts, and which the Law Commission in its report which led to the 1999 Act had suggested should not be taken as creating third party rights. In this case the charterer had issued its own LOI to the shipowner, but the court rejected the analogy with the ‘chain’ contracts. The situations referred to by the Law Commission were ones where established commercial practice made it unlikely that third party rights would be intended. There was no comparable established practice in relation to LOIs. The receivers had failed to prove that the clauses were not intended to provide an enforceable benefit, and the shipowner was entitled to rely on them.

The fact that the burden of proof shifts in this way once a benefit is established means that care will need to be taken in drafting contracts. If the parties do not want a third party to be able to enforce any benefits under the contract, they will be well advised to say so in specific terms.⁴⁵

To meet the requirement of s 1(1)(b), it must be at least one of the purposes of the contract to confer a benefit on the third party, though it does not have to be the predominant purpose.⁴⁶ The fact that a third party obtains an incidental benefit (as where an agent is authorised to receive money owed to the agent’s principal, and is able to deduct its commission from this) is not enough to satisfy this requirement.⁴⁷

The intended third party beneficiary need not be in existence at the time of the contract, but must be expressly identified in the contract by name, or as a member of a class, or as answering a particular description.48 Thus, unborn children, future spouses and companies which have not at the time been incorporated all have the potential to benefit. A contract between the partners of the firm, for example, that each of their spouses will in certain circumstances receive benefits from partnership property will apply both to the spouses of those already married and any future spouses of those who at the time are single. Where, however, a contract for the transfer of a bathroom fitting business referred to the purchasing company ‘settling the liabilities’ of the company being bought, this was not specific enough to include liability to a customer who was dissatisfied with the work of the company being transferred.⁴⁹

If the above conditions are satisfied, the third party will be able to enforce the term of the contract (subject to any other relevant terms of the contract)⁵⁰ in exactly the same way as a party to the contract, obtaining damages, injunctions or specific performance in the normal way.⁵¹ If the term is an exclusion clause, the third party will be able to take advantage of the exclusion or limitation.⁵²

5.6.2 CHANGING THE AGREEMENT

An important issue that arises once third party rights are recognised in this way is the extent to which the parties to the contract should be free to change, or even cancel, their agreement. In other words, does the third party have a legal right as soon as the contract is made, or only at some later stage? Normally, of course, the parties to an agreement can change it in any way they wish, provided there is consideration for any such change.⁵³ Clearly, however, the right under s 1 would be of limited effect if the parties could at any time withdraw the promised benefit. At the same time, it would probably be restricting the normal freedom of the parties too greatly to prevent all possibility of such change. The Act deals with this situation by s 2.

The balance of s 2 lies in favour of the freedom of the contracting parties. Section 2(3) provides that they can include a clause in their agreement which removes the need for any consent by the third party to a variation, or which lays down different procedures for consent from those contained in the Act. If no such clause is included, however, the provisions of s 2(1) will operate. This provides that the parties may not rescind or vary the contract so as to extinguish or alter the third party’s rights under it if one of three conditions is satisfied. These are that:

(a)	the third party has communicated to the promisor (by words or conduct) his assent to the relevant term (the ‘postal rule’ (see 2.12.6 above) does not apply here – s 2(2)); or
(b)	the third party has relied on the term and the promisor is aware of this; or
(c)	the third party has relied on the term and the promisor could reasonably be expected to have foreseen that the third party would do so.

Where the situation is that the third party has relied on the promise, this reliance does not have to be detrimental. If, for example, T (the third party) has been promised £1,000 by A under a contract between A and B, the fact that T has, in reliance on that promise, bought goods at a bargain price, or has acquired shares that have subsequently doubled in value, will be enough to prevent A and B from cancelling the promise, provided that A knew or could reasonably be expected to have known that T had acted in reliance on the promise.

It is important to remember that these provisions relating to the ability of the parties to change the contract do not set out the requirements for the third party’s right to arise. As soon as a contract is made that satisfies the requirement of s 1 of the Act, the third party acquires legal rights under it and may enforce the relevant term without having either assented to or relied on the promise. The significance of the provisions in s 2 is simply that once one of the events specified there has occurred, the promise may not be withdrawn or varied.

5.6.3 DEFENCES

The availability of defences is dealt with by s 3 of the Act. Unless the parties to the contract have agreed otherwise in the contract,54 the promisor can raise against the third party any defences (including ‘set-offs’) that could have been raised against the promisee (that is, the other party to the contract). Thus, if the promisee has induced the contract by misrepresentation or duress, the promisor can use that as a defence to the action by the third party. Similarly, if goods are to be supplied by A to B, with B promising to pay the price to be paid to T, B could raise against T the fact that the goods were not of satisfactory quality under s 14 of the Sale of Goods Act 1979. The main contracting parties may also agree that a set-off arising between them from unrelated dealings may nevertheless be used by the promisor against the third party. The Explanatory Notes to the Act suggest that this could arise where:

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