contractual intention under section 1(1)(b) and 1(2) of the contracts (rights of third parties) act...

Contractual Intention under Section 1(1)(b) and 1(2) ofthe Contracts (Rights of Third Parties) Act 1999

Thomas Roe*

Unlike section 1(1)(a), section 1(1)(b) of the Contracts (Rights of Third Parties) Act19991 is not dependent upon the contracting parties expressly giving a third party aright of action. Rather, it renders enforceable by a third party any term of a contractwhich ‘purports to confer a benefit’ on the third party. But it is subject to subsection(2), which provides that subsection (1)(b) ‘does not apply if on a proper constructionof the contract it appears that the parties did not intend the term to be enforceable bythe third party.’ The determination of whether a term which purports to confer abenefit should be given effect under section 1(1)(b), or denied it under section 1(2), islikely to be a source of litigation in many cases. This note considers the interrelationof subsections (1)(b) and (2). In particular: (i) who needs to prove what when thecourt is considering whether a contractual term which purportedly benefits a thirdparty should be given effect; (ii) how should the court go about determining thestatutory question, whether on the proper construction of the contract it appears thatthe parties did not intend the contract to be enforceable by a third party?

Who needs to prove what under subsections (1)(b) and (2)?

In practice, the incidence of the burden of proof is rarely decisive in a case. Butit is important nonetheless for the way in which it frames the structure of thecourt’s enquiry. A court faced with a contract which apparently confers a benefiton a third party ought, if invited to do so, to look for material which suggests thatan enforceable benefit was not intended to be conferred, rather than materialwhich suggests that it was so intended: this follows from the fact that section1(1)(b) is disapplied by section 1(2) where it appears that the parties did notintend to confer a benefit, rather than applied where it appears that they did. Butthis does not answer the practical question of which party must raise the issue,and how it will be resolved. The legislation itself provides no guidance beyondthe provisions already cited. The Law Commission’s Report,2 on which thelegislation is based, states the Commission’s intentions in various differentways. Where the contract purports to confer a benefit, there is a ‘rebuttablepresumption’ in favour of a third party right.3 (This is the way in which theeffect of the provisions is commonly described.4) The ‘onus of proof’ is on theperson who contends that the contracting parties did not intend the term to be

ß The Modern Law Review Limited 2000 (MLR 63:6, November). Published by Blackwell Publishers,108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 887

* 3 Hare Court, Temple.

1 On the Act generally see C. Macmillan ‘A Birthday Present for Lord Denning: The Contracts (Rightsof Third Parties) Act 1999’ (2000) 63 MLR 721.

2 Law Commission,Privity of Contract: Contracts for the Benefit of Third Parties, Report No 242Cm3329 (1996) (Report).

3 ibid para 7.17.4 eg M. Dean [2000]Journal of Business Law143, 147; M. Furmston,The Law of Contract(London:

Butterworths, 1999) 944.

enforceable by the third party;5 ‘doubts as to the parties’ intentions will beresolved in the third party’s favour.’6

Since the Act was passed to give effect to the Law Commission’s proposals,recourse to the Report will be permissible in interpreting any ambiguities whicharise in its construction.7 However, the court’s primary concern should, of course,be for the words of the statute themselves. From these it is submitted that thefollowing appears to be the position. (It is assumed below that the defendant is oneof the contracting parties – usually, the promisor – while the claimant is the thirdparty). Assuming that the contract purports to confer a benefit on the third party,8

section 1(1)(b) will apply to give the claimant a right unless it is suggested by thedefendant that section 1(2) operates so as to disapply it. This follows from thedrafting of section 1(2) as a proviso and from the general common law principlethat the legal burden of proving a defence which goes beyond a simple denial ofthe claimant’s assertions rests on the defendant.9 Thus, a claimant who can showthat the term purports to confer a benefit will not need to go further and allege that,on a proper construction of the contract, the parties intended to grant anenforceable right. To this extent, it is right to describe the legislation as creating arebuttable presumption of enforceability in cases where the contract purports toconfer a benefit on the third party.

However, if the defendant does raise section 1(2), different considerations arise.The task for the court is to decide ‘if on a proper construction of the contract itappears that the parties did not intend the term to be enforceable by the third party’.This is, at first sight, a curiously drafted provision. On the one hand, the court isdirected to determine ‘if . . . the parties did not intend the term to be enforceable bythe third party.’ Put this way, the question is a subjective one: what did the partiesintend? There would be something to be said for such an approach; insofar as thereason for abolishing the privity rule was to give effect to the intentions of thecontracting parties,10 they ought not to find themselves burdened with obligationsto strangers to the contract which they never intended themselves to have. Yet thedraftsman qualifies the direction to look for the contracting parties’ intentions withthe words ‘on a proper construction of the contract it appears that . . .’ These requirea search for the parties’ intentions only in the limited sense in which the court looksfor intention in construing any contract: what were the parties’ intentions,asexpressed in the language which they actually used?11 It is an objective test. Thereare strong policy arguments that this ought to be the criterion for deciding whetherthe third party is to be able to demand as of right the benefit purportedly conferredon him by the contract; third parties may take the contract at face value and act ontheir consequent assumptions that a benefit will indeed be conferred.12

Accordingly, the exercise under section 1(2) is not to determine what the partiesintended but, rather, what they intended on a proper construction of the contract.

This is important for the burden of proof. The true construction of awritten contract is a question of law, not fact.13 No burden lies on either

5 Report para 7.18.6 ibid.7 UnderPepperv Hart [1993] AC 593 HL.8 This issue is beyond the scope of this note.9 See Adrian Keane,The Modern Law of Evidence(London: Butterworths, 1996) 77–79.

10 This was the Law Commission’s primary argument for reform: see Report para 3.1.11 See egPioneer Shipping Ltdv BTP Tioxide Ltd[1982] AC 724, 736per Lord Diplock.12 This was the second argument for reform: see Report para 3.2.13 Pioneer Shipping Ltdv BTP Tioxide Ltdn 11 above;Carmichaelv National Power Plc[1999] ICR

1226 HL.

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side.14 Accordingly, no question arises of either party needing to ‘rebut’ thepresumption that a contract which purports to confer a benefit actually does so;once the issue has been raised by the defendant, the judge must decide it withoutreference to any burden of proof. It is respectfully suggested that the LawCommission is wrong in the Report to refer to the promisor’s need to rebut apresumption in such circumstances. Whilst it is true that the court’s enquiry is intowhether the parties did not intend the third party to have a right, rather than intowhether they did, there is no formal burden of proof in deciding this issue.However, as is discussed below, as an aid to construction either party may relyupon matters beyond the words of the contract themselves. These are matters offact and, in so far as the facts themselves are in dispute, the burden of proving themwill fall upon the defendant. This again follows from the fact that section 1(2) is aproviso, and amounts to a defence which goes beyond a mere denial of theclaimant’s assertions. Moreover, in contrast to a written contract, the constructionof an oral contract is a question of fact.15 Accordingly, in such cases it is accurateto speak of burdens of proof. The burden ought to lie upon the party who claimsthat the contract does not confer a right on the third party.

Matters which the court ought to take into account in construingthe contract for the purposes of section 1(2)

Plainly, if the contracting parties state that the third party is intended to have anenforceable right, this will have such an effect. (The third party would also beentitled to enforce the contract under section 1(1)(a), of course.) Conversely,stating expressly in the contract that no third party rights are intended to arise willusually be an effective way of ensuring that they do not. Where the properconstruction of the contract is not so clear, the basic principles ought, it issubmitted, to be those which apply to the construction of contracts generally. SirChristopher Staughton recently summed these up in this way:

[Y]ou are to find the intention of the parties, and for that purpose you look first at thewording of the contract and see what it says. You do not ask the parties to tell you what theythought it meant. Secondly, you may look at the surrounding circumstances known to bothparties, that is what was going on around them when they made the contract. Thirdly, if thereis evidence that the ordinary meaning of the words would lead to an absurd result, you mustconsider whether they can reasonably bear some other meaning. Fourthly, the court maylook at evidence of how the market works, if it does not know already, and at any customwhich is commonly regarded as binding on everyone in the market.16

Some words may more easily be taken to show an intention to confer anenforceable right than others. Thus, the use of the same words to confer a benefitboth on one of the contracting parties and on the third party may be likely to showsuch an intention; the words used to confer the right on the contracting party wereobviously meant to confer an enforceable right – why should they mean anythingdifferent when applied to a third party? By the same token, a very different choiceof words may perhaps indicate that the third party is to have something less than an

14 Scottv Martin [1987] 2 All ER 813 CA .15 n 13 above.16 ‘How do the Courts Interpret Commercial Contracts?’ [1999] CLJ 303, 313; see alsoPrenn v

Simmonds[1971] 1 WLR 1381, 1384-1386,per Lord Wilberforce andReardon Smith Line LtdvYngvar Hansen-Tangen[1976] 1 WLR 989, 995–996.

November 2000] Contracts (Rights of Third Parties) Act 1999

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enforceable right. Words which are vaguer may again be taken to signify that thethird party is not to have an enforceable right. But every case will turn on its facts.

The Law Commission gives some examples of how it expects section 1(2) towork in practice. On the facts ofBeswickv Beswick,17 in which a nephew agreed inwriting with his uncle to pay an annuity to his aunt after his uncle’s death, butfailed to do so, the Commission asserts that the nephew could not satisfy the onusof proving that, on the proper construction of the agreement, it was not intendedthat the aunt should have an enforceable right.18 For reasons which have alreadybeen discussed, the Commission is (it is respectfully suggested) incorrect to put thematter in terms of satisfying an onus of proof. But the underlying point is surelyright: it could not be said that this was a contract from which it appeared that theparties had not intended the aunt to have an enforceable right. In reality, neitherparty probably gave much thought to questions of enforceability. However, thenephew had expressly agreed to pay his aunt the annuity. The uncle had expresslyagreed to transfer his business to the nephew in return. They must have intendedthat each could be held to his bargain.

A contrasting example is in the field of construction contracts. Here, of course,the practice is for there to be a chain of contracts from employer to head-contractorto sub-contractor and so on. A sub-contractor’s contract with the head-contractorby its nature will often expressly confer a benefit on the employer, so passing thetest in section 1(1)(b). But the Commission’s view is that this wouldnot beexpected to give the employer a right to enforce its terms under the Act.

This is because . . . the parties have deliberately set up a chain of contracts which are wellunderstood in the construction industry as ensuring that a party’s remedies lie against theother party only . . . On the assumption that the deliberately created chain of liabilitycontinues to thrive subsequent to our reform, our reform would not cut across it because on aproper construction of the contract – construed in the light of the surrounding circumstances(that is, the existence of the connected head-contract and the background practice andunderstanding of the construction industry) – the contracting parties . . . did not intend thethird party to have the right of enforceability.19

In a similar vein, the Law Commission considers that section 1(1)(b) would notnormally give a purchaser of goods from a retailer a right to sue the manufacturerdirect; the purchaser already has a direct right of action against the retailer, so thatit is quite easy to infer that the manufacturer and the retailer, on the properconstruction of their contract, did not intend there to be a direct right of actionagainst the manufacturer.

As these examples show, it may well be significant whether there is anotherroute by which the third party might enforce performance of the term. YoungBeswick’s aunt could only enforce (in her own right) if she had a right under thecontract between nephew and uncle. If nephew and uncle had not intended her tohave this right, they must not have intended her to have any way of enforcing thecontract at all. The employer, by contrast, has a well-established right against thehead-contractor: the head-contractor and the sub-contractor could intend not togrant a directly enforceable right against the sub-contractor, without meaning theemployer to have no right at all.

17 [1968] AC 58.18 Report para 7.46.19 Report para 7.18.



Surrounding circumstances

A related question is the extent to which it is legitimate for the court to haverecourse to the circumstances surrounding the formation of the contract, indeciding whether the parties did not intend to grant an enforceable third party right.Traditionally, the court faced with interpreting a written contract will not withoutcompelling reason go beyond the words of the contract. The speech of LordHoffmann inInvestors Compensation Scheme Ltdv West Bromwich BS20 has beengenerally seen as allowing the court to take a far broader approach when discerningcontractual intention. The background which the court might take into account,according to Lord Hoffmann, nowadays includes ‘absolutely anything whichwould have affected the way in which the language of the document would havebeen understood by a reasonable man,’ provided only that it should have been‘reasonably available to the parties.’ As between contracting parties, such anapproach may (perhaps) be sensible. If applied to the test under section 1(2),however, it could well lead to injustice, for it would permit contracting parties toclaim that the intention behind a contract which, on its face, appeared to beenforceable by the third party, was not that it should be so enforceable. In thiscontext the criticism of the broad approach by Saville LJ, as he then was, inNational Bank of Sharjahv Dellborg21 is apposite. He had assignees in mind, butthe point is much the same:

[T]he position of third parties (which would include assignees of contractual rights) does notseem to have been considered at all. They are unlikely in the nature of things to be aware ofthe surrounding circumstances. Where the words of the agreement have only one meaning,and that meaning is not self-evidently nonsensical, is the third party justified in taking that tobe the agreement that was made [even though, as between the parties, the broad approachmight lead to a different result], or unable to rely on the words used without examining(which it is likely to be difficult or impossible for third parties to do) all the surroundingcircumstances?

Either way, observed Saville LJ, reference to surrounding circumstances notavailable to third parties was highly unsatisfactory. The same considerations surelyapply to the enquiry under section 1(2): it is submitted that the court should bereluctant to look too deeply into the surrounding circumstances when discerningthe contracting parties’ intentions.

Is it relevant that the parties have failed to make provision forthird party rights?

Where the contracting parties simply make no reference either way to third partyrights, to what extent may this omission be relied upon as showing that, on a properconstruction of the contract, they did – or did not – intend to create them? Neitherthe Act nor the Report answers this question. Professor Burrows has said that thepresumption in favour of there being a third party right ‘is a strong one’ which willnot usually be rebutted in the absence of an express term which denies the thirdparty a right or is otherwise inconsistent with there being such a right, or unless the

20 [1998] 1 WLR 896, 912 HL; see alsoMannai Investments Co Ltdv Eagle Star Life Assurance Co[1997] AC 749 HL.

21 Unreported, Court of Appeal 9 July 1997, cited in M. Clarke, ‘Interpreting Contracts – The Price ofPerspective’ [2000] CLJ 18.



contracting parties have entered into a chain of contracts of the type mentionedabove.22 Coming from one of the authors of the Report, these views are, of course,entitled to some respect. In particular, the factors which he mentions as tending tonegative third party rights ought undoubtedly to be weighed carefully by thecourts. However, no ‘strong presumption’ is enacted in the legislation itself, and itis submitted that the better view is that no such gloss should be applied to the clearwords of section 1(2), which simply require consideration of the parties’contractual intention. Thus the significance of a failure either to exclude or toinclude third party rights expressly ought to be assessed in context on a case bycase basis.23

Some limited indication of how the courts will deal with this issue can bederived from case law under New Zealand’s Contracts (Privity) Act 1982, to whichthe English version is substantially identical in this respect.Malyonv New ZealandMethodist Trust Association24 concerned a deed of assignment of a lease. The deedcontained a covenant expressed to be between the appellant (an employee of theassignee) and the assignor under which, inter alia, she ‘guarantee[d] the due andpunctual payment to the Landlord’ by the assignee of the rent. The landlord was aparty to the deed as a whole, although not specifically mentioned as a party to thiscovenant. The rent was not paid, and the landlord claimed against the appellant asguarantor, claiming both at common law as a party to the contract and, on thealternative basis that it was not a party to the relevant covenant, as a person onwhom the covenant had purported to confer a benefit within section 4 of the 1982Act. The New Zealand Court of Appeal accepted that the clause in question might,when read in isolation, be broad enough to constitute a guarantee in favour of thelandlord of the assignee’s obligations. However, it went on to reject the claims atcommon law and under statute. As to the former, it was clear that the covenant waswith the assignor, not the landlord.25 This followed from the express wording of theclause, together with the fact that other obligations in the relevant part of the deedwere also clearly towards the assignor, without mention of the landlord.26 Thefurther claim under the Act was somewhat peremptorily dismissed: (i) since thelandlord was actually a party to the multipartite deed, it could not claim the benefitof the Act; (ii) but even if it could, the same reasons which suggested that theparties saw the guarantee as being between the appellant and the assignor only,also went to negative any intention that the landlord should have an enforceableright.27

This case is by no means the weightiest of authorities, but it is interestingnonetheless when analysed against the approach of Professor Burrows. Here was aterm which purported to benefit the landlord, with no term inconsistent with, orcontrary to, its enforceability. However, the court took relatively little persuasionto find that the clause when read in context was not intended to be enforceable.Certainly, there was no strong presumption in favour of enforceability. Moreover,

22 Andrew Burrows, ‘Reforming Privity of Contract: Law Commission Report No 242’, SPTL AnnualConference, Cambridge 11 September 1996, cited in J. N. Adams, D. Beyleveld and R. Brownsword,‘Privity of Contract – the Benefits and Burdens of Law Reform’ (1997) 60 MLR 238, 252.

23 For criticism of the uncertainty inherent in this, see Adamset al n 22 above 253–254.24 [1993] 1 NZLR 137.25 ibid 139.26 These included a guarantee of all (other) covenants, conditions and provisions in the lease; and a

promise to indemnify the assignor against any claim (eg by the landlord) arising from default in theassignee’s obligations.

27 n 24 above 140.



the failure of the parties to grant the landlord an express right to enforce – as couldeasily have been done, as the parties were setting up something approaching acomplete scheme of contractual entitlement between themselves – does seem tohave weighed in the court’s mind.

In Karangahape Road International Village Ltdv Holloway28 the relevant issuewas whether the description of the purchaser, in an agreement for sale, as ‘Jacksonor nominee’ rendered Jackson’s nominee a third party entitled to sue on theagreement. Chilwell J held that it did not: the third party was not sufficientlydesignated for the purposes of the Act; and in any event the proper construction ofthe agreement was such as to negate any intention to create an enforceable right inthe nominee.29 The case is notable for its lack of reasoning on the second issue; thecourt simply followed the decision of the New Zealand Court of Appeal inField vFitton30 which had held the same.Field, in turn, had decided this point on theground that ‘[t]he mere addition of the words ‘or nominee’ without more, is notsufficient . . . on the proper construction of the agreement to impute an intention tothe parties to create [an enforceable right in the nominee]. The agreement does notinclude a clause or wording which supports that intention’.31 Formally, thisapproach is hard to reconcile with the Act, which requires a search for materialnegativing intention, rather than demonstrating it.32 However, the court inKarangahapeput the question correctly in coming to the same conclusion – ‘theproper construction . . . negates any intention’. Here again one sees the courtfinding a contractual intention not to grant enforceable third party rights from afailure to do so expressly when (although this is left implicit in the judgments) itwould have been simple for the parties to do so.

Although each of these cases33 demonstrates that the failure expressly to providefor third party rights may tell against the enforceability of any terms which purportto benefit the third party, it is significant that the term which purported to benefitthe third party did so in a far from emphatic manner. This was emphasised by thecourt inField v Fitton:34 ‘the mere addition of the words ‘‘or nominee’’ ’; similarly,the reference to the landlord inMalyon v New Zealand Methodist TrustAssociation35 has a flavour of having been made in passing. A failure to provideexpressly for third party rights to be enforceable would have much lesssignificance in the context of a contract which clearly and directly purported toconfer a benefit on the third party.36

Conclusions

The Law Commission appears to have intended the effect of sections 1(1)(b) and1(2) to be that any contractual term which purported to benefit a third party would

28 [1989] 1 NZLR 83.29 ibid 104.30 [1988] 1 NZLR 482.31 ibid 493–494.32 See above p 887.33 Of course, it does not follow that the English courts will pay a great deal of attention to them. Indeed,

the Law Commission, siding with its New Zealand counterpart, thoughtField v Fitton wrong on theidentification point, but saw no need to make express provision to this effect in the draft Bill: Reportpara 8.4.

34 n 30 above 493–494.35 n 24 above.36 See for example the discussion ofBeswickv Beswick: text to n 17 above.



be strongly presumed to be enforceable, with the promisor who wished to resist theclaim facing the task of proving to the court that the contractual intention wasotherwise. However, it is submitted that the legislation which has been enacted tothis end in fact leaves the position rather less clear-cut. Although it will be for thepromisor to raise any alleged lack of contractual intention to grant enforceablerights, and for the court to ask whether enforceability wasnot the parties’ intentionrather than whether enforceabilitywas, the formal burden of proof will in mostcases have little or no role to play, and the court’s task will be the familiar one ofdiscerning contractual intention by the usual means. The court’s enquiry into thecircumstances surrounding the making of the contract ought, however, to be fairlylimited if injustice to the third party is to be avoided. One of the hardest questionsmay be whether the contracting parties’ failure expressly to deal with third partyenforceability should be significant in determining the issue of contractualintention under section 1(2) and, if so, how. It is submitted that it may well be ofsignificance and, although this may leave the position rather more uncertain thanmight be desired, the consequence of the statute’s requirement to construe thecontractual intention of the parties is that the significance of such failure can onlyreally be assessed on a case by case basis.



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