This precedent has been authored by Ilija Vickovich, Lecturer, Macquarie Law School and updated by Dr. Gordon Hughes, Principal, Davies Collison Cave Law.

Introductory note

Contracts very often affect not only the contracting parties but also third parties who may benefit from the contract. A major question that is frequently the subject of dispute and litigation is whether a third-party beneficiary has a right to enforce the benefit to which it claims it is entitled under the contract. Specific boilerplate provisions provide the capacity to control such a right and avoid unnecessary disputation.

General rule and exceptions

The general rule derives from the doctrine of privity of contract. This states that “only a person who is a party to the contract may sue on it” (see Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847; [1914-15] All ER Rep 333; (1915) 84 LJKB 1680; 113 LT 386 and Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] ALR 385; (1967) 40 ALJR 471; BC6700180). It follows then that third parties generally may not take legal action if one of the parties breaches the contract by failing to provide for the third party’s benefit.

However, there may be circumstances in which a third-party beneficiary may enforce its right to the contractual benefit. This may be by way of:

• an alternative non-contractual action under the rules of equity, trust law, agency law and the like (see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 80 ALR 574; 62 ALJR 508; BC8802625); or

• an exercise of a statutory right (such as the right of a third party beneficiary to enforce a contract for sale of land). (See eg Conveyancing Act 1919 (NSW) section 36C; Property Law Act 1958 (Vic) section 56; Property Law Act 1974 (Qld) section 13; Property Law Act 1969 (WA) section 11(2); Law of Property Act 1936 (SA) section 34; Law of Property Act (NT) section 12 and Civil Law (Property) Act 2006 (ACT) section 212.)

Statutory provisions generally apply in this regard only after it has been determined that a particular contract does contain one or more terms that provide for a third party benefit. It is therefore recommended that contracting parties express clearly their intent as far as third party rights are concerned. This is to avoid courts construing the contract contrary to their intent.

Statutory limitations

There may also be statutory limitations on the capacity of contracting parties to extinguish or limit certain statutory or other rights that may arise within the context of contract (such as consumer law implied terms and guarantees as to acceptable quality or disclosed fitness for purpose). (See eg The Australian Consumer Law sections 54 and 55.)

Where appropriate, consideration should be given to the Insurance Contracts Act 1984 (Cth), which covers third parties mentioned in insurance policy: section 48.

Third party beneficiaries

A third party rights clause in a contract should generally avoid asserting that there are no third party beneficiaries under the contract. This is because a court is always entitled to find otherwise on the facts and circumstances regardless of what the parties may have expressly asserted. The aim of a well drafted boilerplate provision should be concerned with the enforceability or otherwise of the rights of any third party beneficiaries. It could be directed at asserting that:

• a third party beneficiary has no enforceable rights or remedies under the contract; or

• a third party beneficiary does have enforceable rights or remedies under the contract.

Allowing the enforceability of third party rights

If the parties do not know what their intention is in this regard, or if they cannot agree about third party rights, they should probably provide expressly that no third party rights may be enforced under the contract. It will always be possible for the parties to amend the contract after initial formation to allow the enforceability of third party rights. However, taking away rights that are contractually created may prove strategically and practically more difficult.

Where the parties wish to preserve or allow a third party’s right to enforce the contract, a suitably drafted boilerplate clause could aim to:

• expressly create rights in a third party;

• declare the parties’ intent in respect of any third party rights;

• define or limit the enforceability of those rights; and

• reserve the power to amend the contract in relation to those rights.

In relation to the final point, it may not be possible for the parties to modify the contract without the consent of the third party beneficiary where the third party’s rights have vested. Depending on the facts, this could be upon the execution of the contract, upon the reliance of the beneficiary or upon the obtaining of consent.