“NO LONGER STRANGERS”. THIRD-PARTY RIGHTS AND THE PRIVITY DOCTRINE IN CONTRACT ENFORCEMENT.” (An analysis of Section 65 of the Contracts Act of Uganda)
The case of Dunlop Pneumatic Tyre Co. vs. Selfridge Ltd (1915) may have settled the issue of whether a contract can impose an obligation or confer rights to a third party. This has been referred to as the privity doctrine, which clearly states that a contract cannot impose obligations or confer rights on those who are strangers to it.It would also be an unwarranted infringement of a third party’s (stranger’s) liberty if contracting parties were able, as a matter of course, to impose burdens on a third party without his or her consent.
However, as time passed, this doctrine, which seems to exclude third parties from contracts, raised many questions. The number of questions grew as legal and commercial relationships became more complex. Modern commercial transactions often extend beyond the immediate contracting parties. Some contracts created unique relationships that gave third parties benefits. The question was, did this mean they could take legal action under the contract? For instance, does a trust created to benefit a third party give the beneficiary the right to sue under the trust?
In 2010 when the Contracts Act of Uganda was amended, one key change was the introduction of Section 65. This section embraced the developments in modern commercial law.
However, to fully understand the intentions of the draftsmen of the law, it is important to note that the amendment was a direct import from the Contracts (Rights of Third Parties) Act 1999 of the United Kingdom. This act was specifically intended to remedy the extremes created by the case of Dunlop Pneumatic Tyre Co. vs. Selfridge Ltd (1915). Therefore, in appreciating the context in which the law makers decided to amend the doctrine of privity, one needs to understand that the purpose of the amendment was to ensure that a third party should be able to enforce the terms of a contract and not be locked out by the old contract rule of privity.
The amendment's core purpose was to grant third parties the ability to enforce contract terms, even if they weren't directly involved in the contract. Some academics have described this change as effectively removing the "stranger" status of third parties in relation to contracts.
Section 65(1) provides that a third party can enforce a contract term if the contract explicitly allows it or if a contract term benefits that person. The first part is clear: the parties must have expressly stated the third party's right to enforce the contract. The second part, referring to a conferred benefit, requires further explanation.
Section 65(2) clarifies the benefit referred to in Section 65(1) and it provides that the third party shall not be able to enforce the contract even if it has a benefit where on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by a third party. It is important to add that Section 65(3) further requires that the third party is identified in the contract. It emphasizes that the third party shall be expressly identified in a contract by name, as a member of a class or as answering a particular description; but need not be in existence at the time the contract is entered into
This qualification of a benefit was tested and clarified in the case of Hurley Palmer Flatt Limited v Barclays Bank Plc [2014] EWHC 304.
In a 2008 agreement, Hurley Palmer Flatt Limited (HPF) agreed to provide engineering design services for a new data hall at a Barclays PLC data center. Barclays Bank PLC, an affiliate of Barclays PLC, was entitled to enforce the agreement's terms as a "Client" under Clause 14.3. The agreement stipulated that disputes would be resolved through adjudication, with the adjudicator's decision binding unless overturned by legal proceedings or mutual agreement.
Disagreements arose resulting in a claim exceeding £4 million against HPF. On August 11, 2014, Barclays Bank PLC, relying on its rights as an Affiliate under the Agreement, issued a notice of adjudication seeking damages from HPF. The dispute was subsequently referred to an adjudicator on August 18, 2014. HPF responded by seeking a declaration that Barclays Bank PLC lacked the authority to commence adjudication and that the adjudicator lacked jurisdiction over the claims.
Barclays Bank invoked Section 1 of the 1999 Act and basically asserted that its position as an affiliate is analogous to the position on assignment and therefore it is entitled to adjudicate under the terms of the Appointment in the contract.
The Judge decided that Barclays Bank could not bring the action under the 1999 act because the contract did not confer an express right to it to commence adjudication proceedings. Since there was no provision to apply adjudication to the relationship between Barclays Bank plc (the third party) and HPF, the adjudication terms wouldn't apply. The Scheme's Part I, paragraph 1(1) states that only a party to a construction contract can give written notice to refer disputes to adjudication. Barclays Bank, as a third party, wasn't a party to the construction contract. Similarly, paragraph 1(2) states that the notice of adjudication must be given to every other party to the contract, which couldn't apply to Barclays Bank.
Therefore, simply being a beneficiary of the contract isn't sufficient. The contract must explicitly state the rights that the third party can enforce. Otherwise, the third party won't be able to circumvent the limitations imposed by the privity doctrine. This is clearly provided in Section 65(4) of the Contracts Act.
Conclusion
While Section 65 provides exceptions to the strict Privity doctrine, allowing third parties to have enforceable rights, the contracting parties retain the power to decide if and how a third party can enforce those rights under their contract. Otherwise, the privity doctrine is still alive.