[2] The second rule of the doctrine of privity, that a third party could not enforce a contract for which he had not provided consideration, had been widely criticised by lawyers, academics and members of the judiciary.
Proposals for reform via an act of Parliament were first made in 1937 by the Law Revision Committee in their Sixth Interim Report.
It received royal assent on 11 November 1999, coming into force immediately as the Contracts (Rights of Third Parties) Act 1999.
[5] The first reversal of this law came in Bourne v Mason [1669] 1 Vent., where the Court of King's Bench found that a third party had no rights to enforce a contract that benefited him.
[8][9] The second rule of privity, that a third party cannot claim benefits from a contract, was widely criticised by academics, members of the judiciary and legal professionals.
[15][20][a] An exception to the "purports to confer a benefit" basis for enforceability involves contracts that include language barring third parties from applying the rule.
[21][22] Another exception applies to contracts between solicitors and their clients to write wills, something governed by White v Jones [1995] 2 AC 207.
[23] After the act was first published, Guenter Treitel argued that in a situation where the promisor felt that the second rule had been wrongly applied by a statement in the contract, the onus would be on him to prove it.
[24] The second situation, that a third party can enforce terms that "purport to confer a benefit on him", has been described by Meryll Dean as too broad, and one view put forward in the parliamentary debates was that it was "un-workable" in situations such as complex construction contracts involving dozens of sub-contractors with chains of contracts among them.
[32] Andrew Burrows, who prepared the Law Commission's report, said that the third party does not acquire rights against the promisee,[33] something Guenter Treitel has also suggested.
At the same time the courts may add conditions to that decision, such as requiring the promisor or promisee to pay the third party compensation.
[41] Part III is directly modelled on the similar section of the New Zealand Contracts (Privity) Act 1982.
[41] The Act takes a different attitude for the defences available to the third party in counterclaims, with the Law Commission saying that to apply the same rules would be "misleading and unnecessarily complex".
[45] It does so in a very limited way, though – the promisor is only protected if he has first paid damages to the promisee, and the third party's claim comes after that.
[45] This fails to take into account situations where the promisee has suffered personal loss from the breach of contract.
Equally section 7(2) gives to defendants (facing action from third parties) the ability to exclude liability for negligence, if reasonable other than for death or personal injury; it disapplies the protection of s.2(2) of the Unfair Contract Terms Act 1977 which subject all such provisions with a counterparty consumer to the contract to the condition of reasonableness.
[53] The act applies in England and Wales and Northern Ireland, but not Scotland, which has its own rules on privity and the rights of third parties.
[55] The reaction from the judiciary, legal profession and academia was largely supportive of the act; the doctrine of privity had long been thought unfair.
It is generally accepted, however, that it would be unfair to make an exception for a particular industry,[25] and case law has clarified the meaning of "purports to confer a benefit".
[57][58][59] It is also now routine in commercial contexts for enforcement by third parties to be excluded under the terms of the contract, as permitted by section 1(2) of the Act.