The Contracts (Rights of Third Parties) Act 2016

The Contracts (Rights of Third Parties) Act 2016

One of the latest notable changes to the Bermuda legislation is the introduction of the Contracts (Rights of Third Parties) Act 2016 (the “Act”). This Act, which is based largely on the UK equivalent, allows parties to a contract in Bermuda to now provide for enforcement of its contractual terms by third parties subject to certain exceptions.

Applicability optional

Previously, all contracts were subject to the common law doctrine of “privity of contract”. This meant that only parties to a contract were entitled to benefit from or enforce its terms. Now contractual parties can confer similar rights on third parties if: (i) the third party is expressly identified in the contract; and (ii) the contract expressly provides in writing that the third party may enforce the contract’s terms. Where the parties choose not to incorporate provisions to benefit third parties, the privity of contract doctrine will continue to apply.

The Act provides that it is sufficient for a third party to be identified in the contract as a member of a class or as answering a particular description. Further, the third party need not be in existence when the contract is entered into. Therefore, it is possible for an unborn person, a company not yet incorporated or a management corporation not yet constituted to be conferred directly enforceable contractual rights under s.4 of the Act.
The Act does not operate retroactively. However, any contract (whenever made) can be varied to include terms which comply with the Act to provide for third party rights. Also, with respect to contracts entered into prior to the Act coming into force which include terms complying with its s.4 to confer rights on third parties, such terms will be deemed to be enforceable on the commencement date of the Act.

Exceptions

The Act stipulates certain contracts in respect of which rights cannot be conferred on third parties. These include: bills of exchange, promissory notes and other negotiable instruments; rights bestowed on a company and its members pursuant to the company’s memorandum of association or bye-laws; employment contracts; and contracts for the carriage of goods by sea or roads or for the carriage of cargo by air and letters of credit.

Variation or rescission

Where parties to a contract have incorporated terms conferring rights on third parties pursuant to s.4 of the Act, they cannot by agreement vary or rescind the contract or affect the third party’s rights without their consent if:

The third party communicates their assent to the term;

The original contractual parties are aware that the third party has relied on the term; or

The third party’s reliance on the term is reasonably foreseeable and s/he has in fact relied on the term.

However, this limitation on the parties’ entitlement to vary or rescind the contract by agreement may be contracted out of entirely or varied in scope. Further, the original contractual parties can apply to the Court or arbitral tribunal to dispense with a third party’s consent if it is just and equitable to do so having regard to all the circumstances or it cannot reasonably be ascertained whether or not the third party has in fact relied upon the applicable contractual term.

Enforcement and Defences

If third parties establish a breach of their rights, they will have available to them all remedies as though they had been a party to the contract. This will include equitable remedies, such as an injunction or specific performance. Likewise, the counterparty to the litigation will have all the defences available to them that they would have had if they had been sued by a party to the contract. Furthermore, the contracting party will be entitled to assert any set-off or counterclaim specifically available to them against the third party.

The Act provides that:

1. Third parties get no additional rights than they would have had if they had been a party to the contract;

2. The same limitation period applies to an action by a third party as it would to an action by a contracting party;

3. The rights conferred on the third party can be made the subject of a binding arbitration clause; and

4. Where a contracting party has recovered losses completely or partially in relation to breach of a term which a third party might also seek to rely upon, the Court may reduce any award to a third party by the amount redeemed by the contracting party.

Assignment

Third parties are entitled to assign their rights under s. 4 of the Act in the ordinary way in which contractual rights can be assigned except if the contract expressly prohibits this or on a proper construction of the contract, the right is personal to the third party and is not assignable.

Summary

The Act, which allows contracting parties to choose whether, and to what extent, to confer rights on third parties within the body of a single agreement without the third party becoming a party to it, came into force on 28 March 2016. Its introduction is yet another example of Bermuda’s commitment to ensuring that its legislation is continuously reviewed and updated where necessary to ensure that the Island remains at the forefront of offshore jurisdictions for meeting the needs of businesses.