(1) The parties (the “promisor” and the “promisee”) may confer by express or implied agreement a right on a third party (the “beneficiary”).
(2) The existence and content of the beneficiary’s right against the promisor are determined by the agreement of the parties and are subject to any conditions or other limitations under the agreement.
Usually contracts are intended by the parties to create rights and obligations between themselves. In such cases only the parties will acquire rights and duties under the contract. The mere fact that a third party will benefit from the performance of the contract does not in itself give that third party any rights under the contract.
1. Professor A makes a contract with the University of country X under which he agrees to give forty one-hour lectures comparing the laws of contract of countries X and Y. A only appears for twenty lectures and does not mention the law of country Y in the lectures. T, a student, does not acquire rights under the contract between A and the University.
However, third parties are not always left without rights. The underlying principle is that of the autonomy of the parties, who, if they wish to create rights in a third party, should be free to do so. The parties may state expressly that this is their intention, but this is not essential since the intention to benefit the third party may be implicit in the contract. In cases where implied intention is alleged, the decision will turn on all the terms of the contract and the circumstances of the case.
The following are illustrations of implied intention.
2. A takes out a policy of insurance on its fleet of lorries which are regularly driven by its employees. The contract provides that the insurance company will cover anyone driving a lorry with A’s consent. An employee, T, has an accident while driving the lorry. T is covered in respect of its liability for the accident.
3. A sells his business to B on the terms that B will pay A GBP 1,000 a month for the rest of his life and will pay A’s wife, T, GBP 500 a month if A predeceases her. A dies. B refuses to pay T anything. T is entitled to the GBP 500 a month.
4. A, the International World University, wishes to build a new law library on land owned by the University. For legitimate tax reasons the contract for the erection of the library is made by B, a company wholly owned by the University, although the contractor well knows that when completed the library will be occupied and used by A. The building has been badly built and it will cost USD 5,000,000 to complete it satisfactorily. A can recover the cost of the remedial work.
5. A, the developer of a shopping mall, concludes a contract with B, a security firm, to provide security at the mall. Both A and B know that the shops will be operated by tenants of A. These tenants are told that one of the major attractions of the mall will be the high level of security provided by B. It is a term of the contract between A and B that all employees of B working at the mall will be ex-policemen personally selected by B’s chief executive. In fact, selection is delegated to a consultancy firm which recruits many unsuitable people. There are many thefts at the shops. Tenants who suffer losses will have contractual claims against B.
The following are illustrations where there is no such implied intention unless the circumstances clearly indicate otherwise.
6. A goes to an expensive furrier and selects and buys a coat. A tells the assistant (truthfully) that it is for T, the wife of a visiting head of State. By the side of the coat is a prominent card saying “It looks like mink, it feels like mink but is guaranteed man made.” A gives the coat to T. In fact, owing to a mistake by the furrier, the coat is a real mink coat and T is subjected to violent and hostile criticism by animal lovers in her country. T has no enforceable contract right.
7. A, a company with a large factory, concludes a contract with a company operating the local sewage system. Under the contract, A is entitled to discharge its waste into the sewer but undertakes not to discharge certain types of waste. In breach of this undertaking, A discharges waste which blocks the sewer and causes damage to T, another user of the sewer. T has no enforceable contract right.
8. A, a company from country X, sells materials to B, a company from country Y. A knows that B plans to resell the materials to T, a pharmaceutical company from country Z, which will use the materials for the manufacture of a new drug under a contract which will effectively limit B’s liability to T to USD 1,000,000. The materials are defective and T’s losses greatly exceed USD 1,000,000. T has no enforceable contract right against A.
The application of this Article will often come up in the context of an associated claim in tort. This possibility is outside the scope of the Principles.
It follows from the scheme of this Article that an express statement that the parties do not intend to create rights in a third party will be effective. It also follows that the promisor and promisee enjoy broad powers to shape the rights created in favour of the beneficiary. In this context the word “rights” should be interpreted liberally. In principle, a third party beneficiary will have the full range of contractual remedies including the right to performance and damages.