A long-standing legal rule states that only those who are party to a contract may bring legal proceedings to enforce the benefits or obligations under that contract. This rule is known as the doctrine of privity. Under this rule, a third party cannot enforce any rights or obligations under that contract, even if the contract was made for the benefit of that party, as they are not a direct party to that contract. The rule, however, has developed. More recently, third parties may have an enforceable right where a contract, or a clause in a contract, confers them a benefit in certain circumstances.
When Does a Contract Confer a Benefit on a Third Party?
A contract may confer a benefit on a third party where:
- a number of stakeholders are involved in a commercial arrangement; or
- the agreement between the two contracting parties significantly affects the third party.
It is common for these clauses to exist in complex commercial contacts where various parties are involved. Common industries where they may occur include:
- mining;
- finance;
- insurance; and
- construction.
Changes to the Law
The doctrine of privity has been the subject of cases and law in some states. You can find an example in the Insurance Contracts Act 1984 (Cth) at the national level. The law allows a person covered by a general insurance policy to recover from the insurer despite not being a party to the insurance contract. In addition, in Queensland, Northern Territory and Western Australia, respective property laws have been modified to enable third-party beneficiaries to enforce contractual rights. Despite these changes, the doctrine of privity has been largely maintained as a fundamental rule in contract law.
Continue reading this article below the formWhat is Declaratory Relief?
When a third party seeks ‘declaratory relief’, they ask the court to declare or affirm something. Declaratory relief is limited, unlike other relief granted by judges. Declaratory judgements will not order one party to do (or not do) something to another.
Are Commercial Contract Benefits Enforceable?
Recently the High Court’s decision in Hobart International Pty Ltd v Clarence City Council 2022 (Hobart) provided some parameters regarding the rights available to ‘outsiders’ of a contract.
The Case
The case regarded the Commonwealth entering into leases with operators of respective airports to privatise the land. A clause of the Commonwealth’s contract provided that the lessees were to pay the respective Local Council the equivalent Local Council land rates, as the Commonwealth land was not subject to such rates. The Councils pursued legal action for the Court to determine the proper meaning of the clause and to clarify the obligation of the lessees to make payment.
What Did the Court Say?
This means that where a third party may be able to enforce a right if:
- they can demonstrate that there is a “sufficient” or “real” interest in obtaining relief; and
- that relief relates to the party’s existing legally enforceable rights or liabilities.
Value of the Declaratory Relief
In this case, the Council (the third party) sought declaratory relief concerning the clause that conferred them a financial benefit. The Council sought calculated payments owed to them under the relevant leases. The clause contemplated that the council was due payment but fell short of outlining further details. The Court exercised its power to agree with the Council and give meaning and effect to its claim. Declaratory judgments, therefore, put the third party in a significantly more assured bargaining position concerning the right conferred on them.
Enforce a Benefit
Although declaratory relief does not result in the legal enforcement of the rights declared, there is still a practical and commercial impact. In Hobart, the benefit conferred required subsequent negotiations between the Councils and the airports to determine the compensation owed to the Council. The effect of the declaratory judgement allowed the Council’s claim for declaratory relief to be supported. As a result, significantly advanced their purposes for future negotiations.
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Considerations for Contracting Parties
Parties entering into contracts must be aware of who their agreement may impact outside those who are signing the document. The High Court’s decision means that parties to a contract may face claims from third parties to obtain declaratory relief. When drafting complex contracts involving numerous parties (in and outside of the contract) you should take care in drafting. Clear and succinct drafting of these clauses will mitigate risk and the instigation of disputes and avoid unforeseen consequences.
Key Takeaways
The doctrine of privity is a longstanding legal principle. It means that only the parties to the contract are able to enforce their rights under the contract. However, recent decisions in the High Court have created some exceptions to this rule. Third parties may seek declaratory relief in respect of a contract to which they are not a party to. The Hobart decision suggests that exceptional circumstances’ requires an element of public interest beyond normal commercial circumstances. Declaratory relief is a limited right only as it is a decision made by a court that sets out the rights and legal relations of the parties. However, it does not grant the enforcement of those rights.
The law has not been broadened to allow a third party to enforce a right conferred to them under the contract directly.
When drafting clauses that may confer rights on third parties, it is important to consider whether a multi-party agreement may be more beneficial. Any other terms may not bind a third party seeking declaratory relief in the contract, such as dispute or arbitration provisions. As such, contracting parties may have to defend a claim commenced by a third party.
If you need help with clauses conferring benefits on third parties, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A third party refers to someone who is not a party to the contract.
The doctrine states that only those who are party to a contract may bring legal proceedings to enforce the benefits or obligations under that contract. This rule is known as the doctrine of privity. Under this rule, a third party cannot enforce any rights or obligations under that contract, even if the contract was made for the benefit of that party, as they are not a direct party to that contract.
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