Demystifying contractual terms for charities: Third Party Rights

When can someone who is not party to a contract enforce its terms. Third party rights and contractual terms.

Background: Third Party Rights

It is commonly understood that when two parties enter into an agreement, such as for the provision of services by one to the other, they can each enforce the terms of that agreement against the other (e.g. where the other is in breach of the terms of that agreement, such as for failing to pay or deliver something). However, what is less well known, is that there are circumstances in which a third party, being somebody (either an organisation or individual) who is not party to a contract but on whom that contract confers a benefit (e.g. to receive something), can enforce the terms of that contract against the parties to it.

This presents risks and opportunities to the parties to a contract, because there may be circumstances in which they expressly wish such third party rights to arise (or indeed not to inadvertently create them), but they fail to document the terms of the contract properly to give effect to such wishes. For example, the parties may well be concerned not to create rights in favour of third parties who are unknown to them or who are not contemplated by them, but who may be able to enforce the contract against them.

The Contracts (Rights of Third Parties) Act 1999 gives such powers to third parties. It provides that, for a contractual provision to be enforceable by a third party:

• that third party must be expressly identified in the contract, by name, class or description; and

• that provision must confer a benefit on the third party.

In addition, no enforceable right will arise as a matter of construction of the contract unless the conferral of the benefit on the third party was a purpose of the bargain between the parties to the contract, and not just incidental to it.

As a consequence of the above, it is usual for an agreement to include a clause which indicates whether any such rights are intended to be created in favour of any such third parties. A third party rights clause.

The relevance of Third Party Rights to charities

There are a number of circumstances in which third party rights might be relevant to arrangements entered into by charities:

• Beneficiary Rights: If a charity enters into a contract that benefits a specific group of people, a third party rights clause can allow those beneficiaries to enforce the terms of that contract directly, without the charity having to take action on their behalf.

• Funding Agreements: Charities often receive funding from various sources, including government grants and private donations. In some circumstances, a charity may onward fund that money to an end recipient. The original funder is not party to the onward funding agreement between the charity and the end recipient, but may well be interested to know that the end recipient is using its onward funding in a way that is consistent with its original funding to the charity. A third party rights clause in that onward funding agreement can ensure that the original funder has the right to enforce certain conditions of that agreement against the end recipient. (Indeed, it is not unusual for funders to require this as a term of their original funding.)

• Service Contracts: When a charity contracts with a service provider, third party rights clauses can protect the interests of the charity's stakeholders such as beneficiaries (being third parties to the contract) by allowing them to enforce the contract terms if the service provider fails to deliver to the charity (for the benefit of such stakeholders).

• Partnerships and Collaborations: Charities frequently collaborate with other organisations, the terms of which are documented in one or more partnership or collaboration agreements. Third party rights clauses can be used to ensure that all parties involved in that partnership or collaboration can, if needed, enforce the terms of those agreements against one another, promoting accountability and transparency.

Recent developments

The law relating to third party rights has not often been tested in the courts. However, in Secretary of State for the Department for Environment, Food and Rural Affairs v Public and Commercial Services Union [2024] UKSC 41, the Supreme Court recently appeared to take a more expansive view of the circumstances in which third party rights may arise.

The case involved a trade union attempting to claim against DEFRA for loss it had sustained as a third party beneficiary to a number of employment contracts entered into between DEFRA and its employees. The employment contracts did not expressly grant third party rights to the trade union. However, they did purport to confer a benefit on the trade union, which was expressly identified in the contracts. The question for the court was therefore if, “on a proper construction of the contracts”, the parties (DEFRA and its employees) did not intend for the arrangement to be enforceable by the trade union.

The court found that once a contract purports to confer a benefit on a third party, there is a “strong presumption” that the term is enforceable by that third party. As a result, it found in favour of the trade union’s claim. This was notwithstanding that the employment contracts did not expressly grant third party rights to the trade union.

What does this mean for charities?

It is important for charities to include terms in their agreements that expressly set out who does, or does not, have third party rights. Otherwise, they might be on the receiving end of an unexpected and unwanted claim by a third party, or they might have failed to confer an enforceable benefit on a third party in circumstances where they might have wished to do so.