Privity of Contract & When a Third-Party Can Sue You in Singapore

Privity of Contract 

As a general rule, only the people who are a party to a contract are able to enforce the rights and obligations arising from it. This is known as the doctrine of privity. As a result, even if the contract were to confer a benefit on a third-party, the third-party will not be able to enforce the contract since he is not a party to it.

For example, even if a contract between a manufacturer and retailer provides that consumers have a right to enforce certain warranty provisions in the contract, the consumers will not be able to enforce the warranty provisions because they are not a party to the contract.

However, the doctrine of privity leads to much difficulty and inconvenience when contracting parties intend to provide a benefit to a third-party in their contract (including a right in the contract for the third-party to exclude or limit his liability), and want to ensure that such intention is carried out. This is since such a third-party is unable to enforce any rights under the contract.

With the introduction of the Contracts (Rights of Third Parties) Act (CRTPA) which came into effect in Singapore on 1 January 2002, there are now statutory exceptions to the doctrine of privity, allowing third-parties to legally enforce their rights under a contract in certain situations, even if they are not a party to it. This article explains these exceptions. It will cover:

• When can a third-party sue on a contract that he is not a party to?
• Exempted contracts
• Qualifications to a third party’s claims
• Prevention of double liability 
• How to exclude third-parties from having rights under a contract

When Can a Third-Party Sue On a Contract that He is Not a Party to?

A third-party may enforce a term of the contract in his own right if the following conditions provided in section 2(1) of the CRTPA are fulfilled.

To start off, the third-party must be expressly identified in the contract:

• By name, as a member of a class (for example, “subcontractors” or “tenants”); or
• As answering a particular description (for example, “John Doe’s contractors who were hired within the last 2 years”).

Next, the third-party must fall within one of the two situations, under sections 2(1)(a) and 2(1)(b) CRTPA respectively, where:

1. The contract expressly provides that he may enforce the term in the contract; or
2.  A certain two-limb test is fulfilled.

The two-limb test to be fulfilled under section 2(1)(b) is as follows:

1. Whether the contractual term that the third-party is trying to enforce seeks to provide a benefit to him. In other words, the third-party must be an intended beneficiary of the contract. The benefit extended to the third-party also cannot merely be an incidental one; and
2. Whether the parties to the contract had intended for the contractual term to be enforced by the third-party.

The following scenario provides an example of how the two-limb test operates: A receives the shipped goods with a missing bill of lading (a document serving as a form of receipt, which must be accompanied with shipped goods), and wants to sue the shipowner for this missing bill of lading. However, there is a letter of indemnity between A and B, the charterer of the ship. The shipowner is not a party to this letter of indemnity.

The letter of indemnity contains a promise by A to indemnify “you [B], your servants or agents” in respect of liability which might be incurred by reason of delivery of goods without production of the bill of lading. Based on this, the letter of indemnity can be deemed to have satisfied the two-limb test, because:

1. The letter of indemnity provides a benefit to the shipowner (i.e. the third-party to the letter of indemnity), as  the shipowner is considered an “agent” of B; and
2. There is no proof that the letter of indemnity was not intended by A and B to be enforceable by the shipowner.

Accordingly, the shipowner can enforce the relevant term in the letter of indemnity against A. A is therefore unable to sue the shipowner for the missing bill of lading.

Once the third-party invokes the exception in section 2 of the CRTPA which allows him to sue on a contract that he is not a party to, he will have any remedy for breach of contract available to him as if he had been a party to the contract. The range of remedies include damages, injunctions and/or specific performance.

Exempted Contracts

However, there are certain types of contracts where the exceptions created under section 2 of the CRTPA do not apply, and the doctrine of privity prevails. A third-party will be unable to enforce the rights and obligations arising from the contract if it is a:

• Contract on a bill of exchange, promissory note or other negotiable instrument;
• Company constitution;
• Registration document of or agreement for a limited liability partnership;
• Contract of employment;
• Contract for the carriage of goods by sea; or
• Contract for the carriage of goods by rail or road, or for the carriage of cargo by air

For the last two exceptions however, although the third-party may not obtain any rights from the contract, he may still avail himself of an exclusion or limitation of liability (if the contract provides for it).

Qualifications to a Third-Party’s Claims

Subject to the contract expressly providing otherwise, section 4(2), 4(3) and 4(4) of the CRTPA provides three situations where defences or set-offs (as explained below) are available to the party to the contract who is being sued by a third-party on a term of the contract.

For ease of reference, the party to the contract who is being sued by the third-party will be referred to as the “promisor”, while the other party to the contract will be referred to as the “promisee”.

Defence or set-off for matters arising from or expressly provided for in the contract

Under section 4(2) and 4(3) of the CRTPA:

1. The promisor has a defence or set-off for any matter arising from or in connection with the contract; or
2. The promisor has a defence or set-off for any matter which the contract expressly provides to be available to him in proceedings brought by a third-party.

An example of the second situation under section 4(3) of the CRTPA is as follows:

A (the promisor) has a contract with B (the promisee), where A has to pay C (third-party) $50,000 if B transfers his car to A. There is an express term in the contract that provides:

“In the event that C claims for the $50,000 (or any part thereof) against A, A may raise any matter that would have given A a defence or set-off as if it was B who was the one who made the claim for $50,000”.

Therefore, if C were to claim the $50,000 against A, A may then argue that B owes A $10,000 under an unrelated contract and the correct amount that A will have to pay C is $40,000 after setting off this $10,000 in the unrelated contract.

This is because if B had been the one who had made the claim for $50,000 against A, A would have been able to set off this claim by the $10,000 that B currently owes to A, such that B may claim for only $40,000. Due to the terms of the contract, this set-off would still apply even though it is C, and not B, who is claiming $50,000 from A.

For the two situations contemplated by section 4(2) and 4(3) of the CRTPA, it is important to note that a third-party has only as many rights to enforce the contract as the promisee.

Where the promisee’s right to claim against the promisor is affected, such as when the promisee has breached the contract and can no longer enforce the contract against the promisor, the third-party’s claim against the promisor will similarly be affected.

Defence, set-off or counterclaim available if the third-party had been a party to the contract

As for the third situation contemplated by section 4(4) of the CRTPA, the promisor has a defence, set-off or a right to counterclaim against the third-party, that would have been available to him if the third-party had been a party to the contract.

To elaborate, if C (from the above example) had induced A to enter into the car transfer contract with B by misrepresentation, of which B was totally unaware, then A may have the defence of misrepresentation against C, as if C had been a party to the contract. This defence of misrepresentation would not have been available to A had the action been brought by B instead.

Prevention of double liability 

A promisor to the contract may find himself in a situation where the promisee to the contract had already enforced the term conferring a benefit on the third-party, and has recovered either:

• The third-party’s loss in respect of that term; or
• The promisee’s expense of making good the third-party’s loss,

but a third-party to the contract still seeks to enforce the relevant term of the contract pursuant to the CRTPA and claim against the promisor. This exposes the promisor to double liability. In such an event, section 6 of the CRTPA provides the promisor protection from double liability, whereby the third-party’s recovered sum will be reduced to such extent.

For example, if both B and C sued A for refusing to pay the $50,000 to C as per the car transfer contract and B had already obtained $30,000 from his lawsuit against A, section 6 of the CRTPA will reduce C’s claim against A by the extent of the sum which B had already recovered from A. Accordingly, double liability is prevented and C can recover only the remaining $20,000 from A.

How to Exclude Third-Parties From Having Rights Under a Contract               

To avoid the situation where third-parties seek to enforce a term in the contract under the CRTPA conferring a benefit on the third-party (“Term”), parties may choose to expressly provide a term to prevent this from happening in their contracts. An example of a commonly used clause is:

“The application of the Contracts (Rights of Third Parties) Act 2001 (No. 39 of 2001) and any subsequent revision or replacement thereof is expressly excluded insofar as this contract is concerned.“ 

However, if the contract had already been executed and the contracting parties are seeking to rescind or vary the contract to add in the suggested clause above, section 3 of the CRTPA provides that the contracting parties will need the third-party’s consent to do so if:

• The third-party has communicated his agreement to the Term by words, conduct or other means of communication;
• The parties are aware that the third-party has relied on the Term; or
• The promisor can reasonably be expected to foresee that the third-party would rely on the Term, and that he had in fact relied on it.

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In summary, the CRTPA allows third-parties to enforce a term in a contract under certain conditions, despite not being a party to the contract. Before entering into a contract, whether as the promisor or promisee, it is important for you to be aware of the CRTPA and its effects, before providing third-parties a benefit under the contract.

Otherwise, you may find yourself caught in the unintended situation of receiving multiple lawsuits from various third-parties despite them not being a party to the contract. If you do not wish for third-parties to enforce terms of a contract that they are not a party to, then you should expressly exclude the application of the CRTPA in your contract.

Please do not hesitate to reach out to one of our corporate lawyers if you require assistance in drafting a contract which excludes the application of the CRTPA, or if you require legal advice on the enforceability of a clause providing benefit to a third-party in Singapore.