Why third party rights matter?
Whether you're negotiating an IT outsourcing deal, a SaaS licence, or just rental of server rack space, beware that someone without their name at the top or bottom of your contract could still enforce its terms. This risk (or, for some, opportunity) arises from the Contracts (Rights of Third Parties) Act 1999, by-now familiar legislation that took on new importance thanks to a recent High Court decision.
How third party rights work, and how to manage them, are now considerations essential for risk management and contract clarity.
What does the law say?
The Contracts (Rights of Third Parties) Act 1999 allows someone who is not a party to a contract to enforce its terms if:
1. They are expressly identified in the contract (by name, class or description), even if they don’t yet exist; or
2. The contract confers a benefit on them.
Traditionally, judges applied this leanly, requiring the fulfillment of both conditions prior to enforcement. A more liberal approach, where the court has permitted a third party to enforce a contract on the merits of condition "1", even without "2" being anything more than the benefit of the right to enforce, now seems to be preferred. There is no need per se to demonstrate that the third party receives any further benefit under the contract.
What’s changed?
In HNW Lending Ltd v Lawrence & Setfords Solicitors, the High Court provided a striking example of how third-party rights could apply in practice.
The facts
HNW Lending, a regulated peer-to-peer lender, arranged a property redevelopment loan on behalf of an unnamed lender. HNW was not a party to the loan agreement itself, but it was expressly named as a party entitled to enforce the contract under a third party clause.
The dispute
The borrower, Ms Lawrence, challenged the validity of the agreement, claiming the loan amount was altered after she had signed it and that she did not authorise her solicitor to agree to the changes.
The outcome
The court disagreed. It found that:
- Ms Lawrence had authorised her solicitor (or later ratified the agreement by accepting the funds);
- The third party clause was valid and effective; and
- HNW was entitled to enforce the repayment terms, even though it was not a direct party to the agreement.
Commercial takeaway
This case confirms that clauses permitting third party enforcement will be upheld by the courts when backed by the parties’ conduct (e.g. by accepting funds) and supporting documentation, irrespective of whether the term also purports to confer a distinct benefit on the third party.
Why it matters for technology and outsourcing contracts
Technology contracts often relate to multiple parties, such as developers, systems integrators, OEM licensors, data subjects, and end users. Historically, "privity of contract" (between the parties actually striking the deal) meant that nobody felt the need to worry much about third parties enforcing their agreements. The importance of clearly defining or excluding third party rights in a way that aligns with the parties' intentions has now become clear.
Suppliers should consider how the shift in the law on third party rights may expand their liability. For example, when entering into an IT outsourcing contract, a supplier wants to ensure that, for occurrences such as cyber-attacks, they are liable only to the main contracting party, without the risk of claims under the GDPR (or related law) from data subjects. The prospect of third party claims could in effect exacerbate the risk in certain supplier obligations (e.g. by customer group companies being able to enforce their place in a delivery roadmap), potentially affecting the required volume of work and jeopardising agreed timelines.
For buyers, the main concern is financial risk. For example, subcontractors used by the supplier to deliver the service or product under the contract could rely on third party rights to pursue action over delays in payment, or their losses from wrongful termination of the head contract, if they are somehow provided for under the contract.
How to protect your business
1. Draft third party clauses with precision
Be explicit about who, if anyone, is allowed to enforce your contract. If you do not wish to confer rights on anyone outside the contracting parties, include a clause that excludes the application of the 1999 Act altogether.
2. Revisit boilerplate language
Often, third party clauses sit at the back of a contract and are overlooked. Ensure that yours reflects your commercial intentions. Don’t assume standard wording will be sufficient.
3. Stress-test the contract structure
Consider who else might benefit from or be affected by the agreement (for instance group companies, subcontractors, funders, or end users) and ensure their rights are either clearly scoped or expressly excluded.
4. Keeping your conduct aligned
Courts will consider not just the contract terms but also how parties behave. If you treat a third party as if they have contractual rights, a court may conclude that this was your intention.
Conclusion
The HNW Lending case signals a more liberal and flexible judicial approach to finding third party rights enforceable. For commercial parties, especially in the tech sector, this reinforces the importance of robust contract drafting and strategic negotiation.
Don’t leave third party rights to chance. Make them work for you, not against you.
If you would like tailored advice on reviewing or drafting your third party clauses, please get in touch with our team.
Co-authored by Carmelina Hanson, PSL and Adrianna Zawilska, Trainee
