Avraamides v Colwill

In Avraamides v Colwill [2006] CA, Mr Avraamides sued Mr Colwill for failures in the refurbishment of his two bathrooms. As occasionally happens, a case on small amounts may throw up complicated legal issues. The problem for Mr Avraamides was that the contract of refurbishment was with a company Bathroom Trading Limited and that company had no assets. Mr Avraamides relied instead on an agreement that Mr Colwill had with the company after the work was done to buy the company’s assets, complete customer orders and settle the liabilities of the company.

Mr Avraamides argued that he was a third party who was to benefit from that agreement and therefore could enforce the agreement and have Mr Colwill settle the companies liabilities to him. It was argued that the liabilities to be settled in the agreement were those to the company’s customers which included Mr Avraamides.

Usually only a party to a contract can sue on the contract. There are exceptions to that rule but these are tightly defined. However in this case, the piece of legislation relied on was the Contracts (Rights of Third Parties) Act 1999.

In order to be able to use the 1999 Act, the third party must not only be intended to benefit from the terms of the contract but must be identified expressly or as a member of a class described in the agreement. The Court of Appeal held that in this case the liabilities to be settled under the agreement were all types of liabilities, not only customers but also for example suppliers or telephone bills. There was no express reference to existing customers, but just a general reference to liabilities. It was held that on that basis the third party required to benefit from the agreement was not sufficiently identified for the 1999 Act to operate. The claim failed on this technical ground.

What This Means

The Contracts (Rights of Third Parties) Act 1999 was enacted to allow third parties to sue on contracts made for their benefit, even if they are not a party to a contract.

Potentially this means that where goods and equipment are supplied under a contract, for the intended use or operation by a specific third party, or a class of third party, then that third party or class could enforce the terms intended for his benefit such as standards and performance levels. If the contract is neutral on the issue, then the 1999 Act operates.

In the above case the action failed but no doubt all parties will have been involved in considerable expense and disruption of business. If a supplier wishes to avoid costly litigation by third parties not known to him he needs to ensure that the 1999 Act is excluded from the supply contract. The supplier should state clearly those persons or organisations who can benefit from the contract under the 1999 Act. If he can he should describe them by name or at least as a class of say first user or such a term. He should then expressly exclude all others not named or defined. Alternatively, and as is common practice in the construction industry he could exclude the 1999 Act altogether.