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Wednesday, Jan 26th 2022

The ACP Legal Association

  • OHADAC and ACP Legal

    The partisans of this project, called OHADAC (Organisation for the Harmonisation of Business Law in the Caribbean), decided to meet within the framework of the association ACP Legal, to help interested Caribbean States to implement the project.

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  • OHADAC in brief

    This brochure has been published by the ACP Legal Association.

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OHADAC PRINCIPLES ON INTERNATIONAL COMMERCIAL CONTRACTS

Article 5.2.1

Contracts in favour of third parties

1. The parties to the contract (promisee and promisor) may include stipulations in favour of a third party (beneficiary), who will acquire, in the absence of any agreement to the contrary, the right to require the promisor to perform it.

2. The existence and the content of the beneficiary's right against the promisor are determined by the agreement of the parties.

1. The principle of privity of contract and contracts in favour of third parties in the OHADAC systems

The contract in favour of a third party essentially implies granting a third party a right arising from a contractual relationship between the promisee (the party which has a direct interest in that right) and the promisor (the party which is obliged to the third party or beneficiary). The legal relationship between the promisee and the promisor is called the “cover relationship”. The relationship between the promisor and the third beneficiary is called the “value relationship”.

The practical utility in international trade of these agreements in favour of a third beneficiary lies in the fact that it is an instrument of contractual simplification and legal economy. In this sense, agreements in favour of third persons are best suited to interlinked contracts or contracts where there is a plurality of participants (chain of contracts, subcontracts or holdings).

Example 1: Insurance company A signs an insurance contract with shipping company B in order to cover it and its subcontractors for certain maritime routes. If a company C assumes, as subcontractor, one of these lines, it would automatically be a beneficiary of the insurance contract between A and B.

In other cases, the contract in favour of a third party may work as a financing instrument, allowing the promisee, which is an obligor of the third party and at the same time an obligee of the promisor, to reach an agreement with the promisor to assume its debt to the third party. Thus, the promisee can pay off its debt to the third party and set-off its right against the promisor through only one transaction.

Example 2: Company A acquires from distributor B a batch of goods, stipulating in the contract that the payment shall be made to manufacturing company C (which is, in turn, a obligee of B). With this contract dealer B has obtained financing to pay its debt to C.

Finally, it is also relatively common in practice to sign contracts in favour of third parties with a clear purpose of guarantee a debt that the third party may have against the promisee obligor [e.g. commercial credit insurances covering the risk of loss resulting from the insolvency of customers so that, for example, the insured (promisee) concludes a factoring contract and designates the factoring company as beneficiary of compensations].

The civil law principle of contract relativity and the common law doctrine of privity of contract start from the same point: firstly, they assume that a third party may not acquire rights or bring actions under a contract in which it is not a party; secondly, they make it impossible to impose obligations on a person which has not agreed. However, overcoming these limits to the subjective scope of contracts has developed differently in different legal systems, which has traditionally implied an important element of divergence within European law between civil law systems (and even some common law system) and English law. While civil law systems allow contracts in favour of third parties in their firmly established legislations, English law maintained its reluctance until very recent times [specifically until the Contracts (Rights of Third Parties) Act 1999], when it admitted for the first time an explicit exception to the privity principle, allowing third parties to invoke rights established in contracts where they are not parties. A general acceptance of contracts in favour of third parties has been supported by its inclusion in different texts on contract law harmonisation (Article 5.2.1 UP; Article 6:109 PECL; Articles II-9:301 to 9:303 DCFR).

This trend of general admission of contracts in favour of third parties is also confirmed in the civil codes of OHADAC countries, which regulate this figure as an exception to the principle of contractual relativity. In some cases, as in the Venezuelan Civil Code, this is qualified by the condition that there is a “personal, material or moral interest in the performance of the obligation” (Article 1.164). Otherwise, as in Haitian Civil Code, there is no general regulation of the contract in favour of a third party, but there are specific provisions which suggest this possibility, such as those in lease contracts in Article 1.737. There is no specific regulation on contracts with clauses in favour of third parties in the Commonwealth Caribbean, which remains reluctant to justify exceptions to privity doctrine, under the direct influence of English common law. However, this legislative silence should not be interpreted rigidly, but rather in the context of the development of English contract law itself. In this sense, everything suggests the recognition of contracts in favour of a third party also under these laws.

2. Identification of contracts in favour of a third party

The first difficulty in contracts in favour of a third party is determining when a contract enables a third party to enforce the obligation stipulated in its favour. In all cases where there is a clearly expressed wish to do so by the contracting parties, no specific problems arise. Difficulties arise when such an event has not occurred. One wonders if liability insurance, manufacturer warranties on product quality, contracts between a travel agency and an air carrier for the transport of their customers or child maintenance agreements include provisions in favour of a third party.

The characterisation of these cases depends on the criteria used in each legal system. Two major models can be distinguished in this area: the first one starts only from the will of the parties and the other also introduces objective parameters for identification of stipulations in favour of third parties.

Under the first model, the intention of the parties is the only criterion from which an actual stipulation for a third party can be inferred. This is the approach in the Contracts Act (Rights of Third Parties) 1999. In drafts developed by the Law Commission, dual intention tests finally envisaged in Section 1 (1) and (2) of the Contracts Act (Rights of Third Parties) of 1999 were already established, determining the available actions for third parties: the first, when a right has been expressly granted by the contract; the second, where the contract confers a right to enforce (rebuttable presumption) unless, according to the proper construction of the contract, it is interpreted that the parties were unwilling to grant this right to a third party. Thus, the determining factor for identifying a contract in favour of a third party is not that a benefit to the third party is derived from the contract, but that there is an expressed willingness to grant the third party a right to claim the performance granted (right to sue), which can only be inferred, in one way or another, from the will of the parties. Similarly, Article 6:253 of the Dutch and Suriname Civil Code contains an express allocation rule of law, indicating that the third party can claim a performance if the contract contains a stipulation in its favour.

Under the second model, in addition to the express will of the parties, the allocation of the right to the third party may be inferred from objectives signs, such as the “circumstances of the contract”, the “purpose” of the contract or the usages. This is the model followed in French law, although it cannot be directly inferred from the wording of its provisions. In practice, a set of standard contracts involving provisions for third parties (for example, contracts involving obligations of advice or security or surveillance, carrier obligations regarding the safety of passengers or obligations of the professional seller to a non-expert buyer) are identified . However, the Proposals for reform of the French law on obligations of 2013 (Article 114) seems to opt only for the will of the parties as a source of the right of the third party.

In the OHADAC territories, most civil codes base the effectiveness of stipulations in favour of third parties on the will of the parties, therefore enabling third parties to sue for its performance (Article 1.506 of the Colombian Civil Code; Article 316 of the Cuban Civil Code; Article 1.549 of the Honduran Civil Code; Article 1.869 of the Mexican Civil Code; Article 1.108 of the Panamanian Civil Code; Article 1.164 of the Venezuelan Civil Code). Article 741 of the Honduran Commercial Code establishes the presumption, with the possibility of agreement to the contrary, that any provision in a contract gives the third party the right to require of the promisor the performance of that obligation. A different approach is seen in Articles 1.122 of the French and Dominican Civil Code and Article 1.531 of the Guatemalan Civil Code, which establish a presumption of validity of the contract between the parties “unless otherwise stated or resulting from the nature of the contract” or “when this is derived from the purpose established in the contract”. Article 963 of the Saint Lucian Civil Code states in the same sense. These provisions extend therefore the chances of identifying a contract in favour of a third party on the basis of objective circumstances of the contract, even if the will of the contracting parties in this regard is not clearly determined.

The rule laid down in the OHADAC Principles follows the first of the models analysed for the identification and characterisation of a contract as a contract in favour of a third party, based on the will of the parties. This criterion is the most respectful with contract interpretation rules inspired by English law, but it also prevents inevitable legal divergences derived from the second model, insofar as characterisation of the contract requires here the analysis of the nature or the purpose of the contract. Agreement of the parties as the exclusive source of the right of the third party also excludes the application of these rules to cases in which a third party may have a direct action against a contracting party based on a legal obligation, which often deserve a characterisation as non-contractual obligations. For example, claims that victims can make on the basis of a direct action against insurers of those responsible for damage are not considered as contractual obligations in favour of third parties.

This Article also includes a specific reference to the fact that the right of a third party implies an action against the promisor. Therefore, it is presumed that any contract which contains a provision in favour of a third party entails, unless otherwise agreed by the parties, the granting of an action for the third party to claim against the promisor. This provision, expressly included in the Mexican and Venezuelan civil codes as mentioned, is interesting insofar as the rule itself clarifies what is the distinctive regime of such contracts in contrast with the general rule of privity. The recognition of this rule may be particularly significant and relevant in the sphere of Commonwealth Caribbean. In fact, due respect to freedom of contract and subjection to the strict rules of interpretation in common law systems lead to the recommendation of this express statement in the contract to avoid any doubt about the real scope of the formulation of the right in favour of the third party.

The second paragraph of the article recalls the restrictive nature of the advantage conferred by the contract on which it is based, and its wording is the same as in Article 5.2.1 UP. It is obvious that the rights of the third party depend absolutely on the agreement between the contracting parties. Therefore, the agreement of the parties depends on the recognition of the third party's right as well as the possibility and scope of actions recognised thereto, all the while establishing conditions and limitations to the acquisition and exercise of that right.

3. Regime of post mortem contracts in favour of third parties

A contract including stipulations in favour of a third party causes a variety of relationships between the different parties involved, some of which (the cover relationship and the relationship between the promisor and the beneficiary) are directly based on the contract, while the relationship between the promisee and the beneficiary, being the cause of the contract itself, is actually alien to the main contract. However, this autonomy of the contract regarding the underlying relationship is not confirmed in all cases and it is not recognised to the same extent in all legal systems. The clearest example is the bank deposits including an appointment of beneficiary in case of death of the depositor holder.

In the field of the OHADAC Principles, a specific provision on post mortem contracts in favour of a third party is not envisaged, particularly due to clear differences between civil law and common law systems and even among civil law systems themselves. Such a provision is not found in other international texts on contract law harmonisation, either (UP, PECL and DCFR). The absence of regulation of this issue does not really imply a gap or a legal vacuum on an essential aspect of contracts in favour of third parties. Succession law must be taken into consideration in relation with the “value” relationship between the promisee and the third party and therefore its legal regime is not required in contracts in favour of a third party. From an abstract perspective, the contract in favour of a third party remains in force and fully effective, while the attribution of the right (which constitutes the value relationship) could subsequently be challenged or avoided by the promisee.

For the sake of legal economy, in these cases the inclusion in the contract of specific clauses allowing compliance with the mandatory rules of the value relationship is recommended, either through specific rules of revocation of the stipulation or through incorporation into the contract of a specific regime of exceptions enforceable by the promisor against the claim of the third party beneficiary in order to enforce the obligation. These two aspects will be discussed in the relevant sections of these Principles.

Commentary

Article 5.2.2

Exclusion or limitation clauses

The parties may give the beneficiary the right to invoke against the promisor a clause that excludes or limits the promisee's liability.

Among the possible benefits provided to third parties, it is possible to agree the extension of exclusion or limitation of liability clauses contained in the contract between promisor and promisee, so that the third party can also invoke them in its favour in case of a claim against it. Thus, this contractual possibility is expressly recognised in Article 5.2.3 UP and in Article II-9: 301 (3) DCFR. Such stipulations in favour of a third party show special features in the most common cases of contracts in favour of a third party: firstly, although the third party generally assumes the position of plaintiff against the promisor, in this case the beneficiary is sued by the promisor; furthermore, in current contracts in favour of a third party, action brought by the third party is based on the contract between the promisor and the promisee, whereas in this case the claim of the promisor against the third party is usually based on tort. Thus, agreements in favour of a third party are particularly useful in sectors such as the construction or transportation to extend the benefits of exclusion or limitation clauses included in the main contract, such as so-called “Himalaya clauses” to auxiliary companies. This type of “rights” is found in the field of transport contracts, which often include limitative clauses of the carrier's liability that will also apply to other parties that participate in performing the transport. As the actual carriers, but who are, strictly speaking, not parties in the contract of carriage, they benefit from the same protection and the same limitations as the carrier who signs the contract, should a claim be brought against them.

Example: Company A and carrier B sign a contract of carriage, fixing the maximum liability at $30,000. To carry out a part of the transport, B subcontracts with C. The goods suffer some damage during transportation. A claims for damages against C. C may invoke the maximum limitation of liability of $ 30,000, which was included in the contract between A and B.

Section 3 (6) of the Contracts (Rights of Third parties) Act 1999 contains a general treatment of these clauses, while Section 6 (5) deals with them in relation with contracts of carriage by sea and contracts of carriage by rail, road and air. The particular history of English law justifies the need of an express treatment of these clauses in the Contracts (Rights of Third parties) Act, which are so important in the field of maritime law that provoke the use of different legal arguments to circumvent limitations derived from privity principle. Thus, rules in the Contracts (Rights of Third Parties) Act means the admission under English law of the effectiveness of “Himalaya clauses”, which allow the extension of limitations of liability of the carrier to stevedores and parties others than the carrier. Following the line established by the Hague-Visby Rules concerning servants and agents of the carrier (Article IV.bis of the International Convention for the Unification of Certain Rules relating to bills of lading, dated 25 August 1924), it implies establishing the same system of limitation of liability regardless of the type of action brought (based on contract or on tort).

There is no similar provision in European laws involved in the OHADAC territory, even in the Proposals for Reform of the French law on obligations of 2013. However, this legislative silence does not mean a refusal of granting these rights to third parties. Obviously, the final answer will depend on each legal system, but the general trend is that the absence of an express rule does not entail a prohibition of such rights under contracts in favour of third parties.

In this context, the absence of an express statement in Caribbean civil codes must not be understood as either a prohibition or an impossibility to agree such clauses in favour of third parties. There are specific regulations that support, expressly or impliedly, the extent of limitations of liability to third parties (e.g. Article 702 Honduran Commercial Code or Article 216 of the Trade Act of Maritime 2006 Venezuelan). Therefore, it can be considered that, within the limits of freedom of contract, it is possible to include exclusion of liability clauses for a third party. In any case, the effectiveness of such clauses must be considered in the light of Articles 7.1.7 and 7.4.7 of these Principles.

Commentary

Article 5.2.3

Revocation of the stipulation in favour of a third party

The stipulation may be modified or revoked while the beneficiary has not notified its acceptance to any of the contracting parties.

1. General rule of revocability and its limits

The contractual source of the rights of third parties implies the significance of the contract content and the time conditions, if any, established for the acquisition of those rights. In this sense, it is important to set the deadline for the revocation or modification of the rights of the third party, which actually determines the time from which the third party can consider its rights as acquired. In the absence of an express agreement to the contrary, the limit lies in the acceptance of the right by the third party. This is intended to keep a balance between the contractual freedom of the contracting parties and the legal certainty of the third party. This is the system followed in the French and Dominican Civil Code, in section 2 (3) of the Contracts (Rights of Third Parties) Act 1999 and in Dutch and Suriname Civil Code, providing the acceptance by the third party as the limit for revocation [Article 6:253.2º]. It is also the solution supported in Spanish law as well as in many Caribbean civil codes (Article 1.010 of the Costa Rican Civil Code; Article 1.121 of the Dominican and French Civil Code; Article 1.549 of the Honduran Civil Code; Article 1.871 of the Mexican Civil Code; Article 1.875 of the Nicaraguan Civil Code; Article 1.108 of the Panamanian Civil Code; Article 1.209 of the Puerto Rican Civil Code; article 962 of the Saint Lucian Civil Code). It is also the solution adopted in the UP and the PECL. However, the DCFR starts from a partially different premise, which is to set the limit to the modification or revocation of the right at the time of notification to the third party that this right has been granted under the contract. This implies setting a system of automatic and immediate entitlement of the beneficiary forcing thus to establish a waiver system [Article II-9: 303 (1) DCFR] which works, mutatis mutandis, as a kind of resolutive condition of the right of the third party.

The rule in these Principles follows the most widespread principle, establishing the acceptance by the third party as the deadline to modify or revoke the right. Unless otherwise established, it supposes the need for acceptance of the right by the third party of the right, so that if the beneficiary dies before having accepted it had no right and nothing will pass on to its heirs.

This rule favours and also facilitates the contractual relationship between promisor and promisee, who know in advance the time available to amend or revoke the agreements affecting the third party. It is fundamental not only the fact of the acceptance but also that the acceptance is communicated to all contracting parties, which may result from an express declaration of intent or from a claim brought against the promisor to demand its fulfilment (as provided for in Article 316 of the Cuban Civil Code). In both cases, there is notification and this is the general criterion shared by Caribbean civil law systems. Notification of the acceptance is a circumstance which also guarantees legal certainty of the contracting parties.

Determining the addressee of the acceptance is also important. The Caribbean civil law systems which deal with this question establish that the acceptance must be communicated to the promisor, which is obliged to perform (this solution is found in the civil codes of Cuba, Honduras, Nicaragua, Panama and Puerto Rico). The same solution is established in the Contracts (Rights of Third Parties) Act 1999. However, the rule included in the OHADAC Principles states the possibility of communication of the acceptance to any of the contracting parties, as provided in Dutch and Suriname Civil Code [Article 6:253.3 º] or in the Draft project reform of the French law on Obligations of 2013 (Article 115). This solution is consistent with the system of entitlement to revoke mentioned below.

In the field of the OHADAC Principles the possibility of tacit acceptance of the right is excluded. This option is found in Colombian Civil Code (Article 1.506), when derived from acts of the obligor that only could have been executed under the contract; it is also established with a more flexible formula in Article 5.2.5 of the UP. Such criterion, besides not being the most commonly accepted in the OHADAC sphere, causes important interpretative problems to identify conducts that may imply, or not, acceptance and therefore introduce unnecessary uncertainty in contract law.

Despite the silence of Caribbean civil codes on this point, the rule includes not only the possibility of revocation, but also to modify the right of the third party, as provided in the UP and the DCFR. The logic here is similar to the revocation, as the acceptance of the benefit granted in its favour by the third party has been done in the agreed terms; a subsequent modification, particularly if it was detrimental to the interests of the third party, could be considered as a restriction of their acquired rights.

In any case, it is inconceivable that the rule established over the limit of the revocation is mandatory if the parties have expressly agreed a special arrangement for the revocation or the modification of the right and, therefore, it is a fact known by the third party. This is what is provided, for example, in the Guatemalan Civil Code, which states that the promisee reserves the right to revoke the right of the third party (Article 1.533). Therefore, the rule included in the OHADAC Principles is merely a presumption that ensures legal certainty of the beneficiary, to the extent that it knows the conditions and the scope of the right on the basis of the contract, and also ensures the autonomy and freedom of the contracting parties, which can freely design the right they wish to give to the third party.

2. Entitlement to the right of revocation

The OHADAC Principles do not establish any rule relating to the entitlement of the right to revoke, considering that this question must be determined on a case-by-case basis by the contracting parties. Comparative law offers at this point two divergent models: the exclusive entitlement of the promisee, contained in the second paragraph of Article 6:253 Dutch and Suriname Civil Code, and the Proposals for Reform of the French law on obligations of 2013; and the shared entitlement, with requirement of agreement between promisor and promisee, stated in the Contracts (Rights of Third Parties) Act 1999.

The same diversity is found in international texts on contract law harmonisation: whereas the UP prefer a shared entitlement between promisor and promisee, the PECL attributes the exclusive entitlement to the promisee and the DCFR leaves the determination of entitlement of the right of the revocation to what is stated in the contract.

This duality in the field of the entitlement of the right to revoke is also observed in the existing regulations in OHADAC countries. The Colombian Civil Code establishes the will of both contracting parties (Article 1.506). Venezuelan law (Article 1.164 Civil Code) assumes the entitlement of the promisee when it indicates that it cannot revoke if the third party has declared that it wants to take advantage of it; a similar solution is provided in Article 962 Saint Lucian Civil Code. In a more extreme sense, Guatemalan law (Article 1.533 Civil Code) allows the promisee to reserve the right to substitute the third party regardless of its will and of that of the other contracting party. Other civil codes, such as the Cuban, Dominican, Mexican or Nicaraguan, do not establish it.

The absence of a specific rule in the OHADAC Principles just means that the contracting parties, in view of the circumstances of each contract, will establish which party can amend or revoke the right. From a strictly contractual perspective, it is not strictly necessary, especially in the absence of consensus, to establish a specific regime of entitlement of the right to revoke which it is mainly related to the underlying relationship between the promisee and the third party. The absence of an express regulation is not a gap, but a general submission to the interpretation of the contract that binds the promisor and the promisee and to the parties' expressed will. This solution is the most consistent with the contractual nature of the right of the third party and allows, in each case, the establishment of the possibilities for revocation based on which party has a real interest in the attribution of the right to the third party. Usually, it is understood that the interest corresponds to the promisee, but nothing prevents the promisor also from having an interest and, consequently, an agreement to any modification or revocation would be required.

Commentary

Article 5.2.4

Defences

The promisor may only assert against the beneficiary, in the absence of any agreement to the contrary, the defences derived from the contract which contains the stipulation in favour of the beneficiary.

Contracts in favour of a third party determine the scheme of defences which may be asserted by the promisor when the third-party beneficiary claims the fulfilment of the contract: in these cases, available exceptions must be determined on the basis of trilateral relationships: the relationship between promisor and promisee, embodied in the contract that contains the stipulation; the value relationship between the promisee and the third party; and relationships between the promisor and the third party, apart from the main contract.

The regime of exceptions enforceable by the promisor against the third party is one of the least controversial questions, within the regime of contracts in favour of third parties, from a comparative point of view: the third party takes its own position, solely dependent on conditions on its right established by promisor and promisee in the contract. This distinguishes the stipulation in favour of a third party, with the characteristic autonomy of this right, from the rights that “successors” of the contracting parties may be entitled to. This question has particular relevance in the field of English maritime liability law when assessing the position of the injured party claiming against the Club Insurance Protection and Indemnity (P & I). By denying the quality of third parties beneficiaries, their position is conditioned by the position previously assumed by the insured party (i.e. the injured party “will fit into the shoes” of the insured).

By virtue of a logical correspondence with this autonomy of the right of the third party, personal defences based on relationships outside the contract containing the provision in favour of the third party, which the promisor has against the promisee, are not enforceable. This rule is clear in legal systems that explicitly state it, but also in other systems which do not recognise it explicitly, given the nature of the contract in favour of third party. Thus, the promisor cannot invoke, for example, a set-off of credits derived from prior obligations with the promisee, against a claim made by the third party against the promisor to enforce the agreed provision in its favour.

Based on the same principle, the promisor cannot raise defences against the third party based on the value relationship between the promisee and the third party. In general, the promisor cannot invoke against the third party issues such as the invalidity or the revocation of the value relationship to avoid the performance of its obligations.

The solution afforded in the OHADAC Principles follows the meaning of Article 1.872 of the Mexican Civil Code and of Article 745 of the Honduran Commercial Code, which expressly limit the promisor to rely on those defences based on the contract from which the right of the third party derives. The silence of the rest of the civil codes should not imply a different approach on this point, insofar as the autonomy of third parties' rights and its origin in the contract between promisor and promisee is, as mentioned, inseparable from the recognition of contracts in favour of a third party. As a general presumption in such contracts, personal defences that the promisee has against the promisor cannot be invoked.

This rule is not in any case mandatory. Another solution may be agreed in the contract that binds the promisor and the promisee. This is usual in cases of assumption of debt owed by the promisee to the third party; in these cases, personal defences that the promisor has against the promisee are available against the third party.

Example: In a contract of sale, the buyer (X) retains part of the price to pay the debts of the seller (Y) with respect to certain obligees (Z1, Z2 and Z3) to which it is obliged to pay. Y is the promisee, the promisor is X and Z1, Z2 and Z3 the beneficiaries.

To the extent that it does not affect the autonomy and setting of the right granted to the third party, nothing prevents the promisor from asserting against the third party all defences based on personal relations between it and the third party, governed by the general regime of the obligation applicable between them. There is no need for a specific rule on that point in the Principles, to the extent that this possibility of enforceability of clauses responds to the usual dynamic of contracts and therefore it is not related to specific stipulations in favour of a third party.

Commentary

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