The Supreme Court, in a recent judgment, addressed a fundamental question in contract law: can a third party to a contract benefit from it? The Court held that under Roman-Dutch law, a third party can, in theory, gain rights from a contract, but only if the contract itself clearly grants such a benefit and the …
Can a Third Party Benefit from a Contract?
The Supreme Court, in a recent judgment, addressed a fundamental question in contract law: can a third party to a contract benefit from it? The Court held that under Roman-Dutch law, a third party can, in theory, gain rights from a contract, but only if the contract itself clearly grants such a benefit and the third party has accepted it.
This ruling arose from a dispute involving a vehicle lease agreement and a separate guarantee. The main lease, between a bank and a company, included a compulsory arbitration clause, meaning any disputes between those two parties had to be resolved by arbitration. When the company defaulted, the bank did not pursue arbitration, instead, it sued one of the guarantors who had signed a separate guarantee agreement, promising to pay if the company failed to.
The guarantor argued that once the bank made a demand on him, he became the “principal debtor,” effectively taking the place of the company, and was therefore entitled to invoke the same arbitration rights under the lease.
The Supreme Court rejected that argument. It explained that the guarantor was not a party to the lease agreement, and the arbitration clause clearly applied only to the lessor and the lessee. While elaborating that the lease agreement was governed by Roman-Dutch law, as it was a leasing transaction and not a banking transaction, the Court noted that while Roman-Dutch law allows a third party to acquire rights under a contract, this can only happen when the contract expressly includes such a stipulation and the third party accepts it.
Since the lease did not specify that the guarantors could benefit from its terms, they could not rely on the arbitration clause. The guarantee, the Court held, was an entirely separate agreement, one that created its own independent obligation.
“…Roman-Dutch law allows a third party to accept the promise and thus acquire a right unless the promisor revokes the promise before such acceptance by the third party. Similarly, a stipulation in a contract in favour of a third party can be enforced by such party where it has been accepted by him [Jinadasa v. Silva (34 NLR 344), De Silva v. Margaret Nona (40 NLR 251), Marthelis Appuhamy v. Peiris (47 NLR 78]. The arbitration clause does not have any stipulation indicating that the 1st and 2nd Defendants as Guarantors are to benefit from it. Moreover, according to Roman-Dutch law, the obligation created thereunder is independent of the obligations created under the Lease Agreement and the 2nd Defendant cannot rely on the scope of the arbitration clause contained in the Lease Agreement…” – Justice Janak De Silva
“…Thus, in Roman-Dutch law, a “guarantee” given by a guarantor to a promisee in relation to a promise by a third party to the promisee, does create an independent obligation to that of the debtor. I must hasten to add that parties can by agreement determine the exact nature of the relationship between them notwithstanding the general definition given in the governing law to particular types of documents. Accordingly, the Guarantee must be examined to determine the rights and obligations of the parties…”- Justice Janak De Silva
Case No: S.C. (C.H.C.) Appeal No. 17/2014 [Decided on 03.10.2025]
Before: P. PADMAN SURASENA,CJ., JANAK DE SILVA,J., ARJUNA OBEYESEKERE, J.
