1.1.4 Privity of contract and rights of third parties - Formation Flashcards
What is meant by the doctrine of privity of contract?
Privity of contract provides the general rule that a person who is not a party to a contract cannot acquire any rights under that contract or be subject to its burdens
Exceptions apply - they allow a third party to enforce a promise in the contract or obtain remedies under a contract to which he is not party.
What is the statutory exception to privity of contract?
There is a key statutory exception is contained within the Contracts (Rights of Third Party) Act 1999. The enforceability criteria needs to be satisfied for the third party to acquire rights and remedies to which he is not a party
What are the common law exceptions to the doctrine of privity of contract?
The structures and devices used under common law to avoid the rule of privity of contract include: assignment, agency, collateral contracts and trusts
Can a promisee enforce certain remedies for the benefit of a third party?
Yes. The remedies available include: damages, specific performance and injunctions.
A promisee must provide consideration for a promise and its impact on third party rights
What does the Contracts (Rights of Third Parties) Act 1999 seek to achieve?
This Act allows a third party to acquire rights under a contract to which it is not a party. These rights allow the third party to:
- Enforce remedies for breach of contract; and
- Rely on a clause that limits or excludes his liability
A third party is not required to provide consideration to acquire rights under, or bring a claim under a contract where the CRTPA 1999 applies.
What criteria must be satisfied for a third party to acquire rights (and remedies) under the CRTPA 1999?
CRTPA 1999 enforceability criteria:
1) [Express statement] The contract must expressly state that the third party may enforce a term of the contract (referring to the third party by name, or as a class of person)
2) [Conferring a benefit] A term in the contract must purport to confer a benefit on the third party, and no other provisions in the contract show that the parties to the contract did not intend for the term to be enforceable by the third party
Can the CRTPA 1999 be excluded?
Yes. Parties to a contract may wish to exclude the CRTPA 1999 to prevent third parties from acquiring rights and remedies under the contract.
Parties can exclude the CRTPA 1999 by clearly stating in the agreement that the CRTPA 1999 does not apply.
Common law structure: assignment
How can assignment be used as a structure under common law for a third party to acquire rights under an agreement?
A person who has rights under an agreement may transfer (assign) his rights to a third party. To be effective, an assignment must be:
1) Permitted under the terms of the relevant agreement;
2) Absolute (final);
3) In writing.
Notice of the assignment must be given to the person against whom the third party acquires rights as a result of the assignment.
Common law structure: agency
How can agency be used as a structure under common law for a third party to acquire rights under an agreement?
The law of agency allows an agreement to be made by one party on behalf of another.
The following requirements must be satisfied for the agency structure to be effective:
1) [3rd party protected by agency clause] It must be clear in the main agreement between the agent and the promisor that the third party is intended to be protected by the limitation clause
2) [Party A acting for 3rd party] Must be clear in main agreement that party to main contract is not just acting on his own account, but is also acting as the agent of the third party
3) [Authority given] The party to the main contract must have authority from the third party to act as his agent
4) [Consideration given] The third party must provide consideration to the party to the main contract who promises to limit the third party’s liability
Common law structure: collateral contracts
How can collateral contracts be used as a structure under common law for a third party to acquire rights under an agreement?
It may be possible to identify an additional contract (a collateral contract) between the 3rd party and the promisor.
A collateral contract avoids the doctrine of privity of contract by giving the person that is third party under the other contract direct contractual rights against the promisor under a separate contract.
Trusts created by contract
How can trusts be used as a structure under common law for a third party to acquire rights under an agreement?
A party declaring himself to be a trustee for the third party beneficiary.
Such an arrangement will not be effective unless the contract in question contains a declaration of trust and this reflects the requirement that the promisor must be aware of the trust relationship.
The promisee (party to the contract) can enforce the third party’s rights, or the third party beneficiary can enforce the relevant rights against the promisor directly.
What remedies can the promisee under a contract exercise for a third party?
1) Damages - exceptions apply;
2) Specific performance if damages are not appropriate (equitable remedy)
3) Injunctions (equitable remedy)
What are the exceptions for claiming damages in respect of a third party’s loss?
Contracts of convenience
For reasons of convenience, one person may enter into a contract with another person , on his own behalf but also on behalf of others (family holidays, ordering meals in restaurants for a party, hiring a taxi for a group)
St Martins Property exception - commercial context
The promisee (a party to the contract) does not need to show any loss in order to claim for the loss of a third party
