5. Privity of Contract

Question 1

What are the key aspects of the doctrine of privity of contract?

Answer 1

1. Only parties to a contract can sue and be sued under it
2. A third party generally cannot acquire rights under a contract
3. A third party cannot be burdened by a contract

Question 2

What are the criteria for third party to enforce a term of a contract under Contracts (Rights of Third Parties) Act 1999?

Answer 2

1. Contract expressly provides the third party may enforce the term OR
2. The term purports to confer a benefit on the third party AND it appears from the terms of the contract that the parties intended the term to be enforceable by the third party

Question 3

To enforce a term of a contract under Contracts (Rights of Third Parties) Act 1999, must the third party be named in the contract?

Answer 3

Either named, or be a member of a benefiting class of people described in the contract (but who need not have existed when the contract was made)

Question 4

Does the Contracts (Rights of Third Parties) Act 1999 allow obligations under a contract to flow to third parties?

Answer 4

No, only benefits

Question 5

What are some contracts to which Contracts (Rights of Third Parties) Act 1999 does not apply?

Answer 5

1. Employment contracts
2. Articles of association of a company
3. Contracts which expressly exclude the Act from applying

Question 6

What are the three criteria, any of which will prevent parties to a contract from changing the contract to the detriment of a third party without consent?

Answer 6

1. Third party has communicated his agreement to the term benefiting him, or
2. Third party has relied on the term of the contract and the party to the contract is aware, or
3. The party to the contract can reasonably be expected to have foreseen that the third party would rely on the term, and the third party did rely on it

Question 7

Where an agent enters into the contract on behalf of a principal, who are the parties to the contract?

Answer 7

The principal and the third party only

Question 8

What is an exception to the rule that a contract entered into by an agent on behalf of a principal is binding only on the principal and the third party?

Answer 8

Where the agent acts for a principal undisclosed to the third party, both the agent and the principal can sue and be sued under the contract

Question 9

Can both the benefit and burden of a contract be assigned?

Answer 9

Just the benefit

Question 10

How can parties transfer obligations under a contract and what is the effect of this measure?

Answer 10

By entering in a novation agreement, which releases the former party/parties, and binds the new party/parties

Question 11

What is subrogation?

Answer 11

Where a party, by e.g. paying an insurance or making a guarantee payment, stands in the shoes of the contract party and has all the rights the contract party would have against the person responsible for the loss or to whom guarantee was paid

Question 12

What is the collateral contract exception to privity?

Answer 12

Where there is a collateral contract between the contract party and a third party, the court may impose obligations on a non-contracting party.

Question 13

How can trusts be used to avoid privity issues?

Answer 13

If A makes a promise to B for the benefit of C, the courts may find that B holds A’s promise on trust for C, which allows C to enforce the promise directly against A