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 ≠ acquire rights under a contract
3. A third party ≠ 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 that 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.
- contract cannot be enforced against third-party

Question 5

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

Answer 5

1. Employment contracts
2. Company’s Articles of Association
3. Contracts expressly excluding the Act from applying

Question 6

What are three instances preventing contracting parties from changing the contract to the detriment of a third party without its consent?

Answer 6

Third party either:

1) Communicated his assent to the term benefiting him, or
2) Promisor is aware that third-party relied on the term, or
3) Foreseeable to promisor that third-party would rely on term.

Question 7

What are four exceptions allowing for a term to be varied/rescinded without consent from the third-party?

Answer 7

1) Contract expressly provides for it;
2) 3rd party’s whereabouts cannot be reasonably ascertained;
3) 3rd party is mentally incapable of consenting; or
4) Reliance on term cannot be reasonably ascertained.

Question 8

How can a third-party acquire direct rights under a contract via agency?

Answer 8

occurs when one of the contracting parties is acting on third party’s behalf.

Question 9

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 9

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 10

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

Answer 10

Just the benefit

Question 11

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

Answer 11

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

Question 12

What is subrogation?

Answer 12

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 13

What is the collateral contract exception to privity, and in what situations does it generally arise?

Answer 13

Where collateral contract exists between one of the contracting parties, and the third-party.
- by instructing someone to ie. buy something on your behalf, impliedly enter into side contract with person selling the goods (Shanklin Pier)

• need to ensure that instruction by third party satisfies general offer and consideration requirements.

Question 14

How can trusts be used to avoid privity issues?

Answer 14

Where main contracting party declares himself to be a trustee for the 3rd party, gives 3rd party direct rights.
- only effective if contract itself contains a declaration of trust = gives notice of trust relationship.

Question 15

What four conditions need to be satisfied for a contract to be validly assigned to third-party?

Answer 15

• permitted under the terms of the relevant agreement.
• absolute (final)
• in writing
  AND
• notice must be given to person against whom 3rd party acquires rights as a result of the assignment.

Question 16

What are contracts of convenience, and how do they assist in circumventing the privity of contract rule?

Answer 16

Apply to contracts in leisure-type contract - ie. family holidays.
- do not entitle third party to acquire rights under contract, and sue under it own name, but allows main contracting party to do so on its behalf.

Question 17

Where a contract expressly excludes the CRTPA 1999, what common law rules may still give third-party enforceable rights?

Answer 17

• Assignments
• Agency
• Collateral contracts
• Trusts created by contract

Question 18

What is the St Martins Property exception, and how does it assist in circumventing the privity of contract rule?

Answer 18

• does not give third-party direct rights under contract.

Applies in commercial context, where parties contract for renovations knowing that the intention is to later transfer property to third party.
- Main party can sue on third party’s behalf if works turn out to be defective, even if it did not itself incur a loss.

Question 19

What are the two exceptions allowing for a promisee to recover remedies under a contract on 3rd party’s behalf?

Answer 19

• occurs where privity rule cannot be directly circumvented via common law/statute.

1) St Martins Property exception
2) Contracts of convenience

Question 20

What effect does a deed of assignment have?

Answer 20

Gives assignee same rights as those assignor benefited from under pre-existing contract.
- ie. A and B contract, and then A assigns her rights to C = C can sue B based on promises initially entered into between B and A.