8 - Privity of Contract

Question 1

Why is it important to determine the parties to a transaction in contract law?

Answer 1

The general rule is that only the contracting parties have rights and liabilities under a contract.
In practice, agents often enter into contracts on behalf of others.

Example: Booking a holiday through a travel agent means the contract is between you and the tour operator, not the agent.

In commercial law, agency is essential as companies (being separate legal entities) need individuals (directors) to act on their behalf.
Agency law determines how authority is granted to parties to bind companies and partnerships in contracts.

Question 2

What is privity of contract and why was it criticised before the C(RTP)A 1999?

Answer 2

Privity of contract: Only contracting parties have rights and obligations under the contract.
A third party cannot sue or be sued under a contract.

Criticism: The rule meant third parties had no rights, even if a contract was made for their benefit.

Example: in Tweddle v Atkinson (1861), despite the contract expressly stating the claimant could enforce it, the court held he had no rights because he was not a party to the contract.

The Contracts (Rights of Third Parties) Act 1999 (C(RTP)A 1999) changed this, allowing third parties to acquire rights if:
- The contract expressly provides that they may acquire a benefit (s 1(1)(a)).
- The term purports to confer a benefit on them (s 1(1)(b)) unless the contract shows that this was not the intention (s 1(2)).

Question 3

Under the Contracts (Rights of Third Parties) Act 1999, how can a third party acquire rights?

Answer 3

A third party can acquire rights under the C(RTP)A 1999 if:
- The contract expressly provides that they may acquire a benefit (s 1(1)(a)).
- The term purports to confer a benefit on them (s 1(1)(b)).

However, s 1(1)(b) does not apply if, on a true construction of the contract, it was not intended that the term be enforceable by a third party (s 1(2)).

To enforce a term in their own right, the third party must be expressly identified in the contract by name, as a member of a class (e.g. ‘employees’), or by answering a particular description.

The Act also extends to the benefit of exemption clauses.

Question 4

Under what circumstances can a third party enforce a term of a contract according to the Contracts (Rights of Third Parties) Act 1999?

Answer 4

A third party can enforce a term of a contract under the following circumstances (s 1(1)):

(1)(a): The contract must specifically provide that the third party can enforce a term, for example: “X has the right to enforce this contract” or “X has a right to sue on this contract.”

(1)(b): It need not be stated specifically that the third party has the right to enforce a term, but it must be established that:
- The agreement purported to confer a benefit on the third party; and
- It was not the case that the contracting parties did not intend the term to be enforceable by the third party.

Question 5

How must a third party be identified for them to enforce a term under the Contracts (Rights of Third Parties) Act 1999?

Answer 5

The third party must be expressly identified in the contract (s 1(3)).

Identification can be achieved by:
- Describing a class of people.
- Answering a particular description.
- Not requiring the third party to exist at the date of the contract, allowing rights to be conferred on, for example, an unborn child.

Question 6

In what circumstances does the presumption that a term purports to confer a benefit on a third party not apply according to the Contracts (Rights of Third Parties) Act 1999?

Answer 6

According to s 1(2):
- The presumption will be rebutted if, on a proper construction of the contract, it appears that the parties did not intend the term to be enforceable by the third party.
- There is a rebuttable presumption in favour of the third party having a right to enforce the term, making it difficult to rebut that presumption.
- To avoid conferring rights on a third party, contracting parties can explicitly exclude this.

Question 7

What is a possible clause that can exclude third party rights under the Contracts (Rights of Third Parties) Act 1999?

Answer 7

A potential boilerplate clause for exclusion may state:

“For the purpose of the Contracts (Rights of Third Parties) Act 1999, this Agreement does not and is not intended to give any rights, or any right to enforce any of its provisions, to any person who is not a party to it.”

This clause ensures that no unintended rights arise for third parties.

Question 8

What remedies are available to a third party enforcing a right under the Contracts (Rights of Third Parties) Act 1999, and how do they compare to those of a party to the contract?

Answer 8

When a third party enforces a right under s 1, their rights are limited:
- The parties to the contract may not rescind the contract or vary it in a way that extinguishes or alters the third party’s entitlement without their consent (s 2(1)).
- The third party may communicate assent by ‘words or conduct’ (s 2(2)(a)).
- If the third party would not have been able to enforce the term as a party, they may not enforce it under s 1 (s 3(6)).

Therefore, the third party’s rights will not be greater than they would have been if they had been a party to the contract themselves.

Question 9

How does s1, the introduction of third-party rights under the Contracts (Rights of Third Parties) Act 1999 impact the promisee’s right to enforce the contract?

Answer 9

A breach of a relevant term could expose the promisor to actions by both the promisee and the third party.

To protect the promisor from double liability, s 5 provides that any award to a third party may be reduced by the court or arbitral tribunal if the promisee has already recovered a sum related to the third party’s loss or expenses incurred by the promisee in addressing the promisor’s default.

Question 10

What considerations should practitioners take into account regarding the application of the Contracts (Rights of Third Parties) Act 1999?

Answer 10

• Identify relevant contracts that may invoke the Act.
• Identify potentially relevant third parties to confer rights upon.
• Consider whether third parties should be given enforceable rights under the Act.
• Determine if restrictions should be placed on the third parties’ ability to enforce their rights.
• Fundamentally, consider whether the Act should be excluded, as there is a rebuttable presumption that if a term purports to confer a benefit on a third party, it will be enforceable unless clear from the contract that the parties did not intend to confer such a benefit.

Question 11

What is actual authority in agency law?

Answer 11

Actual authority: The power granted to an agent by the principal to bind them in a contract.
- It is determined by what the parties have said and done, and any relevant circumstances.
- Express authority: Clearly given to the agent to do specific tasks.
- Implied authority: Arises from the agent’s role, allowing them to do things usually associated with it (e.g. an agent with authority to sell goods may also have implied authority to advertise them).

Agents can act without actual authority for several reasons, such as not understanding their limits or having had their authority revoked (e.g. due to the principal’s illness or death).

If an agent acts without authority, the principal may argue they are not bound, but there are exceptions where the law holds the principal accountable.

Question 12

What is apparent authority in agency law?

Answer 12

Apparent authority arises when:
- The agent does not have actual authority but appears to have it due to a representation made by the principal to a third party.
- The representation must have been intended to be, and in fact was, relied upon by the third party.

For apparent authority to exist, three conditions must be met:
- The principal must have represented (by words or conduct) that the agent had authority.
- The third party must rely on this representation, believing the agent has authority.
- The third party must alter their position (e.g. entering into a contract).

Example: If a principal tells a third party to deal with their agent without specifying limitations on the agent’s authority, the third party may believe the agent is authorised to bind the principal, even if the agent exceeds their actual authority. In this situation, the purchaser will be protected, and the agent will be liable to the principal for breach of the agency agreement.

Question 13

Does the agent have any rights under the resuting contract made?

Answer 13

No. Whilst the statutory rights under the C(RTP)A 1999 represent an exception to the doctrine
of privity, the same is not true of agency. An authorised agent has no rights (or indeed
obligations) under the resulting contract.

The agent is authorised to enter the contract on
behalf of someone else (called the principal) and the resulting contract is between the principal and other party. The agent simply drops out of the picture

Question 14

Provide a summary of privity of contract and agency.

Answer 14

• As a general rule only parties to the contract have rights and liabilities under it. This is the
  rule of privity.
• A third party may acquire the benefit of a contract if it was clearly intended that they
  should be able to enforce it and was identified by name or as a member of a particular class (C(RTP)A 1999).
• An authorised agent may bind the principal to a contract (Figure 4.1). An agent may have
  actual (express or implied) authority or authority may arise by estoppel. This is where the
  principal gave the distinct but false impression the agent had authority and the third party
  relied on that representation.

Question 15

What are the other common law methods to circumventing the doctrine of privity?

Answer 15

• Assignment
• Actions in tort
• Other judicial attempts to avoid the doctrine

Question 16

How can a collateral contract provide an exception to the doctrine of privity in contract law?

Answer 16

A collateral contract can provide an exception to the doctrine of privity by establishing a separate contract between the promisor and a third party.

For example: In Shanklin Pier v Detel Products Ltd [1951]:
- Shanklin Pier instructed contractors to buy Detel’s paint based on Detel’s promise that the paint would last seven years.
- The paint lasted only three months.
- Although the contract was between Shanklin Pier and the contractors, the court held that there was a collateral contract between Shanklin Pier and Detel.
- Detel’s warranty about the paint’s durability was the consideration, and Shanklin Pier’s instruction to buy the paint formed the contract.

This device avoids privity issues when communication and consideration are established between the promisor and third party.

Question 17

What is the role of assignment in relation to third-party rights, and how does it work in practice?

Answer 17

Assignment allows a party to a contract (B) to transfer their contractual rights to a third party (C), enabling C to sue the original promisor (A) based on those rights.

Key points include:
C’s rights can never exceed those held by B.

The process is as follows:
- B has a contract with A and holds contractual rights against A.
- B assigns these rights to C, transferring their benefits.
- C can now claim against A, but B’s obligations cannot be assigned, so A still holds rights against B.

If the contract prohibits assignment, any attempted assignment is generally invalid, as seen in Linden Gardens Trust v Lenesta Sludge Disposals Ltd. A common safeguard is a ‘non-assignment clause’, restricting assignment without consent.

Question 18

How can a third party who is not part of a contract bring a claim in tort based on the breach of that contract?

Answer 18

A third party can bring a claim in tort for breach of duty of care, even if they are not a party to the contract, as shown in Donoghue v Stevenson [1932].

Key points include:
- The plaintiff was not part of the contract between the manufacturer and the retailer of a bottle of ginger beer.
- As the ultimate consumer, the plaintiff successfully claimed against the manufacturer in tort for negligence.

This established that while privity restricts contract claims, it does not apply to tort claims, thereby expanding liability in negligence cases.

Question 19

How have the courts attempted to mitigate the harsh effects of the doctrine of privity in contract law?

Answer 19

Courts have shown flexibility in applying the doctrine of privity, as demonstrated in Jackson v Horizon Holidays [1975]. Key details include:
- Jackson booked a holiday for himself and his family, which was misrepresented in the defendant’s brochure.
- Although the contract was only between Jackson and the holiday provider, the Court of Appeal upheld the damages awarded, which included losses related to his family’s distress.

This case illustrates the courts’ willingness to make exceptions in specific situations to avoid unfair outcomes under strict privity rules, as later noted by Lord Wilberforce in Woodar v Wimpey, who recognised the need for flexibility in such cases.

Question 20

Provide a summary of the other common law methods of circumventing the doctrine of privity.

Answer 20

• The court has used the device of the collateral contract as an exception to the doctrine of privity.
• As a general rule a party can assign its rights under a contract (but not its obligations) to another party, but the contract concerned might prohibit this.
• Where a ‘third party’ is prevented by the privity rule from bringing a claim under the contract, you should consider whether a claim can be brought in tort instead.
• In certain circumstances, the courts have taken a flexible approach to the doctrine of privity, allowing a contracting party to recover in relation to losses suffered by a third party.