Chapter 12: Privity of contract and rights of third parties

Question 1

List some examples of when a third party may obtain a benefit from a contract to which they are not a party

Answer 1

Agency relationships, assignment, collateral contracts and actions in tort

Question 2

What are the necessary requirements to establish an agency relationship and thus make a principal a party to a contract formed by the agent?

Answer 2

The principal should be named and it is clear that the agent is acting on behalf of the principal, the agent must be authorised to act and the consideration must move from the principal

Question 3

How does assignment work?

Answer 3

A under contractual obligations to B and B assigns their contractual rights to C which is only possible if this is not prohibited with a non-assignment clause

Question 4

How does a collateral contract impose rights on a third party?

Answer 4

If there is a separate collateral contract between the promisor and the third party and they communicated to each other and provided consideration (usually in the form of a warranty)

Question 5

What is the scope of the Contracts (Rights of Third Parties) Act 1999?

Answer 5

It can allow a third party to enforce a term of a contract to which they are not a party but a contract cannot be enforced against the third party

Question 6

Which types of contracts are excluded from the operation of this Act?

Answer 6

Employment contracts and contracts between a company and its members

Question 7

In what circumstances can a third party enforce a term?

Answer 7

Either the contract states that the third party can enforce the term or 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. The party cannot be put in a better position than if the party had been a party to the contract themself

Question 8

What protection does the third party have if it has a right under a contract?

Answer 8

The contracting parties may not by agreement rescind or vary the contract which has the effect of extinguishing or altering his entitlement under that right without his consent if the party has communicated (words/conduct) his assent to the term, promisor is aware that the party relied on the term or the promiser can reasonably be expected to have foreseen that the party would rely on it and the party did

Question 9

When can the court dispense with the third party’s consent?

Answer 9

Where their whereabouts cannot be ascertained, mentally incapable of giving consent or where the party’s reliance cannot be reasonably ascertained. Court can impose conditions e.g. compensation

Question 10

How is the promisor protected from double liability?

Answer 10

Any award to a third party can be reduced to such extent as appropriate if the promisee has already recovered a sum in respect of the third party’s loss or in terms of expenses incurred by the promisee in making good to the third party