Chapter 12: Privity of Contracts & Rights of Third Parties

Question 1

1 Introduction (Dunlop Pneumatic Tyre Co. v Selfridge & Co. [1915] AC 847).

Answer 1

At common law, a contract creates rights and obligations only between the parties to it. A contract does not confer enforceable rights on a third party to the contract, nor does it impose obligations on a third party. It is a fundamental principle of the common law that no person can sue or be sued on a contract unless they are a party to it

Question 2

Rules on Consideration and Privity

Answer 2

Their combined effect is that no person can sue on a contract unless:
(a) They are a party to the contract; and
(b) They have provided consideration.

Question 3

Tweddle v Atkinson (1861) 1 B&S 393

Answer 3

Concerned an agreement reached between two fathers of a couple who were about to get married. The father of the bride agreed to pay £200 to the groom, the claimant. The groom sought to enforce his father-in-law’s promise. It was held that he could not. The judgments concentrated on the fact that the consideration for the promise was not provided by the claimant groom but by his father. However, the claim could also have failed on the ground that the groom was not a party to the contract; the contract was between the fathers of the couple.

Question 4

The Contract (Rights of Third Parties) Act 1999.

Answer 4

This allows a third party, who is neither a party to the contract, nor has provided consideration, to enforce a term of the contract in certain circumstances (see s 1). Given that the Act only applies in certain circumstances, the old common law and statutory devices for circumventing privity may still be utilised and may well give superior rights to the third party concerned, as they will not be subject to the limitations in the Act.

Question 5

2 Common law methods of circumventing the doctrine of privity

Answer 5

Common law exceptions:
* Agency
* Assignment
* Collateral contract
* Actions in tort
* Other judicial attempts to avoid the doctrine

Question 6

2.1 Agency

Answer 6

An agency relationship occurs where one party, the agent, is authorised either expressly or by implication, by the principal, to contract on behalf of the principal. In practice, businesses selling goods sometimes appoint agents to find customers, negotiate sales and/or enter into contracts with customers on their behalf. If an agent enters into a contract with Party A on their principal’s behalf, it is as if the contract were made between the principal and Party A. The basic requirements necessary to establish an agency relationship are as follows

Question 7

Requirements for the Agency Principles

Answer 7

(a) The principal should be named (usually by the agent) and it should be clear that the agent is contracting on the principal’s behalf

(b) The agent should be authorised to act as agent. In the vast majority of cases, the agent’s authority will be limited by the principal – eg the agent may be authorised to sell certain of the principal’s goods within a certain range of prices. The agent does not have freedom to enter into any contract it wishes to on behalf of the principal. The principal is only bound by acts of the agent which are within the agent’s authority (or, in certain circumstances, by acts which appear to be in the agent’s authority).

(c) Consideration has moved from the principal.

The agent is not a party to the contract and, once the contract has been concluded, the agent’s existence is no longer relevant. The principle of agency in this sense is simply a method of getting around the doctrine of privity, otherwise it would lead to difficulties in a business context.

Question 8

2.2 Assignment

Answer 8

Where A is under a contractual obligation to B and B assigns their contractual rights to C, it may be possible for C to sue A on their promise to B. Crucially, because B is simply passing their rights to C, the extent of C’s rights can never exceed the rights of B.

Question 9

Non-assignment

Answer 9

Neither party shall be entitled to assign this Agreement or sub-contract any part of this
Agreement to any person, persons or company without the prior written consent of the other party.

Question 10

2.3 Collateral contract (Shanklin Pier v Detel Products Ltd [1951] 2 KB 854)

Answer 10

Shanklin Pier employed contractors to paint the pier. It was a term of the contract that Shanklin Pier was to specify the paint to be used. Detel informed Shanklin Pier that their paint would last for at least seven years. Shanklin Pier instructed the contractors to buy and use Detel’s paint. The paint lasted three months. Shanklin Pier sued for breach of contract. However, the contract was
between Shanklin Pier and the contractors

Question 11

Shanklin Pier v Detel Products Ltd [1951] 2 KB 854) Judgement

Answer 11

Mr Justice McNair held that there was a collateral contract between Shanklin Pier and Detel, the consideration for which was, on the one hand, the warranty by Detel that the paint would last for seven years and on the other, the instruction by Shanklin Pier to the contractors to buy the paint.

Question 12

2.4 Actions in tort

Answer 12

During the development of the (tort) law of negligence, a critical question arose as to whether a person, C, who is not a party to the contract between A and B, may be owed a duty of care, so that conduct amounting to a breach of contract on the part of one of the contracting parties will constitute a breach of the duty of care owed to C, giving a third party (C) the right to sue that contracting party for damages in tort.

Question 13

Donoghue v Stevenson [1932] AC 562

Answer 13

The majority of the House of Lords
(led by Lord Atkin) held that, in principle, a claim of this kind was available. In fact, in Donoghue, the plaintiff (C) was not only a third party in relation to the contract of sale between the manufacturer of the bottle of ginger beer and the retailer (the contract between A and B) but was also a third party in relation to the contract of sale between the retailer and the purchaser of the
bottle of ginger beer (the contract between B and Y)

Question 14

Donoghue v Stevenson [1932] AC 562 Judgement

Answer 14

Nevertheless, it was held that the plaintiff, as the ultimate consumer of the goods, could bring a claim in the tort of negligence directly against the manufacturer (A). In effect, this seminal decision held that the privity principle that restricted the range of claims for breach of contract did not also restrict the range of claims in tort. In so doing, it opened up the possibility of a far more extensive liability regime for negligence.

Question 15

2.5 Judicial attempts to avoid the doctrine

Answer 15

The doctrine of privity came under direct criticism from the House of Lords in the case of Woodar v Wimpey [1980] 1 WLR 277. The problem is that in some cases, A contracts with B to provide something of benefit to C. If B fails to do so, C has suffered a loss, but cannot bring a claim because it is not party to the contract. A is a party to the contract, but has suffered no loss.

Question 16

Court of Appeal in Woodar v Wimpey

Answer 16

The Court of Appeal upheld the award. As
clarified by subsequent authorities (in particular Woodar v Wimpey) the proper interpretation of the decision is probably that either:
(a) Mr Jackson’s own losses were £1,100. The basis for reaching that conclusion is not really explained clearly in any of the judgments that suggest it; or
(b) The case is an exceptional type of contract ‘calling for special treatment’ and an example of one of the many situations ‘which require some flexibility in the law of contract’ (as per Lord Wilberforce in Woodar v Wimpey).

Question 17

2.6 Summary

Answer 17

• Using a relationship of agency, Party A can enter into a contract on behalf of Party B, and Party B (but not Party A) becomes a party to the contract (unless Party A is also contracting on its own behalf).
• The court has used the device of the collateral contract as an exception to the doctrine of privity of contract.
• 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.

Question 18

3.1 The circumstances in which a third party may enforce a term of a contract to which they are not a party Section (1)(1)(a)

Answer 18

Under s 1(1)(a), the contract must specifically provide that the third party can enforce a term of the contract. For example, s 1(1)(a) would apply if the contract specifically stated: ‘X has the right to enforce this contract’ or ‘X has a right to sue on this contract’

Question 19

Section 1(1)(b) in conjunction with s 1(2)

Answer 19

Under s 1(1)(b) in conjunction with s 1(2), it need not be stated specifically that the third party has the right to enforce a term. However, it must be established that:
(a) The agreement purported to confer a benefit on the third party; and
(b) It was not the case that the contracting parties ‘did not intend the term to be enforceable by the third party’.

Question 20

3.1.1 Identification of the third party (Section (1)(3))

Answer 20

The fact that there is no requirement that the third party be in existence at the date of the contract means that a right can be conferred on, for example, an unborn child, being expressly identified as a member of an identified class or answering a particular description.

Question 21

3.1.2 In what circumstances does s 1(1)(b) not apply?

Benefit of the Third Party is a Rebuttable Assumption

Answer 21

In essence, where a term ‘purports to confer a benefit’ on a third party, s 1(1)(b) creates a
rebuttable presumption that the third party will be able to enforce the term. Section 1(2) provides that this 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’.

In other words, once it is held that the contract purports to confer a benefit on a third party, there will be a rebuttable presumption in favour of the third party having a right to enforce the term and it will
be difficult to rebut that presumption.

Question 22

Exclusion of Third-Party Rights

Answer 22

It is of course possible that the parties do not want any third parties to have any rights under the contract. To avoid any possibility that an agreement has ‘purported to confer a benefit on the third party’, the parties can explicitly exclude this. A possible boiler plate ‘exclusion of third-party rights’ clause

Example of a Third Party Exclusion Clause: 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.

Question 23

3.2 What are the remedies available to the third party?

s (2)(1) of the Contracts (Third Party Acts) 1999

Answer 23

Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if

Question 24

s (2)(1) of the Contracts (Third Party Acts) 1999

Answer 24

(a) the third party has communicated his assent to the term to the promisor,
(b) the promisor is aware that the third party has relied on the term, or
(c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

Question 25

Assent sent by post

Answer 25

For the purposes of s 2(1)(a) the third party may communicate assent by ‘words or conduct’ (s 2(2)(a)) but, if the assent is sent by post, s 2(2)(b) stipulates that such communication will not be effective until received by the promisor

Question 26

Allow variation or rescission without the consent of the third party = Express Term in Contract

Answer 26

If the contracting parties wish to allow variation or rescission without the consent of the third party or in circumstances not provided for in s 2(1), they can do so by including an express term in the contract (s 2(3))

Question 27

Conditions to dispense with the third party’s consent

Answer 27

Section 2 also provides that the court can dispense with the third party’s consent where their whereabouts cannot reasonably be ascertained (s 2(4)(a)), where they are mentally incapable of giving their consent (s 2(4)(b)) or where their reliance on the term cannot be reasonably ascertained (s 2(5)). In such circumstances, where the court or arbitral tribunal sees fit to dispense with such consent, it may impose such conditions, for example a requirement to pay compensation, as may be thought fit (s 2(6))

Question 28

Better position of Third Parties? Section 3(6)

Answer 28

Section 3(6) provides that a third party is not, by virtue of s 1, to be placed in a better position than if the third party had been a party to the contract themself. If, as such a party, they would not for whatever reason have been able to enforce the term (including, in particular, a term to exclude or limit liability) then they may not enforce it under s 1. Obvious examples would include where the benefit to be given would have been illegal under the contract or where the third party lacks contractual capacity.

Question 29

3.3 How does s 1 affect the right of the promisee to enforce the contract?

Protection from double liability

Answer 29

As a breach of a relevant term could expose the promisor to actions by both the promisee and the third party, s 5 sets out to protect the promisor from double liability. It provides that any award to a third party may be reduced by the court or arbitral tribunal to such extent as is thought appropriate if the promisee has already recovered a sum in respect of the third party’s loss or the expense incurred by the promisee in making good to the third party the default of the promisor.

Question 30

Application of the Contracts (Third Parties Rights) Act of 1999

Answer 30

1. Identify the relevant contracts
2. Identify potentially relevant Third Parties
3. Consider whether parties should be given enforceable rights
4. Consider that if enforceable rights are given, should there be any restrictions on their ability to enforce rights?

Question 31

3.4 Summary

Answer 31

• The Contracts (Rights of Third Parties) Act 1999 introduced a fundamental exception to the doctrine of privity. The Act allows a third party, in limited circumstances, to enforce a term of a contract to which it is not a party.
• Broadly, a third party will have such a right:
• Where the contract states it should; or
• Where the contract purports to confer a benefit on it, unless it appears the parties did not intend the term to be enforceable by the third party.
• The third party must be expressly identified in the contract, but this can be by describing a
  class of people, and the third party does not need to exist at the time of the contract.
• Once a third party has a right under the Act, that right sometimes cannot be reduced/extinguished by the parties without the third party’s consent
• The third party’s rights will never be greater than they would have been had the third party
  been a party to the contract.