CL12: Privity of contract and rights of third parties Flashcards
Privity of contract
No person can sue or be sued on a contract unless they are party to it
Dunlop Pneumatic Tyre Co v Selfridge & Co 1915
Consideration and privity are…
Distinct legal principles
Combined effect of privity and consideration
No person can sue on a contract unless:
- They are party to the contract; and
- They have provided consideration
Tweddle v Atkinson 1861
£200 to the groom
Groom was not a party to the contract as was been between the fathers of the couple.
Controversial that…
a third party should not be able to obtain a benefit from a contract to which they were not a party.
Common law and statutory devices used to circumvent
… rules on privity
Contract (Rights of Third Parties) Act 1999
Allows a third party who is neither a party to contract, nor has provided consideration to enforce a contract in certain circumstances
Common law methods for circumventing doctrine of privity
- Judicial creativity = courts’ uneasiness
- Agency
- Assignment
- Collateral contract
- Actions in tort
- Other judicial attempts
Agency - principle
If agent enters into contract on principles’ behalf it is as if the contract were made between principal and Party A
Agency requirements - basic requirements
- Principal should be named and clear that the agent is contracting on their behalf.
- Authorized to act as agent - agent’s authority may be limitied by the principal.
- Consideration has moved from the principal.
Not a true exception to the doctrine of privity as it is the principal rather than agent who is party.
Assignment - principle
- A = B
- B assigns to C
- C can sue A on their promise to B
- C’s rights can never exceed those of B
Prohibition on assignment
Any attempted assignment is likely to be unsuccessful
Non assignment clause
Neither party shall be entitled to assign this agreement or subcontract this agreement…. without prior written consent.
Limited assignment within a group of companies may be allowed
Collateral Contract
The court may find a collateral contract between the promisor and the third party to provide an exception to the doctrine of privity
Shanklin Pier v Detel Products Ltd 1951
Shanklin Pier v Detel Products Ltd 1951
Collateral contract
SP specify paint to be used.
Contract bought Detel Paint
Lasted 3 months instead of 7 years
Collateral contract between promisor and third party - avoided privity.
- Communitcation between SP and Detel
- Consideration between them
Actions in tort
Third party duty of care - right to sue for damages in tort?
Donoghue v Stevenson 1932
Donoghue v Stevenson 1932
HoL
* Third party
* Claim of tort negligence against manufacturer
* Privity principle restricts range of claims for breach of contract; but does not restrict the range of claims in tort.
Judicial attempts to avoid the doctrine
Came under direct criticism from HoL in Woodar v Wimpey 1980
Woodar v Wimpey 1980
Courts have taken a flexible approach to the doctrine of privity
Jackson v Horizon Holidays 1975
Lord Scarman
I regret that this House has not yet found the opportunity to reconsider the two rules which effectually prevent A or C recovering that which B, for value, had agreed to provide
Lord Wilberforce
Woodar v Wimpey
Situations which “require some flexibility in the law of contract”
Statutory intervention to doctrine of privity
Contract (Rights of Third Parties) Act 1999
Allows a third party to enforce a term of a contract, even if they are not party and haven’t provided consideration
Does the Contracts Act allow a contract to be enforced against third parties?
No
Contract (Rights of Third Parties) Act - S7
s7(1) the existing common law and statutory exceptions are preserved.
Contract (Rights of Third Parties) Act - S6
The Act leaves the common law unchanged for those contracts excluded from operation of the Act under s6
eg Employment contracts and contracts between parties and members
In what circumstances may a thirdparty enforce a term of a contract to which they are not a party? see s1
s1(1)(a) and s1(1)(b) create alternative circumstances in which a third party can enforce a term
Under s1(1)(a)
The contract must specifically provide that the third party can enforce a term of the contract.
“X has a right to enforce this contract” “X has a right to sue on this contract”
Under s1(1)b the
In conjunction with s1(2), it need not be stated specifically that the third party has the right to enforce a term.
Must establish:
* The agreement purported to confer benefit on the third party
* Was not the case that the contracting parties “did not intend the term to be enforceable by the third party”
Identification of the third party
No requirement that the third party be in existence at the date of the date of the contract, a right can be conferred on an unborn child.
In what circumstances does s1(1)(b) not apply
s1(1)(b) creates a rebuttable presumption that a third party will be able to enforce the term.
s1(2) presumption can be rebutted “on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party”
To avoid possibility of conferring third party rights
Exclusion of third party rights act
“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.”
Section 2(1)
Where a third party has a right under section 1 to enforce a term of the contract, the parties may not, rescind the contract or vary it in such a way as to extinguish or alter his entitlement under the right:
* third party has communicated his assent to the term to the promisor
* promisor is aware that the third party has relied on the term
* promisor should reasonably be expected to forseen that the third party would rely on the term
For the purposes of s2(1)(a)
The third party may communicate assent by “words or conduct”
s2(2)b) stipulates such communication will not be effective until received by the promisor
Contracting parties wish to allow variation or recission without consent of party or as provided for in s2(1)
Contracting parties may exclude in express term in the contract (s2(3))
Court can dispense with the third party’s consent where:
- There whereabouts cannot reasonably be ascertained (s2(4)(a))
- Mentally incapable of giving their consent (s2(4(b))
- Reliance on the term cannot be reasonably ascertained (s2(5))
S3
Defences against the third party are both the same as they would be against the promisee and anything specific that they may be able to claim against the third party
S3(6)
A third party is not by virtue of s1 to be placed in a better position than had they been party to the contract themselves
How does s1 affect the right of the promisee to enforce the contract.
see s4
s5
Protects the promisor from double liability.
Any award to a third party may be reduced by court / arbitral tribunal to appropriate extent.
Application of the Contracts (Rights of Third Parties) Act 1999
- Identify relevant contracts
- Identify potentially relevant third parties
- Consider whether third parties should be given enforceable rights
- Consider if rights are given to third parties whether there should be any restrictions on enforceability of rights
