CL12: Privity of contract and rights of third parties

Question 1

Privity of contract

Answer 1

No person can sue or be sued on a contract unless they are party to it

Dunlop Pneumatic Tyre Co v Selfridge & Co 1915

Question 2

Consideration and privity are…

Answer 2

Distinct legal principles

Question 3

Combined effect of privity and consideration

Answer 3

No person can sue on a contract unless:

• They are party to the contract; and
• They have provided consideration

Question 4

Tweddle v Atkinson 1861

Answer 4

£200 to the groom
Groom was not a party to the contract as was been between the fathers of the couple.

Question 5

Controversial that…

Answer 5

a third party should not be able to obtain a benefit from a contract to which they were not a party.

Question 6

Common law and statutory devices used to circumvent

Answer 6

… rules on privity

Question 7

Contract (Rights of Third Parties) Act 1999

Answer 7

Allows a third party who is neither a party to contract, nor has provided consideration to enforce a contract in certain circumstances

Question 8

Common law methods for circumventing doctrine of privity

Answer 8

• Judicial creativity = courts’ uneasiness
• Agency
• Assignment
• Collateral contract
• Actions in tort
• Other judicial attempts

Question 9

Agency - principle

Answer 9

If agent enters into contract on principles’ behalf it is as if the contract were made between principal and Party A

Question 10

Agency requirements - basic requirements

Answer 10

• 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.

Question 11

Assignment - principle

Answer 11

• A = B
• B assigns to C
• C can sue A on their promise to B
• C’s rights can never exceed those of B

Question 12

Prohibition on assignment

Answer 12

Any attempted assignment is likely to be unsuccessful

Question 13

Non assignment clause

Answer 13

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

Question 14

Collateral Contract

Answer 14

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

Question 15

Shanklin Pier v Detel Products Ltd 1951

Answer 15

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

Question 16

Actions in tort

Answer 16

Third party duty of care - right to sue for damages in tort?

Donoghue v Stevenson 1932

Question 17

Donoghue v Stevenson 1932

Answer 17

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.

Question 18

Judicial attempts to avoid the doctrine

Answer 18

Came under direct criticism from HoL in Woodar v Wimpey 1980

Question 19

Woodar v Wimpey 1980

Question 20

Courts have taken a flexible approach to the doctrine of privity

Answer 20

Jackson v Horizon Holidays 1975

Question 21

Lord Scarman

Answer 21

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

Question 22

Lord Wilberforce

Answer 22

Woodar v Wimpey
Situations which “require some flexibility in the law of contract”

Question 23

Statutory intervention to doctrine of privity

Answer 23

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

Question 24

Does the Contracts Act allow a contract to be enforced against third parties?

Answer 24

No

Question 25

Contract (Rights of Third Parties) Act - S7

Answer 25

s7(1) the existing common law and statutory exceptions are preserved.

Question 26

Contract (Rights of Third Parties) Act - S6

Answer 26

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

Question 27

In what circumstances may a thirdparty enforce a term of a contract to which they are not a party? see s1

Question 28

s1(1)(a) and s1(1)(b) create alternative circumstances in which a third party can enforce a term

Question 29

Under s1(1)(a)

Answer 29

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”

Question 30

Under s1(1)b the

Answer 30

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”

Question 31

Identification of the third party

Answer 31

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.

Question 32

In what circumstances does s1(1)(b) not apply

Answer 32

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”

Question 33

To avoid possibility of conferring third party rights

Answer 33

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.”

Question 34

Section 2(1)

Answer 34

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

Question 35

For the purposes of s2(1)(a)

Answer 35

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

Question 36

Contracting parties wish to allow variation or recission without consent of party or as provided for in s2(1)

Answer 36

Contracting parties may exclude in express term in the contract (s2(3))

Question 37

Court can dispense with the third party’s consent where:

Answer 37

• 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))

Question 38

S3

Answer 38

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

Question 39

S3(6)

Answer 39

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

Question 40

How does s1 affect the right of the promisee to enforce the contract.

Answer 40

see s4

Question 41

s5

Answer 41

Protects the promisor from double liability.

Any award to a third party may be reduced by court / arbitral tribunal to appropriate extent.

Question 42

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

Answer 42

• 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