Contractual Privity and Third-Party Rights

Question 1

What is the Doctrine of Privity?

Answer 1

Only the Parties to a Contract can have Rights and Obligations thereunder.

Question 2

What are the Common Law Exceptions to the Doctrine of Privity?

Answer 2

• Agency.
• Assignment.
• Actions in Tort.
• Judicial Intervention.

Question 3

What is the Exception of Agency?

Answer 3

A properly-authorised Agent can Bind its Principal through its actions. However:

• The Agent-Principal relationship must be clearly disclosed in the Contract; and
• Consideration must move from the Principal.

Question 4

What is the Exception of Assignment?

Answer 4

Assignment enables the transfer of Rights under a Contract to Third Parties, thereby granting them Privity.

Beware Non-Assignment Clauses.

Question 5

What is the Exception of Actions in Tort?

Answer 5

A Party without Privity can bring a Claim in Tort, e.g. Negligence, against Contracting Parties under the appropriate circumstances.

For example, a Consumer can Claim in Tort against Toyota if a negligent vehicular defect causes them harm.

Question 6

What is the Exception of Judicial Intervention?

Answer 6

• If the Facts so suggest, the Court may find a Collateral Contract between a Contracting Party (or both) and a Third Party.
• If the consequences of Privity are unjustly harsh, the Court may bend the Doctrine in exceptional circumstances.

Question 7

What are the Statutory Exceptions to the Doctrine of Privity?

The relevant Statute is the Contracts (Rights of Third Parties) Act 1999.

Answer 7

• Expess Contractual Right to Enforce.
• Implied Contractual Right to Enforce.

This assumes the Third Party is properly Identified, meaning it is named, described, or forms part of a Class.

There is no requirement for the Third Party to exist at Formation.

Question 8

When will a Third Party have an Express Contractual Right to Enforce?

Answer 8

When the Contract expressly grants it Enforcement Rights, Qualified or otherwise.

Question 9

When will a Third Party have an Implied Contractual Right to Enforce?

Answer 9

• When the Contract confers upon it a Benefit; and
• Does not clearly indicate that it should be unable to Enforce the given Term.

Question 10

What are the Remedies to a Third Party under the Contracts (Rights of Third Parties) Act 1999?

Answer 10

• The same Remedies it would have were it Privy to the Contract.
  • However, the Court can reduce any award if the Promisee has already recovered for the same Breach.
• The Promisor also has access to the same Defences as if the Third Party were Privy.

Third Parties cannot be placed in a better position than if they were Privy.

Question 11

If a Third Party has Statutory Rights under a Contract, can the Privy Parties Vary or Rescind it?

Answer 11

If the Third Party has:

• Communicated Assent to the Term; and
• The Promisor has Actual or Constructive Notice of its Reliance thereon;

Then Variation or Rescission is only permissible if:

• It would not extinguish the Third Party’s rights, failing which; then
• Only with the Third Party’s Consent.