Element 4 - Privity of Contract

Question 1

What is the doctrine of privity of contract?

Answer 1

Only parties to the contract can sue or be sued
Third parties do not acquire rights not are they burdened

Question 2

How does the Contracts (Rights of Third Parties) Act 1999 alter the position on privity of contract?

Answer 2

Expressly named Third party (or a class) can enforce a contract if:

1. Contract expressly provides for them to do so; or
2. a term purports to confer a benefit on the third party and the terms infer that the parties intended the term to be enforceable by a third party

Question 3

Does the CRTPA allow for obligations to be imposed on third parties who are not parties to a contract?

Answer 3

No

Question 4

What does the CRTPA not apply to?

Answer 4

1. Employment contracts
2. Articles of association
3. Contracts which expressly exclude it

Question 5

If a third party has rights under a contract, what is required to change the contract if that change is to the detriment of that third party?

Answer 5

1. The consent of the third party is required and one of the following
   a. The third party communicated his agreement to the term benefitting him
   b. third party relied on a term in the contract and the promisor is aware of the reliance
   c. promisor should have foreseen that the third party would rely on the term and the third party has in fact relied on it

Question 6

What are the common law exceptions to the rule that third parties are not bound by a contract?

Answer 6

1. Agency
2. Assignment
3. Subrogation
4. Collateral contracts
5. Trusts

Question 7

Explain the agency exception to the privity doctrine?

Answer 7

Agent is a third party appointed by a principal to negotiate and contract of their behalf. An agent and the undisclosed principle can sue or be sued under contract

Question 8

Explain the assignment exception to the privity doctrine?

Answer 8

Contractual rights can be transferred to a third person outside of the terms of the original contract

Question 9

What are the requirements for effective assignment?

Answer 9

Notice of assignment given to the party liable to perform

Question 10

Can an obligation be assigned?

Answer 10

No

Question 11

What must parties do if they want to transfer the rights and obligations under contract?

Answer 11

Novation of the contract releasing former parties

Question 12

Explain the subrogation exception to the privity rule?

Answer 12

Insurance contracts - when insurer pays a claim to policyholder, insurer subsograted to the rights of policyholder by standing in shoes of policyholder

Also applies to guarantor guarantee situations

Question 13

What does subrogation allow an insurer to do?

Answer 13

Stand in shoes of the insured and have all rights the policyholder would have against the person responsible for the loss giving rise to the claim

Question 14

Explain the collateral contracts exception to the privity rule?

Answer 14

A side-agreement between the promisor and a third party that runs alongside a main contract

Question 15

Explain how Trusts are an exception to the privity rule?

Answer 15

If A makes a promise to B for the benefit of C, court will say that A’s promise was made on trust for C

Question 16

How can you tell if there is a trust relationship?

Answer 16

The use of the words trust or trustee. Or it can be implied if there is an irrevocable intention to benefit a third party