Privity of Contract

Question 1

What the general rule for privity of contract?

Answer 1

A person who is not a party to a contract cannot acquire any rights under that contract or be subject to any of its obligations.

Question 2

Various common law and statutory devices were used to circumvent the rules on privity?

Answer 2

Contract (Rights of Third Parties) Act 1999. 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).

Common law methods of circumventing the doctrine.

Question 3

Common law methods of circumventing the
doctrine of privity?

Answer 3

Agency
* Assignment
* Collateral contract
* Actions in tort
* Other judicial attempts to avoid the doctrine

Question 4

Agency?

Answer 4

The basic requirements necessary to establish an agency
relationship are as follows: (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); and
(c) Consideration has moved from the principal.

Question 5

Assignment?

Answer 5

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 6

Can there be prohibition of assignment?

Answer 6

If there is a prohibition against the assignment in the main contract, then any attempted
assignment is likely to be unsuccessful

This would be a ‘non-
assignment’ clause,

Question 7

What is an n alternative to a total prohibition on assignment or sub-contracting?

Answer 7

As an alternative to a total prohibition on assignment or sub-contracting (as set out above), the parties may agree to allow limited assignment of the benefit of the contract or sub-contracting of the work, for example, within a group of companies or to a named
person or persons.

Question 8

Collateral contract?

Answer 8

The court may find a collateral contract between the promisor and the third party to provide an exception to the doctrine of privity.

e.g. 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. 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 9

Actions in tort?

Answer 9

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.

Question 10

Judicial attempts to avoid the doctrine?

Answer 10

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 11

A husband buys a car from a car dealer for his wife. The wife is involved in an accident because the car’s brakes were defectively installed by the manufacturer of the car. Can the wife sue the manufacturer of the car for breach of contract?

No. The wife should sue the car dealer for breach of contract

Yes. The wife can sue the car manufacturer for breach of contract

No. The wife should sue the car dealer in the tort of negligence

No. The wife should sue the car manufacturer in the tort of negligence

Answer 11

No. The wife should sue the car manufacturer in the tort of negligence

The doctrine of privity, which prevents the wife from suing the car manufacturer and car dealer in contract, does not apply in tort actions. The wife should therefore sue the car manufacturer in tort for breach of their duty of care.

Question 12

the Contracts (Rights of Third Parties) Act 1999?

Answer 12

Under this Act, a third party can acquire rights if:
*
the contract expressly provides that they may acquire a benefit (s 1(1)(a)); or
*
the term purports to confer a benefit on them (s 1(1)(b)).
Subsection (1)(b) does not apply, however, if on a true construction of the contract it was
not intended that the term be enforceable by a third party (s 1(2)). For a third party to
enforce a term of the contract in their own right, they must be expressly identified in the
contract by name or as a member of a class (eg ‘employees’) or answering a particular
descriptio

Question 13

When can a party enforce a term through the Contracts (Rights of Third Parties) Act 1999??

Answer 13

ss 1(1)(a) and s 1(1)(b) create alternative circumstances in which a third party
can enforce a term. 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’. 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 14

Identification of a third party under the Contracts (Rights of Third Parties) Act 1999??

Answer 14

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 15

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

Answer 15

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. The indications are that the courts will be slow to hold that, where the contract does purport to confer a benefit on a third party, there is no intention that the third party should have a right to enforce the term. 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 16

‘exclusion of third party rights’ clause?

Answer 16

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 17

Can third parties rely on exemption and limitation clauses?

Answer 17

Importantly, it should be noted that the Act also allows third parties to rely on exemption or limitation clauses in contracts to which they are not a party in the same way in which it allows third parties to enforce contractual terms (s1(6)).

Question 18

What are the remedies available to the third party?

Answer 18

. Consequently, s 2(1) states:
“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:
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.”
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.
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)).
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 19

Defences against third party?

Answer 19

By virtue of s 3, the promisor’s 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 20

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

Answer 20

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 21

Requirements for The Contracts (Rights of Third Parties) Act 199?

Answer 21

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:
a. Where the contract states it should; or
b. 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.

Question 22

Under what circumstances does the Contracts (Rights of Third Parties) Act 1999 enable a third party in their own right to enforce a term of a contract to which they are not a party?

Answer 22

Where the contract expressly provides that they may

Question 23

How do the remedies available to third parties under the Contracts (Rights of Third Parties) Act 1999 compare to the remedies available to parties to a contract?

Answer 23

S1(5) of the 1999 Act makes available to a third party the same remedies for breach of contract which are available to a party to the contract

Question 24

A contract contains the following clause: ‘In a contract between the insurer and the insured, on the death of the insured, the insurer guarantees to pay £10,000 to the wife of the insured, or to the dependents of the insured if the wife predeceases him.’ Under what section(s) of the Contracts (Rights of Third Parties) Act 1999 would a third party enforce the contract?

The children can enforce the contract under s1(1)(a) and s1(3)

The wife can enforce the contract under s1(1)(a) and s1(3)

The wife can enforce the contract under s1(1)(b) and s1(3)

The children can enforce the contract under s1(2)

Answer 24

The wife can enforce the contract under s1(1)(b) and s1(3)

Correct. The wife can enforce the contract as it purports to confer a benefit on her (s1(1)(b)) and she has been identified by description s1(3)

Question 25

Contracts (Rights of Third Parties) Act 1999 requirements?

Answer 25

The Act allows a third party, in limited circumstances, to enforce a term of a contract to which they are not a party.
To be effective:
- the contract must specifically provide that the third party can enforce a term of the contract; or
- the agreement purports to confer a benefit on the third party, and it is not the case that the contracting parties ‘did not intend the term to be enforceable by the third party’.

The Act does not allow a contract to be enforced against a third party. The third party’s claim will be subject to limitation clauses /exclusions clauses in the contract

Question 26

A supermarket, instructs a firm of lighting engineers, to install bright lights throughout its large supermarket carpark. The contract sets out a specification for the lighting, a price and a deadline for the works. There are no other terms relevant to this scenario. A sole trader owns and operates a small hardware store very nearby, and believes the better lighting in the nearby carpark will attract more customers to his shop. The lighting engineers fail to carry out the work in accordance with its contract with the supermarket. The supermarket is pre-occupied with other aspects of its business, and does nothing about this. Mark wants to force the lighting engineers to comply with its contract with the supermarket. Which one of the following statements best reflects the legal position?

The sole trader cannot bring a claim against the lighting engineers.

The sole trader can bring a claim against the lighting engineers because the supermarket entered into the contract as the sole trader’s agent.

The sole trader can bring a claim against the lighting engineers because there will be a collateral contract between the lighting engineers and the sole trader.

The sole trader can bring a claim against the lighting engineers because the lighting engineers have failed to comply with the terms of the contract, and this has caused the sole trader a loss.

The sole trader can bring a claim against the lighting engineers pursuant to the Contract (Rights of Third Parties) Act 1999.

Answer 26

The sole trader cannot bring a claim against the lighting engineers.

Question 27

A telecommunications company is expanding its business overseas and needs to enter into lots of different contracts in all the different countries that it wishes to operate in. It wishes to be a named party in each contract and wants to get them signed as soon as possible.

What is the best solution for getting these contracts negotiated and signed quickly?

The telecommunications company can travel to the different countries to negotiate and sign the contracts.

The telecommunications company can authorise a third party to act as its agent to negotiate and sign the contracts on its behalf.

The telecommunications company can authorise a negotiator to act as an agent for them and then the telephony company can sign once the contract is agreed.

The telecommunications company can authorise a principal to negotiate and sign the contracts on its behalf.

The telecommunications company can authorise a third party to sign the contract twice; once on behalf of the client and once on behalf of itself.

Answer 27

The telecommunications company can authorise a third party to act as its agent to negotiate and sign the contracts on its behalf.

Question 28

What is a ‘mutual mistake’?

Answer 28

where both parties are mistaken but they are mistaken about different things.

Question 29

Question 1
A client owns a car dealership and sells high value, nearly new cars to business customers
looking to purchase company cars. The Sales Manager can agree to sell a maximum of
three cars in any transaction. Any larger transaction must first be approved by the Finance
Officer. Last week, the Sales Manager agreed to sell five sports cars to a valued customer
with delivery agreed to be made next week. The client has now been informed of the
transaction by the Finance Officer, who found out about it yesterday and had not approved it.
Which of the following statements best describes whether the client will be in breach of
contract if they do not perform the contract?
A No, because the Sales Manager did not have authority to enter the contract.
B No, because the contract has not yet been completed and can be revoked.
C Yes, because the Sales Manager had actual authority to enter the contract.
D Yes, because the client represented to the customer that the Sales Manager had
authority to enter the contract.
E Yes, because the Sales Manager represented to the customer that he had authority to
enter the contract.

Answer 29

Answer
The correct option is D. The Sales Manager (SM) is likely to have apparent authority to act
as the client’s agent. There is a representation that the client (as principal) has made to
the customer that the SM had authority to agree the sale of the five cars. It is likely this is
created by the SM being in charge at the showroom and the customer having made previous
purchases there. The customer has relied on this representation believing the SM had authority
to enter the contract and the customer has altered his position by entering into the contract to
buy the cars.
It must be the principal who makes the representation, not the agent, so E is wrong.
A is wrong as apparent authority is likely to exist here and C is wrong as the actual authority
to sell this number of cars has not been given to the SM on the facts.
B is wrong as the contract is already formed so the client will be in breach if the client does
not perform it

Question 30

Question 2
A client owns a pub and employs someone to manage it. The manager is the exclusive
face of the business; his name is on the bar and the licence of the pub. The client explicitly
instructed the manager not to make any purchases outside of bottled ales and mineral
waters, but the manager entered into an agreement for the purchase of cigars and in the
event did not pay for them. The seller of the cigars discovered the client is the actual owner
of the business and is suing the client for the price.
Which of the following statements best describes whether the client will be liable to
the seller?
A Yes, because the manager had apparent/ ostensible authority to buy the cigars.
B Yes, because the manager had implied actual authority as buying cigars is within the
range of acts usually carried out by a pub manager.
C Yes, because the manager represented he had authority and the seller relied on that
representation and entered into the contract.
D No, because the manager had neither actual (express or implied) nor apparent
authority to buy the cigars.
E No, because the agent had deliberately acted outside his express authority.

Answer 30

Answer
The correct statement is B. Buying cigars is within the usual authority of pub managers and so
the manager had implied actual authority to buy them. The facts of the scenario are based on
Watteau v Fenwick [1893] 1 QB 346.
A is wrong because there was no holding out by the client as principal. The seller was
unaware of the principal at the time of the sale.
C is wrong because there was no representation of authority by the agent and for apparent
authority the representation must come from the principal.
D is wrong because the agent had implied actual authority.
E is wrong because it is irrelevant whether or not the agent deliberately acted outside his
authority.