Privity of contract

Question 1

What is the general rule in the doctrine of privity of contract?

(a) 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.

(b) 
A party who is not a party to a contract cannot be sued in respect of that contract.

(c) 
A contract is a private relationship between the parties.

(d) 
A person who is neither a party to a contract nor has provided consideration can enforce a term of the contract if the contract was entered into for their benefit.

Answer 1

(a) 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 1

Which statute introduced a limited exception to the doctrine of privity of contract?

(a) 
Human Rights Act 1998

(b) 
Unfair Contract Terms Act 1977

(c) Contracts (Rights of Third Parties) Act 1999

(d) Consumer Rights Act 2015

Answer 1

(c) Contracts (Rights of Third Parties) Act 1999


Question 2

What rule of consideration is closely related to the doctrine of privity of contract?

(a) 
Consideration must not be past.

(b) 
Consideration must move from the promisee

(c) 
Consideration must be sufficient.

(d) 
Performance of a pre-existing duty owed to a third party is sufficient consideration

Answer 2

(b) 
Consideration must move from the promisee


Question 3

Which of the following is not a common law method of circumventing privity of contract?

(a) 
Restitution

(b) 
Agency

(c) 
Actions in tort

(d) 
Assignment

Answer 3

(a) 
Restitution


Question 4

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?

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

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

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

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

Answer 4

(a) 
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 5

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


(a) Where the third party is expressly identified as a member of a class

(b) 
Only in circumstances where express provision has been made in the contract for the third party to enforce the term in their own right.

(c) 
Where the contract expressly provides that the third party may in their own right enforce the term or the term purports to confer a benefit upon the third party.

(d) 
Where the third party is expressly identified in the contract by name

Answer 5

(c) 
Where the contract expressly provides that the third party may in their own right enforce the term or the term purports to confer a benefit upon the third party.


Question 5

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?

(a) 
A third party has available to them more remedies under the Act compared to the parties to the contract

(b) 
The remedies available to a third party under the Act are at the discretion of the court

(c) 
A third party has fewer remedies available to them compared to the parties to the contract

(d) 
A third party has available to them the same remedies as the parties to the contract

Answer 5

(d) 
A third party has available to them the same remedies as the parties to the contract
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 6

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?

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

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

(d) 
The children can enforce the contract under s1(2)

Answer 6

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

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 7

What does privity of contract mean?

Answer 7

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

Question 8

What is the general rule as to who can su under a contract?

Answer 8

No person can sue on contract unless
(a) They are party to contract and
(b) They have provided consideration

Question 9

What are the five common law ways of circumventing the doctrine of privity?

Answer 9

1. Agency
2. Assignment
3. Collateral damage
4. Actions in tort
5. Other judicial attempts to avoid doctrine

Question 10

How can agency be used to circumvent privity and what are the basic requirements for agency?

Answer 10

Occurs where one party, agent, is authorised either expressly or by implication, by principal, to contract on behalf of principal

Basic requirements to establish relationship of agency
1. Principal should be named (usually by agent) and it should be clear that agent in contracting on principal’s behalf
2. Agent should be authorised to act as agent - in vast majority of cases, agent’s authority will be limited to principal eg agent may be authorised to sell certain of principal’s goods within range of certain prices, but does not have freedom to enter into any contract it wishes to - principal is only bound by actions of agent which are within agent’s authority (or sometimes, by acts which appear to be in agent’s authority) and
3. Consideration has moved from principal

Principal can sue and be sued - agent is not party to contract and once contrary has been concluded, agent’s existence is no longer relevant

Question 11

Will a principal be bound by all of the agent’s actions?

Answer 11

No - In vast majority of cases, agent’s authority will be limited to principal eg agent may be authorised to sell certain of principal’s goods within range of certain prices, but does not have freedom to enter into any contract it wishes to - principal is only bound by actions of agent which are within agent’s authority (or sometimes, by acts which appear to be in agent’s authority) and

Question 12

How can assignment be used to avoid privity?

Answer 12

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.

Parties can agree that assignment of rights is prohibited - this would be a non-assignment clause eg Neither party shall be entitled to assign this Agreement or sub-contract any part of this Agreement to any person, persons or company without the prior written consent of the other party.

As alternative to total prohibition on assignment or sub-contracting, parties may agree to allow limited assignment of benefit of contract or sub-contracting of work eg within group of cos or to named person(s)

Question 13

How can a collateral contract be used to avoid privity?

Answer 13

= a subsidiary contract which induces a person to enter into a main contract or which depends upon the main contract for its existence.

If court can establish existence of separate collateral contract between promisor and TP, it can avoid difficulties of privity - should also be noted that promisor and TP had communicated with each other and also that court found consideration of bargain between them

Question 14

When will actions in tort circumvent privity?

Answer 14

During development of negligence, crucial question arose as to whether person C, who is not party to contract between A and B, may be owed duty of care, so that conduct amounting to breach of contract on part of one of contracting parties will constitute breach of duty of care owed to C, giving third party (C) right to sue that contracting party for damages in tort.

Nevertheless, it was held that the plaintiff, as the ultimate consumer of the goods, could bring a claim in the tort of negligence directly against the manufacturer (A). In effect, this seminal decision held that the privity principle that restricted the range of claims for breach of contract did not also restrict the range of claims in tort. In so doing, it opened up the possibility of a far more extensive liability regime for negligence.

Question 15

Under what circumstances can a TP enforce a term of contract to which they are not party under CRTRA 1999?

Answer 15

s. 1(1)(a): contract must specifically provide that TP can enforce term of contract eg ‘X has the right to enforce this contract’ or ‘X has a right to sue on this contract’

s. 1(1)(b): need not be stated specifically that TP has right to enforce term - however, it must be established that:
(a) Agreement purported to confer benefit on TP and
(b) It was not case that contracting parties ‘did not intend term to be enforceable by TP’

Question 16

True or false - under CRTPA, a contract can be enforced both by a TP and against a TP

Answer 16

False - Act allows TP, in limited circumstances, to enforce term of contract to which they are not party - case even if TP has not provided any consideration.

Act however, does not allow contract to be enforced against TP.

Question 17

Does a TP have to be in existence at time of contract to enforce term under CRTPA?

Answer 17

No requirement that TP can be in existence at time of contract —> means that right can be conferred eg unborn child, being expressly identified as member of identified class or answering particular description

Question 18

Where does s. 1(1)(b) CRTPA not apply?

Answer 18

Where term ‘purports to confer benefit’ on TP, s. 1(1)(b) creates rebuttable presumption that TP will be able to enforce term

s. 1(2): presumption will be rebutted if ‘on proper construction of contract it appears that parties did not intend term to be enforceable by TP’

Indications are that courts will be slow to hold that where contract purports to confer benefit on TP, there is no intention that TP should have right to enforce term

So once it is held that contract purports to confer benefit on TP, there will be rebuttable presumption in favour of TP having right to enforce term and it will be difficult to rebut that presumption

Question 19

Can parties exclude TP rights from contract?

Answer 19

It is possible that parties do not want any TPs to have any rights under contract - to avoid possibility parties can explicitly exclude this - exclusion of TP rights

Question 20

Can TPs rely on CRTPA for exemption clauses?

Answer 20

Should be noted that act also allows TPs to rely on exemption or limitation clauses in contracts to which they are not party in same way in which it allows TPs to enforce contractual terms

Question 21

Are parties allowed to rescind contract or vary it without TP’s consent?

Answer 21

So s. 2(1): 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) TP has communicated his assent to term of promisor
(b) Promisor is aware that TP has relied on term or
(v0 Promisor can reasonably be expected to have foreseen that TP would rely on term and TP has in fact relied on it

If contracting party wishes to allow variation/rescission without consent of TP or in circumstances not provided for in s. 2(1) they can do so by including express term in contract (s. 2(3))

Question 22

Can courts dispense contract without TP’s consent?

Answer 22

s. 2 also provides that court can dispense without TP’s consent:
a. Where whereabouts cannot reasonable be ascertained (s. 2(4)(a))
b. Where they are mentally incapable of giving their consent (s. 2(4)(b)) or
c. Where their reliance on term cannot be reasonably ascertained

Question 23

True or false - by enforcing term under CRTPA, TP is put in better position than they would have been in had they been a party to the contract in the first place.

Answer 23

s. 3(6): TP is not, by virtue of s. 1, to be placed in better position than if TP had been party to contract themself

If, as such party, they would not for whatever reason have been able to enforce term (eg term to exclude liability) then they may not enforce it under s. 1

Obvious examples: include where benefit to be given would have been illegal or where TP lacks contractual capacity

Question 24

What are promisor’s defences against TP?

Answer 24

s. 3: promisor’s defences against TP are both same as they would be against promisee and anything specific that they might be able to claim against TP

Question 25

How does s. 1 affect right of promisee to enforce contract and how are promisors protected from double liability?

Answer 25

Provides that any award to TP may be reduced by court or arbitral tribunal to such extent as is thought appropriate if promisee has already recovered sum in respect of TP’s loss or expense incurred by promisee in making good to see TP default of promisor