Privity of Contract Flashcards
What is the fundamental principle of privity of contract?
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.
No person can sue or be sued on a contract unless they are party to it
AND
they have provided consideration
However, Contract (Rights of Third Parties) Act 1999 allows a third party who is neither party to the contract not has provided consideration to enforce a term of the contract in certain circumstances. Also other common law and statutory devices.
What are the common law exceptions to the doctrine of privity?
- Agency
- Assignment
- Collateral contract
- Actions in tort
- Other judicial attempts to avoid the doctrine
What is agency?
An agency relationship occurs where one party, the agent is authorised either expressly or by implication by the principal, to contract on behalf of the principal.
If an agent enters into a contract with Party A on their principal’s behalf, it is as if the contract were made between the principal and Party A .
What are the basic requirements to establish agency?
a) The principal should be named (usually be the agent) and its should be clear that the agent is contracting on the principal’s behalf
b) The agent should be authorised to act as agent. In most cases the agent’s authority will be limited by the principal and will only be bound by acts which are within the agent’s authority (or sometimes by acts which appear to be in the agent’s authority); and
c) Consideration has moved from the principal
Note: agent is not party to the contract and it is the principal who can sue and be sued on the contract.
What is assignment?
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.
If there is a prohibition against the assignment in the main contract, then any attempted assignment is likely to be unsuccessful. (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.
What is a collateral contract?
The court may find a collateral contract between the promisor and a third party to provide an exception to the doctrine of privity.
This usually occurs where one of the parties requires eg a contractor to use a specific paint because of assurances they received from the paint company, but there is no actual contract between first party and paint company (because the contractors bought the paint)
The court can establish the existence of a separate collateral contract between the promisor and the third party to avoid the difficulties of privity. Note:
- third party and promisor had communicated with each other and also the court found consideration for the bargain between them (warranty that the paint would last a long time and the instruction to the contractor).
Privity of contract - actions in tort
Tort of negligence - a person who is not party to the contract may still be owed a duty of care so that conduct amounting to a breach on the part of one of the parties may also constitute a breach of duty of care owed to the third party - giving a right to sue in tort.
Contracts of convenience
The courts have sometimes taken a flexible approach to the doctrine of privity allowing a contracting party to recover in relation to losses suffered by a third party.
For reasons of convenience one person may enter into a contract with another person on his own behalf but also on behalf of others:
- family holidays
- ordering means in restaurants for a party; and
- hiring a taxi for a group
In this limited range of examples, the person who entered into the contract can recover for his own losses and for the loss of those persons on whose behalf he made the contract.
When can a third party enforce under the Contracts (Rights of Third Parties) Act 1999
Either:
1) the contract must specifically provide that the third party can enforce a term of the contract
or
2) it need not specifically state the third party has a right to enforce the term, but it must be established that:
- the agreement purported to confer a benefit on the third party; and
- it was not the case that the contracting parties ‘did not intend the term to be enforceable by the third party’
Note: a right can be be inferred on an unknown party being expressly identified as a member of an identified class or answering a particular description - includes unborn children
- IF the contract is held 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 - can expressly rebut this in the contract with an exclusion of third party rights clause
Who can be a third party under a contract?
The third party must be expressly identified in the contract but this right can be be inferred on an unknown party being expressly identified as a member of an identified class or answering a particular description - includes unborn children
- IF the contract is held 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 - can expressly rebut this in the contract with an exclusion of third party rights clause
What rights does a third party have under the act?
The third party has a right to enforce a term of the contract. A third party has available to them the same remedies as the parties to 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 where:
- the third party has communicated his assent to the term to the promisor
- the promisor is aware that the third party has relied on the term; or
- the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has relied on it
May communicate by words or conduct.
Can you assign obligations under a contract?
No it is not possible to assign obligation so the two original rights are against each other. But it will give the assignee to sue in relation to promises made by the other party to the assignor.
