Privity of Contract

Question 1

What is the general rule for privity of contract?

Answer 1

Only the parties to a contract can sue and be sued under it.

A contract cannot impose a burden on any party who is not part of the contract.

Question 2

What is the Statutory EXCEPTION to the general privity of contract rule

Answer 2

Under the Contracts (Rights of Third Parties) Act 1999 (CRTPA), a third party has the right to enforce the term of a contract if:

• The contract EXPRESSLY provides that the 3P can enforce the term

OR

• A term in the contract purports to confer a benefit on the 3P AND it appears the parties intended for the term to be enforceable by the 3P.

Question 3

EXCLUSIONS from the statutory exception to privity of contract (i.e., the CRTPA)

Answer 3

CRTPA does not apply to:
- Employment contracts
- Articles of Association
- Contracts which expressly say the CRTPA does not apply

Question 4

How can parties modify a contract if a 3P has rights under that contract?

Answer 4

If the parties want to modify the contract to the detriment of the 3P, they can only do so UNLESS:

• 3P has communicated their agreement to the term that benefits them
• 3P has relied on the term of the contract and the promisor is aware of that reliance
• The promisor should have foreseen that the 3P would rely on the term, and the 3P actually does rely on it.

Question 5

Common Law Exceptions to the general privity of contract rule

Answer 5

1) Agency
- unless undisclosed principal, then both agent and principal can be sued

2) Assignment
- Notice must be given to assignee
- Only the benefit of a contract can be assigned

3) Subrogation
- Insurer stepping into the shoes of a policy holder
- Guarantor stepping into the shoes of a guarantee

4) Collateral Contracts

5) Trusts
- Must be an irrevocable intention to benefit a 3P