Privity of Contract

Question 1

What is the effect of privity of contract?

Answer 1

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

Question 2

What are the common law methods for circumventing privity of contract?

Answer 2

• Agency
• Assignment
• Collateral contract
• Actions in tort

Question 3

What is the impact of an agency relationship on a contract and what requirements must be satisfied?

Answer 3

If agent enters into a contract with Party A on their principal’s behalf, it is as if the contract is between the principal and Party A - it is the principal who can sue and be sued

Requirements:
1. Clear that agent is contracting on behalf of named principal
2. Agent should be authorised to enter the contract
3. Consideration must move from the principal

Question 4

What is the impact of assignment of a contract?

Answer 4

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.

The extent of C’s rights can never exceed rights of B

A party can pass its rights under a contract, but cannot pass its obligation

Question 5

Is assignment always permitted?

Answer 5

Parties can prohibit assignment via a ‘non-assignment’ clause

Parties may agree to allow limited assignment of benefit of the contract or sub-contracting of the work

Question 6

What is a collateral contract?

Answer 6

The court can circumvent privity if there is a separate collateral contract between promisor and third party

Question 7

How do actions in tort circumvent privity of contract?

Answer 7

C who is not a party to a contract between A and B, can be owed a duty of care, giving the right to sue that contracting party for damages in tort

Donogue v Stevenson (customer’s friend was successful in suing the drink manufacturer even though C was not party to the contract)

Question 8

What is the impact of Contract (Rights of Third Parties) Act 1999?

Answer 8

• Allows a third party, in certain circumstances, to enforce a term of a contract to which they are not a party, even if they have not provided any consideration
• It does not allow a contract to be enforced against a third party

Question 9

What is the requirement for Contract Rights of Third Parties Act to apply?

Answer 9

1. Contract must specifically provide that X has the right to enforce/sue on his contract - must be expressly identified by name, as a member of a class or answering the description (need not be in existence);

OR
2. Contract purports to confer benefit on the third party
3. Not the case that it appears ‘the contracting parties did not intend the term to be enforceable by the third party’ - it is intended the term to be enforceable by the third party

Question 10

What is the impact on the burden of proof where a contract purports to confer a benefit on a third party?

Answer 10

Contract purports to confer a benefit on third party = rebuttable presumption that third party can enforce the term

But presumption can be rebutted

Question 11

Can liability to a third party be excluded?

Answer 11

To avoid any possibility that an agreement has ‘purported to confer a benefit on a third party’ the parties can explicitly exclude this via an ‘exclusion of third party rights’ clause

Question 12

What are remedies available to a third party enforcing their rights under the Act?

Answer 12

• Any remedy that would have been available if he had been a party to the contract
• Third party cannot be placed in a better position than if the third party had been a party to the contract themself

Question 12

When can parties alter the contract to the detriment of a third party without their consent?

Answer 12

• If an express term in contract permits it
• TP’s consent cannot reasonably be ascertained
• TP is mentally incapable of giving consent
• TP’s reliance on term cannot be reasonably ascertained
• If court dispenses with consent it may impose conditions such as requirement to pay compensation

Question 12

What is the impact of the Act on the parties’ ability to alter the contract?

Answer 12

Where a TP has a right to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract or vary it to extinguish/alter the TP’s entitlement under that right, without TP consent if:

a) TP has communicated his assent to the term to the promisor by words or conduct
b) The promisor is aware that the third party has relied on the term,
c) The promisor can reasonably be expected to have foreseen that the TP would rely on the term and the TP has in fact relied on it

Question 13

How does the Act affect the promisee’s right to sue under the contract?

Answer 13

• Does not affect any right of promisee to enforce any term of contract
• s5 protects the promisor from double liability (as breach could expose promisor to actions from the promisee and third party)
• Any award to a TP may be reduced if the promisee has already recovered a sum in respect of TP’s loss or expense incurred by the promisee in making good to the TP the default of promisor

Question 14

What is the effect of agency in company law?

Answer 14

A principal (e.g., a company) authorises an agent to contract on their behalf with a third party (e.g., customer).

As long as agent acts within authority granted by the principal, the principal is bound by any contract the agent enters into.

There is no contractual relationship with the agent

Question 15

What is a collateral contract?

Answer 15

It is formed between one party of a contract and a third party outside of that contract, where the third party has given a promise on which the party relied and entered into the contract with the other party, and for which the third party has received some sort of benefit

• Note difference to agency - the third party to the contract is receiving some sort of benefit (e.g., commission); whereas, agent is only acting to bind the principal

Question 16

Must the TP be expressly identified to enforce a term under C(RTP)A?

Answer 16

Yes, the third party needs to be expressly identified in the contract - clear whether by name, class or description

Question 17

Does CRTPA apply to exemption clauses?

Answer 17

It can apply to exemption clauses, meaning a third party can rely on an exemption clause if they are expressly named or part of a class identified in the contract

Question 18

What is an example of evidence of agency?

Answer 18

Third party indicates ‘it is acting on behalf of the company’

Question 19

Who can be an agent in context of a company?

Answer 19

Anyone with authority - usually a director

Not necessarily a director, but directors are likely to have general authority, whereas junior employee may only have authority to enter into minor contracts on the company’s behalf

Question 20

What are the two circumstances where CRTPA can arise?

Answer 20

1. Contract expressly provides that a third party may enforce the terms of the contract;
   OR
2. The contract:
   - purports to confer a benefit on the third party; AND
   - the parties intended the term to be enforceable by the third party. This is presumed if a contract confers a benefit on the third party, but the presumption can be rebutted

Question 21

What does ‘confer a benefit on the third party’ mean for the purposes of CRTPA?

Answer 21

It means that one of the purposes of the contract must be to benefit the third party

Question 22

A and B enter into a contract. A then enters into a deed of assignment by which A assigns her rights under the contract with B to C.

What is the effect of this?

Answer 22

C can sue B in relation to the promises B made to A