Privity of Contract and Rights of Third Parties

Question 1

What is the doctrine of privity of contract?

Answer 1

It is the principle that a contract only creates rights and obligations between the parties to it. No enforceable right or obligations are conferred on a third party and no person can sue or be sued under a contract they are not party to.

Question 2

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

Answer 2

• agency
• assignment
• collateral contract
• actions in tort
• judicial attempts to avoid the doctrine

Question 3

How does agency avoid the doctrine of privity of contract?

Answer 3

The principal is allowed to enforce the contract even though it was the agent who negotiated the contract.

Not really circumventing as contract was only ever between principal and there party, not agent.

Question 4

How does assignment avoid the doctrine of privity of contract?

Answer 4

As original party can assign their contractual obligations to a third party

Question 5

What limitations does assignment have?

Answer 5

The rights of the party who is benefitting under assignment can never be greater than the original party’s rights.

The contract may contain a prohibition on assignment.

Question 6

How does collateral contract avoid the doctrine of privity of contract?

Answer 6

If the court can establish the existence of a separate collateral contract between the promisor and the third party, it can avoid the difficulties of privity.

Essentially though the obligations are enforced under a separate contract.

Question 7

How do actions in tort avoid the doctrine of privity of contract?

Answer 7

Tort provides recourse in law for those who do not have a claim under contract against the wrongdoer

Question 8

How do judicial attempts avoid the doctrine of privity of contract?

Answer 8

The courts in certain circumstances have allowed third parties to recover in relation to losses suffered by a third party

Question 9

What primary right does the Contract (Rights of Third Parties) Act 1999 confer on third parties?

Answer 9

The act allows a third party, in limited circumstances, to enforce a term of contract to which they are not party even if they have not provided consideration.

Question 10

Does the 1999 Act allow a contract to be enforced against a third party?

Answer 10

No

Question 11

In what circumstances may a third party enforce a term of a contract to which they are not a party under the 1999 Act?

Answer 11

Two alternative circumstances:

• either the contract provides that they can specifically enforce a term of the contract

OR it is not stated they can enforce a term but

• the agreement purports to confer a benefit on a third party AND
• it was not the case that contracting parties ‘did not intend the term to be enforceable by the third party’

Question 12

Does the third party have to be in existence at the date of contract?

Answer 12

No

Question 13

When will a party not be able to enforce under the circumstance where:

• the agreement purports to confer a benefit on a third party AND
• it was not the case that contracting parties ‘did not intend the term to be enforceable by the third party’?

Answer 13

If the contracting parties can rebut the presumption that the third party is able to enforce by showing they did not intend for the term to be enforced by a third party

Question 14

How can parties avoid the possibility of third parties being able to enforce terms?

Answer 14

By containing a clause in the contract which states that third parties cannot enforce any terms

Question 15

What remedy is available to third parties under the 1999 Act in relation to rescission of a right conferred on them?

Answer 15

They can prevent parties rescinding a right conferred on them without their consent provided that:

• they communicate their assent to the term to the promisor
• the promisor is aware 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 in fact relied on it

Question 16

How may a third party communicate their assent?

Answer 16

By words or conduct

If assent sent by post, not effective until received by promisor

Question 17

Can contracting parties ever allow variation or rescission without consent of third party?

Answer 17

Yes, if there is an express term of the contract allowing it

Question 18

In what circumstances can the court dispense the requirement for third party consent?

Answer 18

• if their whereabouts cannot reasonably be ascertained
• where they are mentally incapable of giving their consent
• where their reliance on the term cannot reasonably be ascertained

Question 19

Is a third party entitled to anything if the court discharges any right of theirs?

Answer 19

They may receive compensation - discretion of the court

Or the court may impose other conditions

Question 20

Is the third party able to be in a better position than any contracting party?

Answer 20

No - not allowed to be placed in a better position than if they were a party to the contract

Question 21

Does a promisor have any defences against a third party?

Answer 21

They would have any defences they would have against the promisee and anything specific against the third party

Question 22

How is the promisor protected from dual liability under the 1999 Act?

Answer 22

the court may reduce any award to a third party if appropriate if the promisee has already recovered a sum in relation to the same loss from the promisor