Privity of contract and rights of third parties

Question 1

What is the basic principle of the privity of contract?

Answer 1

Only a contracting party can sue or be sued for a breach of contract.

I.e. are a party and have provided consideration

E.g. groom could not enforce the promise of his father-in-law to pay him £200 - was agreed to by his father not him (and didn’t provide the consideration)

Question 2

What are the common law methods used to circumvent the doctrine of privity?

Answer 2

• Agency
• Assignment
• Collateral contract
• Actions in tort (DOC basically; Donoghue v Stevenson’ consumer could bring claim directly against manufacturer who was contracted with the retailer)
• Other judicial attempts

Question 3

How does the exception of agency work?

Answer 3

One party - agent - authorised by principal to contract on their behalf

The principal rather than the agent enters contract with other party, and agent’s existence no longer relevant once contract concludes

Not really an exemption - principal is a party rather than agent

Question 4

What are the 3 requirements to establish an agency relationship?

Answer 4

1. Principal should be named/clear agent is contracting on their behalf
2. Agent should be authorised to act as agent (and this is limited); principal only bound by acts of agent within their authority
3. Consideration has moved from principal

Agent acts on behalf of principle

Question 5

Examples of legal agents

Answer 5

• Travel agent
• Insurance broker
• Tickets agents
• Shop assistants
• Auctioneers
• Company directors

NB: if a person is called “agent”, it does not mean they neccessarily are in a legal sense, eg.
* estate agent = NOT agent in legal sense.

Question 6

Actual authority

Answer 6

Can be granted expressly or impliedly.

Based on consent of P: agrees in advance to give A authority.

It can be express by words or implied by conduct (eg appointing A as a sales assistant indicates tha owner (P) of business accepst to give him power to sell on behalf of owner.

Question 7

Apparent authority

Answer 7

Based on concept of estoppel. Appearence of authority created by P & acted upon by 3rd party.

• P must have represented by words/conduct that A has authority
• 3rd party must rely on this representation
• 3rd party must alter their position (eg by entering into a contract)

3rd party believes agent is authorised to act on P’s behalf.

3rd party due to actions of P thinks A has apparent authority - P bound to a contract.

Question 8

If 3rd party due to actions of Principle thinks Agent has apparent authority, then

Answer 8

Principle is bound. Estopped from denying eg authority to sell.

**Agent drops out **out of the picture under resulting contract.

A has no rights/libailities under contract for sale, but under liable agency contract to P.

Question 9

How does the exception of assignment work? What is the extent of assignment?

Answer 9

• If A is under an obligation to B and B assigns those contractual rights to C, it might be possible for C to sue A on their promise to B
• Extent of C’s rights can never exeed that of B’s

Question 10

What is a non-assignment clause?

Answer 10

Where parties agree that the assignment of rights is prohibited - any attempted assignment unsuccessful

Question 11

How does the collateral contract exception work?

Answer 11

Where a court can establish existence of a separate collateral contract between promissor and third party, it can avoid difficulties of privity

E.g. Shanklin Pier v Detel

• SP employed contractors to paint pier - term of contract that SP specified paint used
• Detel told SP that paint would last 7 years, it lasted 3 months after SP instructed contractors to use it
• Court held there was a collateral contract between SP and Detel (consideration was the warranty and the instruction to buy the paint)
• SP could sue on this basis

NB promisor and TP had communicated and had consideration

Question 12

How do actions in tort mean a person who is not a party to a contract between A and B can circumvent privity of contract?

Answer 12

Where C is owed a duty of care, conduct amounting to a breach of contract on part of one of the contracting parties can constitute a breach of duty of care owed to C - so C has right to sue contracting party for damages in tort

Question 13

What does the Contracts (Rights of Third Parties) Act 1999 allow a third party to do?

Answer 13

In limited circumstances, a 3rd third party can enforce a term of a contract to which they are not a party even if they have not provided consideration

Does not allow a contract to be enforced against a third party

The exception sits alongside those in common law

Question 14

In what 2 circumstances can a third party enforce a term of a contract to which they are not a party?

Under C(RTP) Act 1999

Answer 14

Either

1. The contract expressly provides that the TP can enforce a term (‘X has the right to sue on this contract); or
2. (If not stated specifically) It must be established that the agreement purported to confer a benefit on the TP and it was not the case that the contracting parties did not intend the term to be enforceable by the TP (hard presumption to rebut)

Question 15

How is a third party identified? Must they exist?

Answer 15

By express term but no requirement they exist at date (can be unborn child) and can be a wide class (e.g. member of an identified class)

Can be by name or member of class (employees) or answering description

Question 16

If parties do not want any TP to have rights under the contract, what should they do?

Answer 16

Explicitly exclude using boiler plate exclusion of third-party rights clause

Question 17

Where can parties to a contract not extinguish or alter entitlement to the right of a third party without his consent?

Where TP has the right to enforce

3 scenarios

Answer 17

1. TP has communicated his assent to the term to the promisor (by words/conduct, if post then not until received)
2. The promisor is aware the TP has relied on the term; or
3. 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

An express term can be included if the parties wish to do this without their consent

Question 18

How else can a court dispense of a TP’s consent to vary or extinguish their entitlement under the contract? What might the court attach to this?

3 scenarios

Answer 18

• Whereabouts cannot be reasonably ascertained
• Where they are mentally incapable of giving consent; or
• Where their reliance on the trm cannot be reasonably ascertained

Court/tribunal may dispense with condiction of compensation, for example

Question 19

Can a third party be placed in a better position than if they had been a party to contract themselves?

Answer 19

No!!!!!
If they were a party to the contract and would not, for any reason, be able to enforce the term, they may not enforce it

Question 20

To protect a promisor from double liability, when can an award to TP be reduced?

A breach could expose promisor to actions by promisee and TP

Answer 20

Any award to TP may be reduced by the court to such extent as is thought appropriate if…

• promisee has already recovered a sum in respect of TP’s loss; or
• expense incurred by promisee in making good to the TP by default of the promisor