privity to contract Flashcards
The doctrine of privity of contract
The doctrine of privity of contract means that only the par- ties to a contract can sue and be sued under it. A third party cannot acquire rights under a contract, nor does a contract impose any burden on anyone other than the parties to it.
statutory exceptions
- Contracts (Rights of Third Parties) Act 1999
Under the CRTPA, a third party (that is, a person who is not a party to a contract) has a right to enforce a term of the contract if:
, The contract expressly provides **the third party may
enforce the term; or
**A term of the contract purports to confer a benefit on the third party and it appears from the terms of the con- tract the parties intended the term to be enforceable by the third party.
Note that the person must be expressly named in the con- tract or be a member of a benefiting class of people de- scribed in the contract (although the person need not have been in existence at the time the contract was entered into).
Note: The CRTPA does not allow obligations under a contract
to be imposed on third parties—it only allows a third party to
benefit from a contract.
Exclusions from CRTPA
The CRTPA does not apply to
1. employment contracts
2. articles of association
3. Neither does it apply if the
contract says that it will not apply
Variation and Rescission of Contract
If a third party has rights under a contract, the parties may
not agree to change the contract** to the detriment **of the
third party **without the consent **of the third party if any of the
following is true:
* The third party has communicated his agreement to the term benefiting him;
* The third party has relied on the term of the contract and
the promisor is aware of that reliance; or
* The promisor should have foreseen that the third party
would rely on the term and the third party has in fact
relied on it.
common law exceptions
- agency
An agency relationship arises when a person, the ‘principal’,
authorises another person, the ‘agent’, to negotiate and enter
into a contract on their behalf with third parties. The ultimate
contract will be between the principal and the third party:
the agent is not a party. So, strictly speaking, agency is not
an exception to the privity doctrine, as the principal is ‘privy’
to the contract. However, if an agent acts for an undisclosed
principal (in other words, the third party is unaware of the
existence of the principal and thinks they are dealing only
with the agent), then an exception to the privity rule arises:
under the law of agency, both the agent (acting with authority) and the undisclosed principal can sue or be sued under the contract. - Assignment
Assignment is a method whereby a contractual right can be
transferred to a third person outside of the terms of the original contract. To be fully effective, notice of the assignment
must be given to the party liable to perform the obligation
which has been transferred. Only the benefit of a contract
can be assigned, however, not the burden. If the parties
want to transfer obligations under a contract as well as the benefit, then the old and the new parties need to enter into a
contract known as a ‘novation agreement’, under which the
former parties are released from the arrangement and the
new parties become party to it. - subrogation
In an insurance contract, if the insurer has to pay a claim to
the policyholder, the insurer is ‘subrogated’ to the rights of
the policyholder. This means that the insurer stands in the
shoes of the policyholder and has all the rights that the policyholder would have against the person responsible for the
loss which gave rise to the claim. A similar principle applies in
a guarantor-guarantee relationship. If the guarantee is called upon and the guarantor is required to pay a creditor, the
guarantor is subrogated to the rights of the creditor and so
can sue the debtor in the creditor’s place. - Collateral contract
Another exception to the requirement of privity is when the
courts find that there is a collateral contract between the
promisor and a third party, running alongside the main contract. Many of the situations where the courts have previously
found collateral contracts would now be covered by the
CRTPA, because the contract purports to confer a benefit on
a non-party - Trusts
A trust is another mechanism sometimes used by the courts
to avoid problems of privity. If A makes a promise to B for
the benefit of a third party C, the courts may find that B
holds A’s promise on trust for C. This allows C to enforce
the promise directly against A. It is easiest to find this when
the words ‘trust’ or ‘trustee’ are used in the agreement, but
a trust relationship may be implied even if those words are
not present. However, it must at least be possible to find that
there is an irrevocable intention to benefit the third party.
The courts are unlikely to find a trust where there is no indication that this was the parties’ intention.