privity to contract

Question 1

The doctrine of privity of contract

Answer 1

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.

Question 2

3

statutory exceptions

Answer 2

1. 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.
2. 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).
3. 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.

Question 3

3

Exclusions from CRTPA

Answer 3

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

Question 4

3

Variation and Rescission of Contract

Answer 4

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:
1. The third party has communicated his agreement to the term benefiting him;
2. The third party has relied on the term of the contract and
the promisor is aware of that reliance; or
3. The promisor should have foreseen that the third party
would rely on the term and the third party has in fact relied on it.

Question 5

5

common law exceptions

Answer 5

1. 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.
2. 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 ontract 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.
3. 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.
4. 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
5. 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 whenthe words ‘trust’ or ‘trustee’ are used in the agreement, but
   a trust relationship may be mplied 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.