The Concept of Contract

Question 1

Which forms can a contract take?

Answer 1

Written contract
Oral contract
By conduct

Question 2

What are the 3 legal requirements of a valid contract?

Answer 2

Agreement (Offer and Acceptance)
Consideration
Intent to create a legal relationship

Question 3

What is basic meaning of privity of contract? (Give case examples)

Answer 3

That only the parties to a contract are bound by it.

E.g.
Tweddle v Atkinson [1861]
Dunlop v Selfridge [1915]

Question 4

What caused a major change to the existing common law rules on privity of contract?

Answer 4

The enactment of Contracts (Rights of Third Parties) Act 1999, which allows a third party to enforce a term of the contract if the contract:

1. expressly says they may (s1(1)(a)) or
2. the term in question purports to confer a benefit on him (s1(1)(b)).

Question 5

Will a third party be able to enforce a term if they are named in the contract?

Answer 5

No, it is not enough to simply ‘name’ a third party. The contract must either:

1. expressly say they may
2. the term purports to confer a benefit on him

(s1 Contracts (Rights of Third Parties) Act 1999)

Question 6

Did Contracts (Rights of Third Parties) Act 1999 wipe out the old rules on privity of contract?

Answer 6

No, the old rules are preserved by s7(1) Contracts (Rights of Third Parties) Act 1999 and exist alongside the new rules.

Question 7

When does s1(1)(b) Contracts (Rights of Third Parties) Act 1999 not apply?

Answer 7

A third party won’t be able to enforce a term of the contract if;

• the properly constructed contract looks to not intend the third party to enforce a contract (s1(2))
• unless ‘expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.’ (s1(3))

Question 8

What are the main sections of Contracts (Rights of Third Parties) 1999?

Answer 8

s1.
(1) Allows a third party to enforce a term of the contract if the contract;
(a) expressly says they may
(b) the term in question purports to confer a benefit on him

(2) - Cannot enforce a term if the properly constructed contract looks to not intend the third party to enforce a contract

(3) - Cannot enforce a term unless ‘expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.’

Question 9

What are the problems with common law privity of contract and what are the solutions?

Answer 9

Problems:

Beswick v Beswick, when uncle sold business to nephew, term was that uncle and aunt be provided for, uncle died and nephew stopped payments, aunt couldn’t sue. No privity.

Dunlop v Selfridges, when Selfridges sold Dunlop tyres at a reduced rate via a middle man, Dunlop couldn’t sue. No privity.

Solutions:

Statute:

Contracts (Rights of Third Parties) 1999

Allows third party to enforce rights/allow to sue. 2 ways.

EITHER you are expressly identified in the contract/answer a description that is expressly made OR it appears to be made for your benefit (you can also be excluded).

Common Law

Jackson v Horizon Holidays, when courts got round privity by giving Jackson (alone) money that would cover his family too. Wouldn’t work if Jackson had died and wife sued.

Question 10

Under Contracts (Rights of Third Parties) Act 1999, when can a third party NOT sue/enforce a term?

Answer 10

• If they are simply named and did not have an express term to sue, or conferred a benefit.
• If the contract did confer a benefit, but it appears from the contract that the parties did not intend for them to enforce the term/sue.
• If the contract did confer a benefit, but the third party is not expressly identified by name, as a member of class, or as answer a particular description. They don’t have to be in existence yet though (e.g. future children)

Question 11

Which two cases disagreed about the contract’s wording being ‘express’?

Answer 11

Avraamides v Colwill [2006] held that the contract’s wording was insufficiently precise and although the contract could have been intended to benefit third parties, these fell into a large number of unidentified classes.
It therefore confirmed that the word “express” in C(RTP)A 1999 could not be subject to ‘construction or implication’, it must be clear from the wording without need of additional interpretation of who should be included.

In Chudley v Clydesdale Bank plc [2019], the approach from Avraamides was modified. The judge said the wording used in Avraamides ‘must be in error’ and that the court must instead have meant that the word ‘express’ doesn’t allow a process of ‘construction by implication’. This is because the identification for the third party will involve ‘a construction of the contract as a whole’.

Question 12

What does ‘privity’ mean?

Answer 12

A direct relationship between parties

Question 13

What is assignment in contract law?

Answer 13

Where an assignor transfers rights, property or other benefits to an assignee.

Question 14

When is assigning rights to a third party acceptable?

Answer 14

Unless assignment is prohibited in the contract, the party generally may assign the rights under contract to a third party without the consent of the other party.

However, you can’t normally assign the obligations under contract.

Question 15

When is assigning obligations to a third party acceptable?

Answer 15

You can’t normally assign the obligations under contract.

If you want to transfer the burden on the contract as well as the benefits under it, you have to novate.

Question 16

What is novation of contract?

Answer 16

Novation transfers benefits under a contract (similar to assignment), but unlike assignment, a novation can also transfer the burden.

Question 17

What is the difference between assignment and novation in contract law?

Answer 17

Assignment = party transfers benefits to a third party, but not the burden

Novation = party transfers both benefits and burden to a third party.

Question 18

Do commercial contracts usually allow assignment?

Answer 18

Commercial contracts usually restrict assignment- either there’s a strict prohibition or assignment is permitted with the other party’s consent or to a select group of people.
- E.g. Boilerplate provision to prevent assignment of the benefit and burden in a contract:
‘Neither party may without the prior written consent of the other party assign a benefit or obligation imposed in this Agreement.’

If you want to transfer the burden on the contract as well as the benefits under it, you have to novate.

Question 19

How does a novation happen and who needs to be consulted?

Answer 19

In a novation, the original contract is extinguished and is replaced by a new one in which the third party takes up rights and obligations which replicate those of one of the original parties to the contract.

Novation is only possible with the consent of the original contracting parties, as well as the new party. Consideration must be provided for new contract, unless novation is documented in a deed signed by all three parties.

Question 20

What are the three possibilities for novation?

Answer 20

1) All or part of the burden of contract can be transferred to another person

2) All or part of the benefit of contract can be assigned to another person.

3) The whole of the benefit and the burden can be transferred to another person. This is also novation.

Question 21

Where a supplier notifies a contracting party that they will be replaced by another supplier and then the contracting party starts to receive supply from the new supplier without objection or complaint, what has happened?

Answer 21

The contract has likely been novated.

Question 22

Is assignment the same as sub-contracting?

Answer 22

No.

Generally, sub-contracting (passing on works to a third person) is permitted by the law unless there is a contractual restriction preventing it.