Third Parties and Privity of Contract

Question 1

what is privity of contract?

Answer 1

a contract creates rights and obligations only between the parties to it

it does not confer enforceable rights or obligations on third parties (unless an exception at common law or statute applies)

Question 2

what is the effect of privity of contract if a party wants to sue another party under a contract?

Answer 2

no one can sue on a contract unless:

(a) they are party to the contract,
AND
(b) they provided consideration

Question 3

what are 4 exceptions to privity of contract under common law?

i.e., when can a party not to the contract sue or be sued under the contract

Answer 3

(1) Agency Contract: the principal (third party) can enforce rights and obligations under the contract entered into between its agent and another party

(2) Assignment: a party can transfer their rights (not obligations) under a contract to a third party (but this must be allowed under the contract)

(3) Collateral contract: it may be possible to identify an additional collateral contract between a third party and one of the contractual parties which allows the third party rights against them

(4) Actions in tort: a third party may be owed a duty of care so the conduct amounting to a breach of contract may constitute a breach of duty of care owed to the third party thus giving them the right to sue the contractual party for damages in tort

Question 4

when does a third party acquire rights under a contract according to Contracts (Rights of Third Parties) Act 1999?

Answer 4

A party can enforce a term in a contract it is not party to if:

(1) the contract expressly provides that this specific third party can enforce a term

OR

(2) The contract confers a benefit on the third party (identified specifically or as a member of a class) and it is not the case that the contracting parties did not intent the term to be enforceable by the third party (e.g., other contract terms do not show such intention)

Question 5

what is the effect of CRTPA 1999 on third parties?

Answer 5

• third party can enforce remedies for breach of contract
• third party can rely on a clause that limits or excludes its liability
• the third party’s right cannot be altered (e.g., varying the right, or rescinding the contract) by the parties without the third party’s consent if they communicated assent to the term or the promisor knew or should have known that they relied on the term
• the third party will not have greater rights and remedies than it would have had it been a party to that contract

BUT CRTPA cannot allow a contract to be enforced against a third party

Question 6

does a third party have to provide consideration to enforce / acquire rights under a contract where CRTPA applies?

Answer 6

no