Privity of contract and rights of third parties

Question 1

What is the basic principle of the privity of contract?

Answer 1

No person can sue or be sued on a contract unless they are a party to it

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

Question 5

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

Answer 5

• 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 6

What is a non-assignment clause?

Answer 6

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

Question 7

How does the collateral contract exception work?

Answer 7

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 8

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 8

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 9

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

Answer 9

In limited circumstances, a 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 10

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

Under RTP Act

Answer 10

Either

1. The contract specifically 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 11

How is a third party identified? Must they exist?

Answer 11

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)

Question 12

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

Answer 12

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

Question 13

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 13

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 14

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 14

• 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 15

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

Answer 15

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 16

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 16

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