Privity of Contract Flashcards
What the general rule for privity of contract?
A person who is not a party to a contract cannot acquire any rights under that contract or be subject to any of its obligations.
Various common law and statutory devices were used to circumvent the rules on privity?
Contract (Rights of Third Parties) Act 1999. This allows a third party, who is neither a party to the contract, nor has provided consideration, to enforce a term of the contract in certain circumstances (see s 1).
Common law methods of circumventing the doctrine.
Common law methods of circumventing the
doctrine of privity?
Agency
* Assignment
* Collateral contract
* Actions in tort
* Other judicial attempts to avoid the doctrine
Agency?
The basic requirements necessary to establish an agency
relationship are as follows: (a) The principal should be named (usually by the agent) and it should be clear that the
agent is contracting on the principal’s behalf; (b) The agent should be authorised to act as agent. In the vast majority of cases, the agent’s authority will be limited by the principal - eg the agent may be authorised to sell certain of the principal’s goods within a certain range of prices. The agent does not have freedom to enter into any contract it wishes to on behalf of the principal. The principal is only bound by acts of the agent which are within the agent’s authority (or,
in certain circumstances, by acts which appear to be in the agent’s authority); and
(c) Consideration has moved from the principal.
Assignment?
Where A is under a contractual obligation to B and B assigns their contractual rights to C, it may be possible for C to sue A on their promise to B. Crucially, because B is simply
passing their rights to C, the extent of C’s rights can never exceed the rights of B.
Can there be prohibition of assignment?
If there is a prohibition against the assignment in the main contract, then any attempted
assignment is likely to be unsuccessful
This would be a ‘non-
assignment’ clause,
What is an n alternative to a total prohibition on assignment or sub-contracting?
As an alternative to a total prohibition on assignment or sub-contracting (as set out above), the parties may agree to allow limited assignment of the benefit of the contract or sub-contracting of the work, for example, within a group of companies or to a named
person or persons.
Collateral contract?
The court may find a collateral contract between the promisor and the third party to provide an exception to the doctrine of privity.
e.g. Shanklin Pier employed contractors to paint the pier. It was a term of the contract that Shanklin Pier was to specify the paint to be used. Detel informed Shanklin Pier that their paint would last for at least seven years. Shanklin Pier instructed the contractors to buy and use Detel’s paint. The paint lasted three months. Shanklin Pier sued for breach of contract. However, the contract was between Shanklin Pier and the contractors. Mr Justice McNair held that there was a collateral contract between Shanklin Pier and Detel, the consideration for which was, on the one hand, the warranty by Detel that the paint would last for seven years and on the other, the instruction by Shanklin Pier to the
contractors to buy the paint.
Actions in tort?
Where a ‘third party’ is prevented by the privity rule from bringing a claim under
the contract, you should consider whether a claim can be brought in tort instead.
Judicial attempts to avoid the doctrine?
In certain circumstances, the courts have taken a flexible approach to the doctrine of privity, allowing a contracting party to recover in relation to losses
suffered by a third party.
A husband buys a car from a car dealer for his wife. The wife is involved in an accident because the car’s brakes were defectively installed by the manufacturer of the car. Can the wife sue the manufacturer of the car for breach of contract?
No. The wife should sue the car dealer for breach of contract
Yes. The wife can sue the car manufacturer for breach of contract
No. The wife should sue the car dealer in the tort of negligence
No. The wife should sue the car manufacturer in the tort of negligence
No. The wife should sue the car manufacturer in the tort of negligence
The doctrine of privity, which prevents the wife from suing the car manufacturer and car dealer in contract, does not apply in tort actions. The wife should therefore sue the car manufacturer in tort for breach of their duty of care.
the Contracts (Rights of Third Parties) Act 1999?
Under this Act, a third party can acquire rights if:
*
the contract expressly provides that they may acquire a benefit (s 1(1)(a)); or
*
the term purports to confer a benefit on them (s 1(1)(b)).
Subsection (1)(b) does not apply, however, if on a true construction of the contract it was
not intended that the term be enforceable by a third party (s 1(2)). For a third party to
enforce a term of the contract in their own right, they must be expressly identified in the
contract by name or as a member of a class (eg ‘employees’) or answering a particular
descriptio
When can a party enforce a term through the Contracts (Rights of Third Parties) Act 1999??
ss 1(1)(a) and s 1(1)(b) create alternative circumstances in which a third party
can enforce a term. Under s 1(1)(a), the contract must specifically provide that the third party can enforce a
term of the contract. For example, s 1(1)(a) would apply if the contract specifically stated:
‘X has the right to enforce this contract’ or ‘X has a right to sue on this contract’. Under s 1(1)(b) in conjunction with s 1(2), it need not be stated specifically that the third
party has the right to enforce a term. However, it must be established that:
(a) The agreement purported to confer a benefit on the third party; and
(b)It was not the case that the contracting parties ‘did not intend the term to be
enforceable by the third party’.
Identification of a third party under the Contracts (Rights of Third Parties) Act 1999??
The fact that there is no requirement that the third party be in existence at the date of the contract means that a right can be conferred on, for example, an unborn child, being expressly identified as a member of an identified class or answering a particular
description.
In what circumstances does s. 1(1)(b) not apply?
In essence, where a term ‘purports to confer a benefit’ on a third party, s 1(1)(b) creates a rebuttable presumption that the third party will be able to enforce the term. Section 1(2) provides that this presumption will be rebutted if ‘on a proper construction of the contract
it appears that the parties did not intend the term to be enforceable by the third party. The indications are that the courts will be slow to hold that, where the contract does purport to confer a benefit on a third party, there is no intention that the third party should have a right to enforce the term. In other words, once it is held that the contract purports to confer a benefit on a third party, there will be a rebuttable presumption in favour of the third party having a right to enforce the term and it will be difficult to rebut that
presumption.
‘exclusion of third party rights’ clause?
For the purpose of the Contracts (Rights of Third Parties) Act 1999, this Agreement does not and is not intended to give any rights, or any right to
enforce any of its provisions, to any person who is not a party to it.
Can third parties rely on exemption and limitation clauses?
Importantly, it should be noted that the Act also allows third parties to rely on exemption or limitation clauses in contracts to which they are not a party in the same way in which it allows third parties to enforce contractual terms (s1(6)).
What are the remedies available to the third party?
. Consequently, s 2(1) states:
“Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if:
a) the third party has communicated his assent to the term to the promisor,
b) the promisor is aware that the third party has relied on the term, or
c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.”
For the purposes of s 2(1)(a) the third party may communicate assent by ‘words or conduct’ (s 2(2)(a)) but, if the assent is sent by post, s 2(2)(b) stipulates that such communication will not be effective until received by the promisor.
If the contracting parties wish to allow variation or rescission without the consent of the third party or in circumstances not provided for in s 2(1), they can do so by including an express term in the contract (s 2(3)).
Section 2 also provides that the court can dispense with the third party’s consent where their whereabouts cannot reasonably be ascertained (s 2(4)(a)), where they are mentally incapable of giving their consent (s 2(4)(b)) or where their reliance on the term cannot be reasonably ascertained (s 2(5)). In such circumstances, where the court or arbitral tribunal sees fit to dispense with such consent, it may impose such conditions, for example a requirement to pay compensation, as may be thought fit (s 2(6)).
Defences against third party?
By virtue of s 3, the promisor’s defences against the third party are both the same as they would be against the promisee and anything specific that they may be able to claim against the third party.
How does s 1 affect the right of the promisee to enforce the contract?
As a breach of a relevant term could expose the promisor to actions by both the promisee and the third party, s 5 sets out to protect the promisor from double liability. It provides that any award to a third party may be reduced by the court or arbitral tribunal to such extent as is thought appropriate if the promisee has already recovered a sum in respect of the third party’s loss or the expense incurred by the promisee in making good to the third party the default of the promisor.
Requirements for The Contracts (Rights of Third Parties) Act 199?
The Act allows a third party, in limited circumstances, to enforce a term of a contract to which it is not a party.
* Broadly, a third party will have such a right:
a. Where the contract states it should; or
b. Where the contract purports to confer a benefit on it, unless it appears the parties did not intend the term to be enforceable by the third party.
* The third party must be expressly identified in the contract, but this can be by describing a class of people, and the third party does not need to exist at the time of the contract.
* Once a third party has a right under the Act, that right sometimes cannot be reduced / extinguished by the parties without the third party’s consent.
* The third party’s rights will never be greater than they would have been had the third party been a party to the contract.
Under what circumstances does the Contracts (Rights of Third Parties) Act 1999 enable a third party in their own right to enforce a term of a contract to which they are not a party?
Where the contract expressly provides that they may
How do the remedies available to third parties under the Contracts (Rights of Third Parties) Act 1999 compare to the remedies available to parties to a contract?
S1(5) of the 1999 Act makes available to a third party the same remedies for breach of contract which are available to a party to the contract
A contract contains the following clause: ‘In a contract between the insurer and the insured, on the death of the insured, the insurer guarantees to pay £10,000 to the wife of the insured, or to the dependents of the insured if the wife predeceases him.’ Under what section(s) of the Contracts (Rights of Third Parties) Act 1999 would a third party enforce the contract?
The children can enforce the contract under s1(1)(a) and s1(3)
The wife can enforce the contract under s1(1)(a) and s1(3)
The wife can enforce the contract under s1(1)(b) and s1(3)
The children can enforce the contract under s1(2)
The wife can enforce the contract under s1(1)(b) and s1(3)
Correct. The wife can enforce the contract as it purports to confer a benefit on her (s1(1)(b)) and she has been identified by description s1(3)