Privity of Contract

The doctrine of privity has largely become irrelevant as a result of recent changes - Justin Santiago

Under the doctrine of privity only a party to a contract can sue or be sued on a contract. There are two aspects to this doctrine firstly parties cannot by their contract impose liabilities or burdens upon a third party and secondly strangers to a contract cannot take advantage of its provisions even where the provisions were intended to benefit them.

Criticisms were leveled at the doctrine of privity as it failed to give effect to the expressed intention of the parties and could sometimes lead to results which were regarded as fundamentally unjust and parties that were intended to be benefited were not benefited. The law had become unduly complex with the large number of exceptions to the rule. The doctrine was also commercially inconvenient.

This doctrine was emphasised in a number of cases such as Tweddle v Atkinson where the husband was unable to enforce a promise by his father and father in law to pay him a sum of money because he did not provide consideration. In Dunlop Pneumatic Tyre Company Ltd v Selfridge Dunlop sued Selfridge on the basis that the promise between Dew and Selfridge could be imposed as Dew were acting as Dunlop’s agent. The action failed because Dunlop had provided no consideration for the promise of Selfridge, the consideration had been provided by Dew. Tweddle and Dunlop are both consistent with the view that the claimants could not sue because they had not provided consideration for the defendant’s promise. The rigorous application of this rule denied a third party who was a gratuitous beneficiary of the contract.

However there are several exceptions to this rule. Collateral contracts where a contract made by one of the two contractual parties to a 3rd party can be enforced by a 3rd party. In Shanklin Pier Ltd v Detel Products, the claimants instructed their contracts to purchase a particular type of paint from Detel products which turned out to be of inferior quality. The claimants were entitled to damages based on the fact that they had provided consideration in the form of instructions to their contractors.

Under the law of agency, an agent were entitled to take the benefit of the exclusion clause although they were not parties to the contract as they had supplied consideration in the form of performance : the Privy Council case of The Eurymedon however this is contrasted against Scruttons Ltd v Midlands Silicones Ltd which decided that an exclusion clause that protected one party did not extend to his employees and agents.

Under the law of trusts, a trust situation could give rise to obligations by parties to a contract to third parties : Les Affreteurs Reunis v Walford.

Restrictive covenants could be enforced against subsequent purchasers of land who were not party to the original contract : Tulk v Moxhay.

There were also a number of statutory exceptions which allowed third parties to recover compensation such as the Road Traffic Act 1927, the Married Woman’s Property Act 1882 and the Third Parties (Rights Against Insurers) Act 1930.

The Contracts (Rights of Third Parties) Act 1999 marks an enormous change in the English common law doctrine of privity allowing third parties to enforce a benefit conferred to them. However the Act also allows development of the common law in relation to the doctrine and this has created confusion especially in situations where both common law and statute would apply. Additionally parties must bring themselves within the ambit of the Act and they can exclude its operation from their contract.

The main change that the Act has brought about is that third parties could claim their beneficial rights which has been expressly intended and is not dependent on whether he has provided consideration. This benefit could be in the form of a positive benefit or the provision of an exclusion or limitation of liability. The effect of the Act would mean the cases like Scruttons Ltd v Midlands Silicones Ltd and Beswick v Beswick would be decided differently.

The Act only becomes relevant where the parties expressly state so. Two circumstances may arise with regard to application of the Act. Under S1(1)(a), a third party is given a right to enforce a term if the contract expressly provides that he may. A situation may arise where the contracting parties can make clear their intention not to confer a right of action on the third party. In the second circumstance under S1(1)(b), where the parties do not make their intention express and is silent on whether the contract term purports to confer a benefit on a third party, the difficulty would lie in discerning the intention of the parties except in cases under S1(2) where 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 case of Nisshin Shipping Co. Ltd v Cleaves & Co. Ltd put the onus on the party seeking to disapply S1(1)(b) with S1(2).

The Act solidifies situations where a contracting party wants to sue and recover damages in respect of a loss suffered by a 3rd party. Previously the law did not allow for such claims : Woodar Investment Development Ltd v Wimpey Construction UK Ltd which also criticized the judgement of Lord Denning in Jackson v Horizon Holidays. Section 1(1)b of the act now would allow the 3rd party to have a direct right of action in such cases.

However the same section will not extend to the White v Jones type of cases which involves a contract for the benefit of a third party but not a promise to confer a benefit on a third party or in cases where a third party has been given his own right of action with the use of a separate contract or with the use of an assignment : Alfred McAlpine Construction Ltd v. Panatown Ltd which would be better covered under the law of trust or the law of agency.

One further limitation on the right of the third party to sue is that the third party must be 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). Thus the Act would not give the third party a right of action on the facts of a case such as Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd because the third party was not identified in the contract.