doctrine of privity contract law essay

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Contract: Privity and Third-Parties

Privity of contract & third party rights, privity of contract, the general rule.

A non-party to the contract cannot sue to enforce rights under that contract or claim damages for breach: Tweddle v Atkinson (1861) 1 B&S 393; Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847. This is known as the privity rule.

Privity of contract also prevents a third-party from relying on a defence in a contract he is not a party to: Scruttons   Ltd v Midland Silicones   Ltd [1962] AC 446.

The Contract (Rights of Third Parties) Act 1999

Third party enforcement right (s 1).

The main exception to the privity rule is found under section 1(1) of the Contract (Rights of Third Parties) Act 1999 . It applies to most contracts, save for a limited list of exceptions . This states that a third-party is entitled to enforce a contract term (or rely on an exclusion/limitation clause – s 1(6)) if:

• The contract states that he can (s 1(1)(a)); or
• The term purports to confer a benefit on him (s 1(1)(b)). This is so unless on ‘proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.’ (s 1(2)).

A term only purports to confer a benefit on a third party if the language of the contract shows that one of the parties’ purposes was to benefit the third party. The fact that the third party incidentally benefits from the term is not enough: Dolphin Maritime & Aviation Services Ltd v Sveriges Angfartygs Assurans Forening [2009] EWHC 716 (Comm).

For this exception to apply, 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’ (s 1(3)).

The third party’s ability to enforce a contract term is contingent on any other relevant terms of the contract (s 1(4)). For example, if the term is conditional on the performance of another term, the third party cannot enforce it unless the other term has been performed.

Variation/Rescission (s 2)

If a third party has gained a right to enforce the contract under s 1, the parties’ ability to agree to vary or rescind the contract might be limited (s 2(1)). The parties lose the right to vary or rescind the contract without the third party’s consent if:

• The third party ‘has communicated his assent to the term to the promisor’ by words or conduct; ss 2(1)(a), 2(2)(a)
• The ‘promisor is aware that the third party has relied on the term’; (s 2(1)(b) or
• 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’: s 2(1)(c).

The postal rule does not apply to communications of assent under this provision. This means that for a communication of assent to be valid, it must actually be received by the promisor: s 2(2)(b).

The right to vary or rescind the contract will not be lost if there is an express contract term which allows non-consensual variation/rescission: s 2(3). The contract may also sets out different circumstances in which the third party’s consent is needed.

Consent is also unnecessary if the third party is mentally incapable or their whereabouts ‘cannot be reasonably ascertained’: s 2(4).

Defences & Set-Off

In defence to a claim by a third party under the Contract (Rights of Third Parties) Act 1999, the promisor may rely on any defence or set-off:

• Which they would have against the promisee and which ‘arises from or in connection with the contract and is relevant to the term’: s 3(2). This includes exclusion and limitation clauses: s 3(6);
• Which the contract expressly states is available to him against the third party: s 3(3); and
• Which they would have had directly against the third party if the third party were a contract party: s 3(4).

The parties may provide by express terms that any particular defence or set-off will be unavailable to the promisor against the third party: s 3(5).

Impact on the Promisee’s Rights

Any rights granted to the third party by section 1 do not affect the promisee’s own rights to enforce the contract: s 4. This means that the promisee can sue for specific performance to force the promisor to confer the benefit on the third party.

The promisee can also sue for damages, but usually only for their own losses – they cannot sue for losses accruing only to the third party: Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277.

There is an exception to the rule that the promisee cannot sue for the third party’s losses where the contract was entered into for the benefit of the third party, the loss was foreseeable and the third party has no right to recover substantial damages themselves: Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4; McAlpine   Construction Ltd v Panatown Ltd [2001] 1 AC 518. Given that these cases preceded the Contract (Rights of Third Parties) Act 1999, it is likely to be a rare case where the promisee can recover for the third party’s losses. This is because the third party will normally have the right to sue personally, as explained above.

The rule against double recovery applies, meaning that the promisor cannot be sued twice for the same loss. As a result, the court has the power to reduce any award to the third party to take into account sums paid to the promisee with respect to the third party’s loss or ‘the expense to the promisee of making good to the third party the default of the promisor’: s 5. The reduction is the amount the court thinks is appropriate.

Other Exceptions to Privity of Contract

Collateral contracts.

If the third party has a separate contract with one of the parties obliging them to make sure the original contract is enforced to their benefit, then they can indirectly enforce the original contract by suing for breach of this collateral contract: Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854.

However, in many cases it will be difficult to show that a collateral contract exists. This is because usually because the third party has not provided any consideration .

Trust of a Promise

The privity doctrine does not apply to property rights. This means that if a third party has property rights in the contract’s subject matter, they can sue for any interference with their rights.

Prior to the enactment of the Contract (Rights of Third Parties) Act 1999, the courts tried to get around the privity rule using the notion of a ‘trust of a promise’: Les Affréteurs Réunis Société Anonyme v Leopold Walford (London) [1919] AC 801. A trust is a proprietary arrangement in which one person (‘the trustee’) holds the legal title to a piece of property for the benefit of another person (‘the beneficiary’). The beneficiary holds part or all of the equitable title to the property. The beneficiary can sue the trustee if they breach their obligations.

The problem is that not everything is capable of being ‘property’ subject to a trust. It was historically controversial whether a contractual obligation could be ‘property’. In addition, the creation of a trust now has strict requirements. In particular, the parties must actually intend to create a trust in the third party’s favour. This is likely to be rare.

As a result, in modern times it will be a very rare and unusual case where a ‘trust of a promise’ is relevant: Re Schebsman [1944] Ch 83; Rolls Royce Power Engineering plc v Ricardo Consulting Engineers Ltd [2003] EWHC 2871.

A contract party is normally free to assign their contract rights and obligations under the contract. If this is done, the third party takes the original party’s place in the contract. They can then enforce those rights and/or are subject to those obligations.

Agency is a legal device which allows a person (‘the agent’) to contract on behalf of another (‘the principal’). If the person negotiating the contract is an agent, in reality they will never become a party to the contract. The real second party is the principal. However, to be an agent, the negotiator must have the principal’s authority to enter into the transaction.

Contract Rights of Third Parties Quiz

Test yourself on the principles governing when a third party can sue under a contract they are not privy to.

In what circumstances will the original parties no longer need to acquire the consent of the third party who has a right to sue under the  Contract (Rights of Third Parties) Act 1999 to vary or terminate the contract?

Where a third party has a claim under the Contract (Rights of Third Parties) Act 1999 , can a party to the contract sue for damages incurred by the third party?

Incorrect . A party to the contract can only sue for a third party's damages if the contract was entered into for the benefit of the third party, the loss was foreseeable and the third party has no right to recover substantial damages themselves: L inden Gardens Trust Ltd v Lenesta Sludge Disposals.

Kefka and Lenne enter into a business contract for the benefit of Celes, expressly granting her rights to sue for breach under the Contract (Rights of Third Parties) Act 1999. The contract also provides that both Kefka and Lenne can rely on a particular exclusion clause if they are sued for negligence by Celes. Lenne breaches the contract in a way which triggers this exclusion clause. Can Celes succeed in a claim against Lenne?

Incorrect . If the claimant is a third party to the contract who is relying on the Contract (Rights of Third Parties) Act 1999, an exclusion clause is valid even if it is not reasonable: Contract (Rights of Third Parties) Act 1999, s 7(2).

If a third party has gained the right to rely on a contract's terms under the Contract (Rights of Third Parties) Act 1999 , when do the original parties require their consent to vary or terminate the contract?

Under the Contract (Rights of Third Parties) Act 1999 , in what two scenarios can a third-party to a contract enforce the terms of that contract?

For the purposes of the Contract (Rights of Third Parties) Act 1999 , when is a contract term 'for the benefit' of a third party? (Two answers)

Where a claim is made by a third party under the Contract (Rights of Third Parties) Act 1999 , which three defences can the defendant rely on?

At common law, can a third-party who did not provide consideration for a contract rely on the terms of that contract?

Incorrect . The general rule of privity of contract is that someone who is not party to a contract cannot sue to enforce rights under that contract or claim damages for its breach:  Tweddle v Atkinson.

The postal rule applies to any communications of assent to a contract by third parties under the  Contract (Rights of Third Parties) Act 1999 . True or false?

Incorrect . The  postal rule  does not apply to communications of assent under this provision. This means that for a communication of assent to be valid, it must actually be received by the promisor: s 2(2)(b).

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privity of contract

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The relationship that exists between the parties to a contract. The common law doctrine of privity of contract established that only the parties to the contract, i.e. those that provided consideration, could sue or be sued under the contract. Third parties could not derive rights from, nor have obligations imposed on them by, someone else's contract. This position has now been modified by the Contracts (Rights of Third Parties) Act 1999. By the provisions of the Act, a person or class of persons can enforce a term of a contract to which he is not a party provided that the term purports to confer a benefit on him or the contract expressly provides for such enforcement. The Act does not, however, interfere with the principle that a person cannot incur obligations under a contract to which he has not provided consideration.

From:   privity of contract   in  A Dictionary of Law »

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The Common Law Doctrine of Privity of Contract Seems Unjustifiable Essay

Introduction, how the common law doctirne of privity of contract is unjustifiable.

The privity of contract doctrine states that it is only parties involved in a contract have the legal mandate of taking any action meant to enforce such a contract. Thus, a third party beneficiary has no legal mandate of enforcing the same when the benefits promised are denied. Reflectively, this may not be justifiable. Thus, this analytical treatise attempts to explicitly justify why the common law doctrine of privity of contracts seems unjustifiable.

In Scruttons Ltd. v Midland Silicones limited , the privity doctrine applied in ruling the case. Other than special consideration of agency, trust, assignment or statute, a person, not a party to a contract cannot enforce, or rely for protection on its provision.

In Dunlop Pneumatic Tyre Co Ltd. v Selfrigde & Co Ltd. , the court applied the same doctrine in ruling the case. It was held that since the plaintiffs were undisclosed principals, no consideration moved from them to the defendant and that the contract was unenforceable by them (Stone 2008).

From the ruling on the above cases under English law, it can be deduced that consideration should move from the promise only, and a contract cannot be enforced by a person who is not a party to the contract even if it has made for his benefit. It was held that since the plaintiffs were undisclosed principals (August 2008). Therefore, no consideration moved from them to the defendant, and that the contract was unenforceable by them.

In the United Kingdom Privity of contract forms a benchmark of contractual law which implies that both the third party and the contracting party who makes the condition may demand performance in favor of the third party unless it is not indicated in the contract. From the above article, it is apparent that the common law applies the doctrine of Privity of Contract when making some precedents (Keenan & Riches 2002).

There are a number of remedies available to the promisee for the benefit of the third party. They include specific performance in equity and damages at common law. Under specific performance, “third parties whose benefit a contract has been made may not sue on the contract but the party making the contract may sue for specific performance for the benefit of the third party even where the damages to be obtained are normal” (Legal Service India 2012, par. 6).

However, the remedy of specific performance will not be granted if damages at common law are adequate. In a suit for damages, the plaintiff cannot recover more than the amount required in compensating for his own loss and not that of a third party (Stone 2008).

As mentioned above, the general rule of law of contract is that contractual obligations are created by the parties to the contract. They have the exclusive right of enforcement. Nevertheless, due to the complexity of business relations in the contemporary business world, third parties may have an interest in the execution of a contract. Therefore, the application of this doctrine may be avoided so as to have justice in scenarios where third parties are affected by the execution of the contract.

These are the exceptions to the Doctrine of Privity of Contract. For instance, in an agency relationship, an agent may contract on behalf of his principal by a third party and form a binding contract between the principal and third party. For example, “a third party may be able to take the benefits of an exclusion clause by providing that the party imposing the clause was acting as the agent of the third party” (Privity of Contract 2012, par. 9).

Moreover, “on the basis of trust which is an equitable obligation to hold property on behalf of the beneficiary, equity can develop a general exception to the doctrine of Privity by use of the concept of trust” (Privity of Contract 2012, par. 12). In a scenario where a person acts as a trustee and enters into a contract, the beneficiary of the contract can sue if the promise has not been performed. Another exception to the doctrine of Privity of contract is estoppel.

From the case ruling of Waltons Stores (interstate) Ltd v Maher, “a third party may be able to seek relief against a promissory on the basis of promissory estoppel principle” (Legal Service India 2012, par. 6). Thus, “the third party needs to establish the elements of promissory estoppels in the contract” (Legal Service India 2012, par. 6).

Reflectively, unjust enrichment principle underpins any remedy that denies the third party his or her benefits. This is brought out in the case of Pavey & Mathews Pty Ltd v Paul . The principle “forms the basis for which a third party can seek relief” (Turner 2005, p. 38). However, action based upon unjust enrichment is not based on the contract but independent of it.

The general rule of a contract is that a stranger cannot execute a contract or enforce action for execution of a contract. However, this rule may not be applicable in all cases. There are exceptions to the general rule. From the above discussion, it is apparent that the principle of Privity of contract can be circumvented. This is done so as to provide justice to the third party beneficiary in a contract.

August, R. (2008). International Business Law: Text Cases and Readings . New York: Routledge.

Keenan, D, & Riches, S. (2002). Business Law. New York: Pearson/Longman.

Legal service India: Third Party beneficiary rights . (2012). Web.

Privity of Contract: The doctrine of privity. (2012). Web.

Stone, R. (2008). The Modern Law of Contract . New York: Routledge.

Turner, C. (2005). The Comprehensive Guide to all the facts Contract Law . Hodder: Oxon.

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IvyPanda. (2018, December 11). The Common Law Doctrine of Privity of Contract Seems Unjustifiable. https://ivypanda.com/essays/the-common-law-doctrine-of-privity-of-contract-seems-unjustifiable/

"The Common Law Doctrine of Privity of Contract Seems Unjustifiable." IvyPanda , 11 Dec. 2018, ivypanda.com/essays/the-common-law-doctrine-of-privity-of-contract-seems-unjustifiable/.

IvyPanda . (2018) 'The Common Law Doctrine of Privity of Contract Seems Unjustifiable'. 11 December.

IvyPanda . 2018. "The Common Law Doctrine of Privity of Contract Seems Unjustifiable." December 11, 2018. https://ivypanda.com/essays/the-common-law-doctrine-of-privity-of-contract-seems-unjustifiable/.

1. IvyPanda . "The Common Law Doctrine of Privity of Contract Seems Unjustifiable." December 11, 2018. https://ivypanda.com/essays/the-common-law-doctrine-of-privity-of-contract-seems-unjustifiable/.

Bibliography

IvyPanda . "The Common Law Doctrine of Privity of Contract Seems Unjustifiable." December 11, 2018. https://ivypanda.com/essays/the-common-law-doctrine-of-privity-of-contract-seems-unjustifiable/.

Privity of Contract under Contract Law

• Contract Act Subject-wise Law Notes
• April 3, 2023

In contract law, the concept of privity of contract refers to the legal relationship between the parties who have entered into a contract. It refers to the fact that only the parties who have entered into a contract can enforce the terms of that contract. This means that a third party cannot enforce the contract or be sued for a breach of contract. 

Meaning of Privity of Contract

The doctrine of privity of contract is a fundamental principle in contract law that governs the rights and obligations of parties to a contract. It means that only the parties to a contract can enforce the terms of that contract. 

This principle ensures that the contract remains a private agreement between the parties and cannot be enforced by anyone else who is not a party to the contract. Therefore, a third party who has not entered into a contract cannot enforce the terms of that contract.

Illustrations of Privity of Contract

Example of an employment contract.

A enters into a contract with B to provide employment services. The contract sets out the terms and conditions of employment, including A’s duties, salary, and benefits. If B breaches the contract, A can sue B for damages. However, if C, who is not a party to the contract, suffers harm as a result of the breach, C cannot sue B for a breach of contract.

Example of a Sale of Goods Contract

A enters into a contract with B to sell a product. The contract specifies the price, quantity, and delivery date of the product. If B fails to deliver the product on the agreed-upon date, A can sue B for breach of contract. However, if C, who is not a party to the contract, suffers harm as a result of the breach, C cannot sue B for a breach of contract.

Example of a Lease Contract

A enters into a contract with B to lease a property. The contract specifies the terms of the lease, including the rent, duration of the lease, and maintenance responsibilities. If B breaches the contract, A can sue B for damages. However, if C, who is not a party to the contract, suffers harm as a result of the breach, C cannot sue B for a breach of contract.

Example of an Insurance Contract

A enters into a contract with B to provide insurance coverage. The contract sets out the terms of the coverage, including the premium, coverage limits, and exclusions. If B fails to provide coverage for a covered loss, A can sue B for breach of contract. However, if C, who is not a party to the contract, suffers harm as a result of the breach, C cannot sue B for a breach of contract .

Example of a Construction Contract

A enters into a contract with B to build a house. The contract specifies the terms of the construction, including the price, timeline, and quality standards. If B fails to complete the construction according to the contract, A can sue B for breach of contract. However, if C, who is not a party to the contract, suffers harm as a result of the breach, C cannot sue B for a breach of contract.

Status of Privity of Contract under the Indian Contract Act

Privity of contracts is an essential concept under the Indian Contract Act, 1872. Section 2(d) of the Act defines a contract as an agreement that is enforceable by law. This means that only parties to a contract have the right to enforce it, and no third party can claim a right under it.

Under Indian law, the doctrine of privity of contract is a well-established principle. The Act recognizes that only parties to a contract are bound by its terms and are entitled to its benefits. The principle of privity of contract means that no person can acquire any rights under a contract to which he is not a party. 

This means that a third party who is not a party to a contract cannot sue for its breach, nor can he enforce any rights or obligations under the contract.

Essentials of Privity to Contract

Here are the essentials of privity of contract:

• Agreement: Privity of contract requires that there is an agreement between two or more parties. This agreement must be supported by consideration , which means that each party must give something of value to the other party.
• Intention to create legal relations: T here must be an intention on the part of the parties to create legal relations. This means that the parties must intend that the agreement be legally binding and enforceable.
• Capacity: The parties to the contract must have the capacity to enter into a contract. This means that they must be of legal age, of sound mind, and not under any duress or undue influence.
• Identification of parties: The parties to the contract must be clearly identified. This means that there must be a clear indication of who the parties are, and what their respective roles and obligations are under the contract.
• Privity: The principle of privity of contract requires that only parties to a contract have rights and obligations under the contract. This means that no third party can claim a right under the contract, nor can they sue for its breach.

Exceptions to Doctrine of Privity of Contract

The doctrine of privity of contract stipulates that only parties to a contract have the right to sue each other. However, over time, certain exceptions to this general rule have emerged, which allow even non-contracting parties to bring legal action. These exceptions include:

The beneficiary under a contract

If a contract is made for the benefit of a third party who is not a party to the contract, that third party can enforce their right against the contracting parties if there is a failure to perform. 

For example, if a contract is made between Alex and James and it creates a beneficial right for Robin over some property, Robin can enforce their claim based on this right. This exception has been established in the case of Muhammad Khan v. Husaini Begum .

Conduct, acknowledgement or admission

In situations where there is no privity of contract between two parties, but one of them acknowledges the other’s right or recognizes it through their conduct, they may be liable under the law of estoppel. ( Narayani Devi v. Tagore Commercial Corporation Ltd ). 

For instance, if A enters into a contract with B to pay Rs. 5000 every month during their lifetime, and after that to A’s son C, and A acknowledges this in C’s presence, then C can sue A if they default, despite not being a party to the contract.

Provision for maintenance or marriage under family arrangement

Such provisions are treated as exceptions to the doctrine of privity of contract to safeguard the rights of family members who may not receive a specific share and to give effect to the testator’s will. 

For example, if A bequeaths their property in equal portions to their three sons with the condition that after A’s death, each son gives Rs. 10,000 to C, A’s daughter, then C can sue if any one of them fails to comply with this provision.

In conclusion, the doctrine of privity of contract is a fundamental principle in contract law that provides that only parties to a contract have the right to sue each other. However, with the passage of time, several exceptions to this doctrine have emerged, allowing non-contracting parties to enforce their rights against the contracting parties. 

These exceptions include a beneficiary under a contract, conduct, acknowledgement or admission, and provisions for maintenance or marriage under family arrangements. It is essential for individuals and businesses to understand these exceptions when entering into contracts and for legal professionals to interpret and enforce contractual rights and obligations. 

By understanding these principles, parties can ensure that their rights and interests are protected, and contracts are executed efficiently and effectively.

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Privity is established when there is a substantive legal relationship between two or more parties. Typically, this relationship involves a mutual interest, such as the same loss, the same measure of damages , or the same or nearly identical issues of fact and law. 

In civil procedure , a prior judgment will bind nonparties in privity because nonparties’ interests are viewed as adequately presented in the original action. However, as the privity between the party and nonparty becomes less close and more adversarial, the nonparty in privity may have more opportunities to bring suit .

In property law, privity may be established by consensual substantive legal relationships between two or more parties. For example, landlord-tenant relationships, grantor - grantee relationships, and receiving land from a common grantor all establish privity because each relationship shares a substantive mutual interest. 

When two or more parties in a contract are in privity, all parties are bound by the contract and are obligated to each other in some way. For instance, one party may receive remedies for breach of contract or force fulfillment of the contract as a result of privity of contract.

[Last updated in September of 2021 by the Wex Definitions Team ]

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