11

Privity of contract
Thus far in this guide we have been concerned with three areas of contract law: the formative elements necessary to create a binding contract; the content of a contract; and those elements which vitiate an apparent contract. The rule of "privity of contract" is a long established principle in English law. It provides that a person who is not privy to a contract, that is, a third party, can neither sue nor be
sued on the contract.

Introduction

In other words, the rule treats a contract as an essentially private affair between two parties under which third parties acquire neither liabilities nor rights, even though they might well have some interest which would be served by the performance of the contract. here the rule prevents a contract imposing a burden on a third party, the rule is, in most situations,
perfectly sensible and just.

Thus if A enters into a contract with B stipulating that a third party C will swim across the Channel on New Year's Day, C cannot be compelled to do so against his wishes. The contract cannot be enforced against the third party. The rule of privity is less easy to justify where a contract between A and B confers a benefit on a third
party C.

Under the traditional doctrine C has no rights under the contract e!en if it was intended to "enefit him. e encountered this principle when considering the rule that "consideration must move from the
promisee", where in Tweddle v Atkinson the claimant's father and prospective father-in-law entered into a contract that they would each pay the claimant a sum of money.

The claimant could not enforce the contract as he had provided no consideration under it, even though the contract purported to give the claimant full power to sue the parties. !owever, he was not a party to the contract and would have failed on this ground alone because
of the doctrine of privity.

#egislati!e reform to allow the third party to sue in circumstances such as those that arose in
Tweddle v Atkinson and similar cases was mooted over 7 years a!o by the "aw #evision $ommittee.

In "##$ the %aw &ommission put forward draft legislation which ultimately became the &ontracts '(ights of Third )arties* +ct "### '&'(,T)*+*. here certain conditions are satisfied, the +ct allows a third party to enforce a contract made for
their benefit.

The provisions of the +ct will be considered in detail later in this chapter. It is important to note that C(
!TP"A does not do away with the fundamental rule of privity re!ardin! the enforcement of the benefit of a contract by a third party, but it does create a substantial e#ception to the rule.

The "asic rule should "e retained because there will be cases where the parties to a contract simply do not intend the third party to enforce the contract. Indeed if there was a general right given to third parties to enforce the benefit of a contract, it might become arguable that the right should e-tend to an indeterminate number of unintended or incidental beneficiaries. .o far as the rule of privity prevents the burden of a contract being imposed on a third party, &'(,T)*+ does not impact on this principle. %a!e $ of %

11$1 The doctrine of pri!ity The doctrine of privity of contract is primarily concerned with the question of who can enforce a contract. There are two aspects to the doctrine of privity of contract. o The first is that only parties to a contract are bound by it; + and / cannot, by their contract, compel & 'a third party to the contract* to do something or to refrain from doin! somethin! &see
'i!ure(.

o The obligation on & to pay / 0"11 in 2igure ""." is unenforceable because $ is not a party to
the A)B contract.

The second is that only the parties to a contract can derive rights and benefits from their contract; + and / cannot, by their contract, confer an enforceable benefit upon & even if + and / clearly intend to confer a benefit upon $ &see 'i!ure(.

%igure 11$& ''nly parties to a contract can deri!e rights and "enefits from it' The obligation on / to pay & 0"11 in 2igure "".3 is also unenforceable because $ is not a party to
the A)B contract.

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+t common law the parties to a contract cannot impose a burden on a third party, nor can they confer a benefit on a third party. Tweddle v Atkinson &*+,*(. ightman % said: o It is now established that no stranger to the consideration can take advantage of a contract,
although made for his benefit."

+ number of decisions of the !ouse of %ords illustrate the problems created by the doctrine. Dunlop (neumatic Tyre v 'elfridge ( Co &*-*.(. o 4unlop sold tyres to 4ew, sub5ect to a retail price maintenance scheme. o 4ew resold the tyres to .elfridge 6 &o and sought to impose the same retail price maintenance scheme. o .elfridge 6 &o sold the tyres for a price less than the scheme allowed. o 4unlop sued .elfridge 6 &o on the basis that )ew had contracted with 'elfridge ( Co as
)unlop*s agent.

o The !ouse of %ords rejected this argument. o In the words of %ord !aldane *only a person who is a party to a contract can sue on it*. 7iscount !aldane %.&. laid down an authoritative ruling: "8y %ords, in the law of England, certain principles are fundamental. ,ne is that only a person who is a party to a contract can sue on it. ,ur law 9nows nothing of a 5us quaesitum tertio :third party right; arising by way of contract. .uch a right might be conferred by way of property, as, for e-ample, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam. + second principle is that if a person with whom a contract not under seal has been made is to be able to enforce it consideration must have been given by him to the promisor
or to some other person at the promisor*s re+uest."

o The requirement, which is clearly laid down by the !ouse of %ords in 4unlop v .elfridge, that,
in order to be able to enforce a contract, the claimant must/

be a party to the contract and have provided consideration o under it has led to some elaborate devices being 5udicially constructed in order to avoid the rule of
privity

o +s we shall see, where the third party has an enforceable right to the benefit of the contract under the provisions of C( !TP"A, there is no re+uirement that the third party should have
provided consideration, providin! of course that the promisee has under the contract supplied consideration.

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Confirmed again the principle

)cruttons #td v -idland 'ilicones .td &*-,0(. o The !ouse of %ords, %ord (eid stated that the agency argument might "e successful if: the contract made it clear that the ste!edores were intended to recei!e the protection of the e-emption clause the contract made it clear that the carrier, in addition to contracting on his own "ehalf,
was also contractin! on behalf of the stevedores

the carrier had authority from the stevedore to enter into the contract on his behalf &or, possibly, a later ratification of the contract by the stevedores would suffice( and any difficulties about how the stevedores would provide consideration for this contract were overcome.

o The agency argument was not successful in the case before %ord (eid. o <othing indicated that the carriers were contracting as the agent for the stevedores. o #ord Denning dissenting, refused to allow stevedores the benefit of an e1emption of a liability o o
clause entered into between the carrier &who hired the stevedores to unload the vessel( and the owner of !oods. +s a general rule, a stran!er to a contract cannot take advanta!e of its provisions even where the provisions were intended to benefit him. .o, only reco!ni2e the possibility by the a!ency issue

Beswic* v /eswick &*-,+( o +n uncle contracted with his nephew whereby the nephew would receive the uncle=s coal business. o In e-change, the nephew agreed to pay a wee9ly sum to the uncle and, upon the uncle=s death, to the uncle=s widow. o +fter his uncle=s death, the nephew refused to ma9e the payments to his aunt. o The !ouse of %ords held that the aunt was not entitled to sue to enforce the obligation to
make the payments to her.

o )o doctrine of pri!ity is affirmed$ o !owever, the aunt was able to succeed in her capacity as the personal representative of her
deceased husband's estate.

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Problems

The first aspect of privity, that the parties cannot by their contract impose liabilities or burdens upon a
third party, is unobjectionable.

o The circumstances in which 5ustice calls for such a result are very limited. The second aspect, that the parties cannot benefit a third party to the contract, is objectionable. o There are many situations in which the parties to the contract clearly intend to confer an enforceable benefit upon a third party. o The denial of the benefit to the third party defeated the intention of the contracting parties and often produced manifest injustice and commercial inconvenience. .ince that time there have been forceful 5udicial criticisms of the doctrine, most notably in Darlington Borough Council ! +ilt shier Northern #td where .teyn stated: o The case for recognising a contract for the benefit of a third party is simple and straightforward. o The autonomy of the will of the parties should be respected. o The law of contract should give effect to the reasonable e-pectations of contracting parties. o )rinciple certainly requires that a burden should not be imposed on a third party without his consent. o /ut there is no doctrinal logical or policy reason why the law should deny effecti!eness to a contract for the "enefit of a third party where that is the e,pressed intention of the parties$" +s a result, the common law created a number of devices to overcome the ri!orous application of the
doctrine of privity.

ithout these devices, it is doubtful that the doctrine of privity would have survived as long as it did. There were numerous calls for the reform or abolition of the doctrine. +fter a period of thorough consultation and consideration, the %aw &ommission recommended a legislative reform of the doctrine of privity 'see %aw &om <o 3>3, Privity of Contract: Contracts for the
Benefit of Third Parties).

These recommendations were implemented by the Contracts ( ights of Third Parties" Act *---. The +ct allows the parties to a contract to provide the third party with an enforceable benefit. The &ommission did not favour wholesale abolition of the common law rule of privity in so far as it
prevented the benefit of a contract bein! enforced by a third party.

.uch a reform would be li9ely to create uncertainty and open the floodgates to claims by unintended and incidental beneficiaries. Instead, it fa!oured creating a statutory e,ception to the rule gi!ing third parties the right to enforce the benefit of a contract where it is the intention of the contracting parties that the third party should have such a right. The legislation should not therefore affect any of the other established e-ceptions to privity 'to be discussed later in this chapter* and if the third party can successfully base their claim on one of these they are not disentitled from so doing.

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Consider the arguments in fa!our of pri!ity of contract and the arguments against pri!ity of contract$ The principal arguments in favour of privity of contract are: o the doctrine clearly defines the ambit and enforceability of contractual obligations o it can ensure that courts do not create a contractual obligation o it operates in tandem with the requirement that consideration must move from the promisee and the third party has not provided any consideration o it would not be desirable for a promisor to face actions for breach of contract from both the promisee and the third party o if the third party could enforce the contract, this would affect the ability of the parties to vary or rescind the contract. The point here is that %ord (eid is indicating how parties can establish a collateral contract between the owner of the goods and the stevedores in order to provide the stevedores with the benefit of the e-clusion clause. /ecause it is a separate contract, it requires consideration. The principal arguments against privity of contract are: o it leads to commercial inconvenience o it can operate to create great in5ustices o it defeats the intentions of the parties to the contract o it puts English contract law in an anomalous position in that the contract law of other countries does recognise third party rights o it creates uncertainty in contractual relationships given the number of devices which e-ist to circumvent the application of the doctrine.

+hy do you thin* pri!ity of contract has sur!i!ed in the common law for so long The survival of privity of contract illustrates some of the limitations of the common law. &ourts were hesitant to overrule the doctrine 'e-isting contractual relationships would be upset if the doctrine was abolished* and e-pressed disapproval of it. .teyn %?, in 4arlington /& v iltshier <orthern %td '"##@* pointed out that common law courts =are the hostages of the arguments deployed by counsel= A if counsel did not see9 to challenge the doctrine, it was difficult for the court to do so. %egislative action was difficult to achieve, in large part because of the difficulty in finding parliamentary time to deal with the matter

)ummary The doctrine of privity of contract provides that the parties to a contract cannot confer a benefit upon a third party nor can they impose a burden on the third party.

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