Privity & third-party rights

CON.03 — Privity & Third-Party Rights

The core rule

Privity of contract: only a party to a contract can sue or be sued on it. A stranger acquires no rights and bears no burdens, even where the contract is made for their benefit. Tweddle v Atkinson (1861); Dunlop v Selfridge (1915).

Privity is closely tied to consideration: consideration must move from the promisee, though it need not move to the promisor. A third party who gives nothing cannot enforce at common law.

The statutory gateway — Contracts (Rights of Third Parties) Act 1999

A third party (C) may enforce a term in their own right where:

• s.1(1)(a) — the contract expressly provides that they may; or
• s.1(1)(b) — the term purports to confer a benefit on them — UNLESS, on proper construction, the parties did not intend it to be enforceable (a rebuttable presumption: Nisshin Shipping v Cleaves (2003)).

The third party must be expressly identified by name, class, or description (s.1(3)), but need not exist when the contract is made (e.g. a future spouse or company).

C gets the same remedies as if a party (s.1(5)) — damages, specific performance, injunction. C is also bound by relevant terms, e.g. exclusion/arbitration clauses (s.1(6)).

Variation/rescission (s.2): once C's right has crystallised — C has communicated assent, or relied on the term and the promisor knew or could reasonably foresee the reliance — the parties cannot vary or cancel it without C's consent (subject to express terms otherwise).

Common-law work-arounds (still examinable)

• Agency (undisclosed/disclosed principal); assignment of contractual benefits (burdens cannot be assigned without novation).
• Collateral contracts; trusts of a promise; tort (e.g. negligence, Donoghue v Stevenson).
• Promisee suing for the third party's loss — narrow exceptions: Jackson v Horizon Holidays; the "broad/narrow ground" in Linden Gardens / Panatown / St Martins.

Traps to avoid

• The 1999 Act does not displace common-law routes; C can use either.
• A benefit being conferred is not enough — check the parties did not exclude enforcement.
• Distinguish enforcement (the right) from defences — the promisor keeps defences available against the promisee (s.3).
• Excluded contracts: most provisions don't apply to negotiable instruments, company constitutions, employment contracts (against employees), and carriage contracts (s.6).
• The Act gives no right to a party — only third parties; it does not abolish privity, it carves an exception.